G.R. No.

146364
June 3, 2004
COLITO T. PAJUYO, petitioner,
vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December
2000 Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of
Appeals set aside the 11 November 1996 decision3 of the Regional Trial Court of
Quezon City, Branch 81,4 affirming the 15 December 1995 decision5 of the
Metropolitan Trial Court of Quezon City, Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400 to a certain Pedro
Perez for the rights over a 250-square meter lot in Barrio Payatas, Quezon City.
Pajuyo then constructed a house made of light materials on the lot. Pajuyo and his
family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra")
executed a Kasunduan or agreement. Pajuyo, as owner of the house, allowed
Guevarra to live in the house for free provided Guevarra would maintain the
cleanliness and orderliness of the house. Guevarra promised that he would voluntarily
vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and
demanded that Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of
Quezon City, Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession
over the lot where the house stands because the lot is within the 150 hectares set
aside by Proclamation No. 137 for socialized housing. Guevarra pointed out that from
December 1985 to September 1994, Pajuyo did not show up or communicate with
him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The
dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff
and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as
reasonable compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81
("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of
the RTC decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the
decision appealed from, being in accord with the law and evidence presented, and
the same is hereby affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until
14 December 1996 to file his appeal with the Court of Appeals. Instead of filing his
appeal with the Court of Appeals, Guevarra filed with the Supreme Court a "Motion for
Extension of Time to File Appeal by Certiorari Based on Rule 42" ("motion for

extension"). Guevarra theorized that his appeal raised pure questions of law. The
Receiving Clerk of the Supreme Court received the motion for extension on 13
December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution9
referring the motion for extension to the Court of Appeals which has concurrent
jurisdiction over the case. The case presented no special and important matter for the
Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution10 granting the motion for extension conditioned on the timeliness of the
filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras
petition for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC
decision. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil
Case No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that
the ejectment case filed against defendant-appellant is without factual and legal
basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the
Court of Appeals should have dismissed outright Guevarras petition for review
because it was filed out of time. Moreover, it was Guevarras counsel and not
Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos
motion for reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No
costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is
the house and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra
to use the house only by tolerance. Thus, Guevarras refusal to vacate the house on
Pajuyos demand made Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant
relationship between Pajuyo and Guevarra. The terms of the Kasunduan bound
Guevarra to return possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the
Revised National Government Center Housing Project Code of Policies and other
pertinent laws. In an ejectment suit, the RTC has no power to decide Guevarras
rights under these laws. The RTC declared that in an ejectment case, the only issue
for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and
Guevarra illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez
had no right or title over the lot because it is public land. The assignment of rights
between Perez and Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did
not have any legal effect. Pajuyo and Guevarra are in pari delicto or in equal fault.
The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the
Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord

and tenant relationship. The Court of Appeals ruled that the Kasunduan is not a lease
contract but a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the
appellate court held that Guevarra has a better right over the property under
Proclamation No. 137. President Corazon C. Aquino ("President Aquino") issued
Proclamation No. 137 on 7 September 1987. At that time, Guevarra was in physical
possession of the property. Under Article VI of the Code of Policies Beneficiary
Selection and Disposition of Homelots and Structures in the National Housing Project
("the Code"), the actual occupant or caretaker of the lot shall have first priority as
beneficiary of the project. The Court of Appeals concluded that Guevarra is first in the
hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos
claim that Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the
Supreme Court was stamped "13 December 1996 at 4:09 PM" by the Supreme
Courts Receiving Clerk. The Court of Appeals concluded that the motion for
extension bore a date, contrary to Pajuyos claim that the motion for extension was
undated. Guevarra filed the motion for extension on time on 13 December 1996 since
he filed the motion one day before the expiration of the reglementary period on 14
December 1996. Thus, the motion for extension properly complied with the condition
imposed by the Court of Appeals in its 28 January 1997 Resolution. The Court of
Appeals explained that the thirty-day extension to file the petition for review was
deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have
dismissed the petition for review because it was Guevarras counsel and not
Guevarra who signed the certification against forum-shopping. The Court of Appeals
pointed out that Pajuyo did not raise this issue in his Comment. The Court of Appeals
held that Pajuyo could not now seek the dismissal of the case after he had
extensively argued on the merits of the case. This technicality, the appellate court
opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension
of thirty days to file petition for review at the time when there was no more period to
extend as the decision of the Regional Trial Court had already become final and
executory.
2) in giving due course, instead of dismissing, private respondents Petition for
Review even though the certification against forum-shopping was signed only by
counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court
and in holding that "the ejectment case filed against defendant-appellant is without
legal and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case
No. Q-96-26943 and in holding that the parties are in pari delicto being both
squatters, therefore, illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of
the National Government Center Housing Project instead of deciding the same under
the Kasunduan voluntarily executed by the parties, the terms and conditions of which
are the laws between themselves.13
The Ruling of the Court

The procedural issues Pajuyo is raising are baseless. However, we find merit in the
substantive issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras
petition for review because the RTC decision had already become final and executory
when the appellate court acted on Guevarras motion for extension to file the petition.
Pajuyo points out that Guevarra had only one day before the expiry of his period to
appeal the RTC decision. Instead of filing the petition for review with the Court of
Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to
file a petition for review. This Court merely referred the motion to the Court of
Appeals. Pajuyo believes that the filing of the motion for extension with this Court did
not toll the running of the period to perfect the appeal. Hence, when the Court of
Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are
appealable to the Court of Appeals by petition for review in cases involving questions
of fact or mixed questions of fact and law.14 Decisions of the regional trial courts
involving pure questions of law are appealable directly to this Court by petition for
review.15 These modes of appeal are now embodied in Section 2, Rule 41 of the 1997
Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law.
Guevarra thus filed his motion for extension to file petition for review before this Court
on 14 December 1996. On 3 January 1997, Guevarra then filed his petition for review
with this Court. A perusal of Guevarras petition for review gives the impression that
the issues he raised were pure questions of law. There is a question of law when the
doubt or difference is on what the law is on a certain state of facts.16 There is a
question of fact when the doubt or difference is on the truth or falsity of the facts
alleged.17
In his petition for review before this Court, Guevarra no longer disputed the facts.
Guevarras petition for review raised these questions: (1) Do ejectment cases pertain
only to possession of a structure, and not the lot on which the structure stands? (2)
Does a suit by a squatter against a fellow squatter constitute a valid case for
ejectment? (3) Should a Presidential Proclamation governing the lot on which a
squatters structure stands be considered in an ejectment suit filed by the owner of
the structure?
These questions call for the evaluation of the rights of the parties under the law on
ejectment and the Presidential Proclamation. At first glance, the questions Guevarra
raised appeared purely legal. However, some factual questions still have to be
resolved because they have a bearing on the legal questions raised in the petition for
review. These factual matters refer to the metes and bounds of the disputed property
and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate
Appellate Court,18 we declared that the Court of Appeals could grant extension of
time in appeals by petition for review. In Liboro v. Court of Appeals,19 we clarified
that the prohibition against granting an extension of time applies only in a case where
ordinary appeal is perfected by a mere notice of appeal. The prohibition does not
apply in a petition for review where the pleading needs verification. A petition for
review, unlike an ordinary appeal, requires preparation and research to present a
persuasive position.20 The drafting of the petition for review entails more time and
effort than filing a notice of appeal.21 Hence, the Court of Appeals may allow an
extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of
Appeals,22 we held that Liboros clarification of Lacsamana is consistent with the

Revised Internal Rules of the Court of Appeals and Supreme Court Circular No. 1-91.
They all allow an extension of time for filing petitions for review with the Court of
Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer
period.
A judgment becomes "final and executory" by operation of law. Finality of judgment
becomes a fact on the lapse of the reglementary period to appeal if no appeal is
perfected.23 The RTC decision could not have gained finality because the Court of
Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved
Guevarras motion for extension. The Court of Appeals gave due course to the motion
for extension because it complied with the condition set by the appellate court in its
resolution dated 28 January 1997. The resolution stated that the Court of Appeals
would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion
for extension are (1) the date of receipt of the judgment or final order or resolution
subject of the petition, and (2) the date of filing of the motion for extension.24 It is the
date of the filing of the motion or pleading, and not the date of execution, that
determines the timeliness of the filing of that motion or pleading. Thus, even if the
motion for extension bears no date, the date of filing stamped on it is the reckoning
point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision.
Guevarra filed his motion for extension before this Court on 13 December 1996, the
date stamped by this Courts Receiving Clerk on the motion for extension. Clearly,
Guevarra filed the motion for extension exactly one day before the lapse of the
reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on
technical grounds, Pajuyo did not ask the appellate court to deny the motion for
extension and dismiss the petition for review at the earliest opportunity. Instead,
Pajuyo vigorously discussed the merits of the case. It was only when the Court of
Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against
Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse
decision on the merits, is estopped from attacking the jurisdiction of the court.25
Estoppel sets in not because the judgment of the court is a valid and conclusive
adjudication, but because the practice of attacking the courts jurisdiction after
voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras
failure to sign the certification against forum shopping. Instead, Pajuyo harped on
Guevarras counsel signing the verification, claiming that the counsels verification is
insufficient since it is based only on "mere information."
A partys failure to sign the certification against forum shopping is different from the
partys failure to sign personally the verification. The certificate of non-forum shopping
must be signed by the party, and not by counsel.27 The certification of counsel
renders the petition defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.29 It is intended simply to secure an assurance that what are
alleged in the pleading are true and correct and not the product of the imagination or
a matter of speculation, and that the pleading is filed in good faith.30 The party need
not sign the verification. A partys representative, lawyer or any person who personally
knows the truth of the facts alleged in the pleading may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum
shopping was merely an afterthought. Pajuyo did not call the Court of Appeals

attention to this defect at the early stage of the proceedings. Pajuyo raised this
procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of
Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will
not divest the inferior court of its jurisdiction over the ejectment case.32 Even if the
pleadings raise the issue of ownership, the court may pass on such issue to
determine only the question of possession, especially if the ownership is inseparably
linked with the possession.33 The adjudication on the issue of ownership is only
provisional and will not bar an action between the same parties involving title to the
land.34 This doctrine is a necessary consequence of the nature of the two summary
actions of ejectment, forcible entry and unlawful detainer, where the only issue for
adjudication is the physical or material possession over the REAL property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not
the owners of the contested property and that they are mere squatters. Will the
defense that the parties to the ejectment case are not the owners of the disputed lot
allow the courts to renounce their jurisdiction over the case? The Court of Appeals
believed so and held that it would just leave the parties where they are since they are
in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action
for recovery of possession. The parties cannot present evidence to prove ownership
or right to legal possession except to prove the nature of the possession when
necessary to resolve the issue of physical possession.36 The same is true when the
defendant asserts the absence of title over the property. The absence of title over the
contested lot is not a ground for the courts to withhold relief from the parties in an
ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is
entitled to the physical possession of the premises, that is, to the possession de facto
and not to the possession de jure.37 It does not even matter if a partys title to the
property is questionable,38 or when both parties intruded into public land and their
applications to own the land have yet to be approved by the proper government
agency.39 Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or
terror.40 Neither is the unlawful withholding of property allowed. Courts will always
uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even
against the owner himself.41 Whatever may be the character of his possession, if he
has in his favor prior possession in time, he has the security that entitles him to
remain on the property until a person with a better right lawfully ejects him.42 To
repeat, the only issue that the court has to settle in an ejectment suit is the right to
physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government
did not authorize either the plaintiff or the defendant in the case of forcible entry case
to occupy the land. The plaintiff had prior possession and had already introduced
improvements on the public land. The plaintiff had a pending application for the land
with the Bureau of Lands when the defendant ousted him from possession. The
plaintiff filed the action of forcible entry against the defendant. The government was
not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of
possession because while the application of the plaintiff was still pending, title
remained with the government, and the Bureau of Public Lands had jurisdiction over
the case. We disagreed with the defendant. We ruled that courts have jurisdiction to
entertain ejectment suits even before the resolution of the application. The plaintiff, by

priority of his application and of his entry, acquired prior physical possession over the
public land applied for as against other private claimants. That prior physical
possession enjoys legal protection against other private claimants because only a
court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as
squatters, strictly speaking, their entry into the disputed land was illegal. Both the
plaintiff and defendant entered the public land without the owners permission. Title to
the land remained with the government because it had not awarded to anyone
ownership of the contested public land. Both the plaintiff and the defendant were in
effect squatting on government property. Yet, we upheld the courts jurisdiction to
resolve the issue of possession even if the plaintiff and the defendant in the ejectment
case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession
because of the public need to preserve the basic policy behind the summary actions
of forcible entry and unlawful detainer. The underlying philosophy behind ejectment
suits is to prevent breach of the peace and criminal disorder and to compel the party
out of possession to respect and resort to the law alone to obtain what he claims is
his.45 The party deprived of possession must not take the law into his own hands.46
Ejectment proceedings are summary in nature so the authorities can settle speedily
actions to recover possession because of the overriding need to quell social
disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for
recovery of possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take
cognizance of possessory actions involving these public lands before final award is
made by the Lands Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public lands everywhere and
there are thousands of settlers, especially in newly opened regions. It also involves a
matter of policy, as it requires the determination of the respective authorities and
functions of two coordinate branches of the Government in connection with public
land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old,
which was in force in this country before the American occupation, or in the new, we
have a possessory action, the aim and purpose of which is the recovery of the
physical possession of REAL property, irrespective of the question as to who has the
title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman
Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1,
1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the
Philippine Commission) we implanted the common law action of forcible entry
(section 80 of Act No. 190), the object of which has been stated by this Court to be
"to prevent breaches of the peace and criminal disorder which would ensue
from the withdrawal of the remedy, and the reasonable hope such withdrawal
would create that some advantage must accrue to those persons who,
believing themselves entitled to the possession of property, resort to force to
gain possession rather than to some appropriate action in the court to assert
their claims." (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So
before the enactment of the first Public Land Act (Act No. 926) the action of forcible
entry was already available in the courts of the country. So the question to be
resolved is, Did the Legislature intend, when it vested the power and authority to
alienate and dispose of the public lands in the Lands Department, to exclude the
courts from entertaining the possessory action of forcible entry between rival
claimants or occupants of any land before award thereof to any of the parties? Did
Congress intend that the lands applied for, or all public lands for that matter, be

removed from the jurisdiction of the judicial Branch of the Government, so that any
troubles arising therefrom, or any breaches of the peace or disorders caused by rival
claimants, could be inquired into only by the Lands Department to the exclusion of the
courts? The answer to this question seems to us evident. The Lands Department
does not have the means to police public lands; neither does it have the means to
prevent disorders arising therefrom, or contain breaches of the peace among settlers;
or to pass promptly upon conflicts of possession. Then its power is clearly limited
to disposition and alienation, and while it may decide conflicts of possession in
order to make proper award, the settlement of conflicts of possession which is
recognized in the court herein has another ultimate purpose, i.e., the protection
of actual possessors and occupants with a view to the prevention of breaches
of the peace. The power to dispose and alienate could not have been intended
to include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this, therefore, the
corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands
Department with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches of the
Government of the exercise of the respective functions or powers thereon,
such as the authority to stop disorders and quell breaches of the peace by the
police, the authority on the part of the courts to take jurisdiction over
possessory actions arising therefrom not involving, directly or indirectly,
alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the
effect that courts have no jurisdiction to determine the rights of claimants to public
lands, and that until the disposition of the land has passed from the control of the
Federal Government, the courts will not interfere with the administration of matters
concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this principle.
The determination of the respective rights of rival claimants to public lands is different
from the determination of who has the actual physical possession or occupation with
a view to protecting the same and preventing disorder and breaches of the peace. A
judgment of the court ordering restitution of the possession of a parcel of land to the
actual occupant, who has been deprived thereof by another through the use of force
or in any other illegal manner, can never be "prejudicial interference" with the
disposition or alienation of public lands. On the other hand, if courts were deprived
of jurisdiction of cases involving conflicts of possession, that threat of judicial
action against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced between
applicants, occupants or squatters, where force or might, not right or justice,
would rule.
It must be borne in mind that the action that would be used to solve conflicts of
possession between rivals or conflicting applicants or claimants would be no other
than that of forcible entry. This action, both in England and the United States and in
our jurisdiction, is a summary and expeditious remedy whereby one in peaceful and
quiet possession may recover the possession of which he has been deprived by a
stronger hand, by violence or terror; its ultimate object being to prevent breach of the
peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312,
314.) The basis of the remedy is mere possession as a fact, of physical possession,
not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or right to
possession is never in issue in an action of forcible entry; as a matter of fact,
evidence thereof is expressly banned, except to prove the nature of the possession.
(Second 4, Rule 72, Rules of Court.) With this nature of the action in mind, by no
stretch of the imagination can conclusion be arrived at that the use of the remedy in
the courts of justice would constitute an interference with the alienation, disposition,

and control of public lands. To limit ourselves to the case at bar can it be pretended at
all that its result would in any way interfere with the manner of the alienation or
disposition of the land contested? On the contrary, it would facilitate adjudication, for
the question of priority of possession having been decided in a final manner by the
courts, said question need no longer waste the time of the land officers making the
adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We
explained the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and
in pari delicto potior est conditio defedentis. The law will not aid either party to an
illegal agreement. It leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to
its application. One of these exceptions is where the application of the pari delicto rule
would violate well-established public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of
forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that,
regardless of the actual condition of the title to the property, the party in peaceable
quiet possession shall not be turned out by strong hand, violence or terror. In
affording this remedy of restitution the object of the statute is to prevent breaches of
the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage
must accrue to those persons who, believing themselves entitled to the possession of
property, resort to force to gain possession rather than to some appropriate action in
the courts to assert their claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to compel the party out of
possession to respect and resort to the law alone to obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between
squatters is fraught with danger. To shut out relief to squatters on the ground of pari
delicto would openly invite mayhem and lawlessness. A squatter would oust another
squatter from possession of the lot that the latter had illegally occupied, emboldened
by the knowledge that the courts would leave them where they are. Nothing would
then stand in the way of the ousted squatter from re-claiming his prior possession at
all cost.
Petty warfare over possession of properties is precisely what ejectment cases or
actions for recovery of possession seek to prevent.53 Even the owner who has title
over the disputed property cannot take the law into his own hands to regain
possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit
are squatters. The determination of priority and superiority of possession is a serious
and urgent matter that cannot be left to the squatters to decide. To do so would make
squatters receive better treatment under the law. The law restrains property owners
from taking the law into their own hands. However, the principle of pari delicto as
applied by the Court of Appeals would give squatters free rein to dispossess fellow
squatters or violently retake possession of properties usurped from them. Courts
should not leave squatters to their own devices in cases involving recovery of
possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The
Court of Appeals refused to rule on the issue of physical possession. Nevertheless,
the appellate court held that the pivotal issue in this case is who between Pajuyo and
Guevarra has the "priority right as beneficiary of the contested land under

Proclamation No. 137."54 According to the Court of Appeals, Guevarra enjoys

preferential right under Proclamation No. 137 because Article VI of the Code declares
that the actual occupant or caretaker is the one qualified to apply for socialized
housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a
relocation site under Proclamation No. 137. Proclamation No. 137 laid down the
metes and bounds of the land that it declared open for disposition to bona fide
residents.
The records do not show that the contested lot is within the land specified by
Proclamation No. 137. Guevarra had the burden to prove that the disputed lot is
within the coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras
unsubstantiated claim that he is the beneficiary of Proclamation No. 137. Guevarra
merely alleged that in the survey the project administrator conducted, he and not
Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No.
137. Pajuyo allowed Guevarra to occupy the disputed property in 1985. President
Aquino signed Proclamation No. 137 into law on 11 March 1986. Pajuyo made his
earliest demand for Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that
Proclamation No. 137 allegedly segregated the disputed lot, Guevarra never applied
as beneficiary of Proclamation No. 137. Even when Guevarra already knew that
Pajuyo was reclaiming possession of the property, Guevarra did not take any step to
comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No.
137 and Guevarra has a pending application over the lot, courts should still assume
jurisdiction and resolve the issue of possession. However, the jurisdiction of the
courts would be limited to the issue of physical possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving
public land to determine the issue of physical possession. The determination of the
respective rights of rival claimants to public land is, however, distinct from the
determination of who has the actual physical possession or who has a better right of
physical possession.56 The administrative disposition and alienation of public lands
should be threshed out in the proper government agency.57
The Court of Appeals determination of Pajuyo and Guevarras rights under
Proclamation No. 137 was premature. Pajuyo and Guevarra were at most merely
potential beneficiaries of the law. Courts should not preempt the decision of the
administrative agency mandated by law to determine the qualifications of applicants
for the acquisition of public lands. Instead, courts should expeditiously resolve the
issue of physical possession in ejectment cases to prevent disorder and breaches of
peace.58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the
house built on it. Guevarra expressly admitted the existence and due execution of the
Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay
nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa
nasabing bahay at lote ng "walang bayad." Kaugnay nito, kailangang panatilihin nila
ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang
reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot
free of rent, but Guevarra was under obligation to maintain the premises in good

condition. Guevarra promised to vacate the premises on Pajuyos demand but

Guevarra broke his promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the
withholding by a person from another of the possession of REAL property to which
the latter is entitled after the expiration or termination of the formers right to hold
possession under a contract, express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any
contract, the defendant is necessarily bound by an implied promise that he will vacate
on demand, failing which, an action for unlawful detainer will lie.60 The defendants
refusal to comply with the demand makes his continued possession of the property
unlawful.61 The status of the defendant in such a case is similar to that of a lessee or
tenant whose term of lease has expired but whose occupancy continues by tolerance
of the owner.62
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated
Pajuyos forbearance. Pajuyo did not require Guevarra to pay any rent but only to
maintain the house and lot in good condition. Guevarra expressly vowed in the
Kasunduan that he would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras continued possession of
the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of
commodatum.
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it.63 An
essential feature of commodatum is that it is gratuitous. Another feature of
commodatum is that the use of the thing belonging to another is for a certain period.64
Thus, the bailor cannot demand the return of the thing loaned until after expiration of
the period stipulated, or after accomplishment of the use for which the commodatum
is constituted.65 If the bailor should have urgent need of the thing, he may demand its
return for temporary use.66 If the use of the thing is merely tolerated by the bailor, he
can demand the return of the thing at will, in which case the contractual relation is
called a precarium.67 Under the Civil Code, precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra
was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay
rent, it obligated him to maintain the property in good condition. The imposition of this
obligation makes the Kasunduan a contract different from a commodatum. The effects
of the Kasunduan are also different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as one that is akin to a
landlord-tenant relationship where the withdrawal of permission would result in the
termination of the lease.69 The tenants withholding of the property would then be
unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would still have the duty to turn over possession of
the property to Pajuyo, the bailor. The obligation to deliver or to return the thing
received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum.70 These contracts certainly involve the obligation to
deliver or return the thing received.71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo
is also a squatter. Squatters, Guevarra pointed out, cannot enter into a contract
involving the land they illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra
freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after
he had benefited from it. The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and
Guevarra has a right to physical possession of the contested property. The
Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos better
right of physical possession. Guevarra is clearly a possessor in bad faith. The
absence of a contract would not yield a different result, as there would still be an
implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and
that is allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal
act."72 Guevarra bases his argument on the preferential right given to the actual
occupant or caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in
the property without paying any rent. There is also no proof that Pajuyo is a
professional squatter who rents out usurped properties to other squatters. Moreover,
it is for the proper government agency to decide who between Pajuyo and Guevarra
qualifies for socialized housing. The only issue that we are addressing is physical
possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of
the distinctions between forcible entry and unlawful detainer.74 In forcible entry, the
plaintiff is deprived of physical possession of his land or building by means of force,
intimidation, threat, strategy or stealth. Thus, he must allege and prove prior
possession.75 But in unlawful detainer, the defendant unlawfully withholds possession
after the expiration or termination of his right to possess under any contract, express
or implied. In such a case, prior physical possession is not required.76
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan.
Guevarras transient right to possess the property ended as well. Moreover, it was
Pajuyo who was in actual possession of the property because Guevarra had to seek
Pajuyos permission to temporarily hold the property and Guevarra had to follow the
conditions set by Pajuyo in the Kasunduan. Control over the property still rested with
Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property.
Possession in the eyes of the law does not mean that a man has to have his feet on
every square meter of the ground before he is deemed in possession.77 One may
acquire possession not only by physical occupation, but also by the fact that a thing is
subject to the action of ones will.78 Actual or physical occupation is not always
necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and
intruders who clandestinely enter into titled government property cannot, by such act,
acquire any legal right to said property."80 We made this declaration because the
person who had title or who had the right to legal possession over the disputed
property was a party in the ejectment suit and that party instituted the case against
squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the
ejectment case. This case is between squatters. Had the government participated in
this case, the courts could have evicted the contending squatters, Pajuyo and
Guevarra.
Since the party that has title or a better right over the property is not impleaded in this
case, we cannot evict on our own the parties. Such a ruling would discourage
squatters from seeking the aid of the courts in settling the issue of physical
possession. Stripping both the plaintiff and the defendant of possession just because
they are squatters would have the same dangerous implications as the application of
the principle of pari delicto. Squatters would then rather settle the issue of physical
possession among themselves than seek relief from the courts if the plaintiff and

defendant in the ejectment case would both stand to lose possession of the disputed
property. This would subvert the policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to
remain on the property until a person who has title or a better right lawfully ejects him.
Guevarra is certainly not that person. The ruling in this case, however, does not
preclude Pajuyo and Guevarra from introducing evidence and presenting arguments
before the proper administrative agency to establish any right to which they may be
entitled under the law.81
In no way should our ruling in this case be interpreted to condone squatting. The
ruling on the issue of physical possession does not affect title to the property nor
constitute a binding and conclusive adjudication on the merits on the issue of
ownership.82 The owner can still go to court to recover lawfully the property from the
person who holds the property without legal title. Our ruling here does not diminish
the power of government agencies, including local governments, to condemn, abate,
remove or demolish illegal or unauthorized structures in accordance with existing
laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo.
Attorneys fees as part of damages are awarded only in the instances enumerated in
Article 2208 of the Civil Code.83 Thus, the award of attorneys fees is the exception
rather than the rule.84 Attorneys fees are not awarded every time a party prevails in a
suit because of the policy that no premium should be placed on the right to litigate.85
We therefore delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra.
Guevarra did not dispute this factual finding of the two courts. We find the amount
reasonable compensation to Pajuyo. The P300 monthly rental is counted from the last
demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and
Resolution dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No.
43129 are SET ASIDE. The Decision dated 11 November 1996 of the Regional Trial
Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming the Decision
dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31 in
Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of attorneys
fees is deleted. No costs.
SO ORDERED.

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ,
respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.
GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent
Court of Appeals in the present two cases between petitioner and two private
respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the
Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case
No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for
Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T.
Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No.
3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar
Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357
to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of
plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said
defendant is ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial
court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in
CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on
the ownership of lots 2 and 3 in question; that the two lots were possessed by the
predecessors-in-interest of private respondents under claim of ownership in good
faith from 1906 to 1951; that petitioner had been in possession of the same lots as
bailee in commodatum up to 1951, when petitioner repudiated the trust and when it
applied for registration in 1962; that petitioner had just been in possession as owner
for eleven years, hence there is no possibility of acquisitive prescription which
requires 10 years possession with just title and 30 years of possession without; that
the principle of res judicata on these findings by the Court of Appeals will bar a
reopening of these questions of facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in
the two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows

... The documents and records presented reveal that the whole controversy started
when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for
brevity) filed with the Court of First Instance of Baguio Benguet on September 5, 1962
an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated
at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being
the sites of the Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the
Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/
Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto.
After trial on the merits, the land registration court promulgated its Decision, dated
November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of
Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision
of the land registration court to the then Court of Appeals, docketed as CA-G.R. No.
38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing
the decision of the land registration court and dismissing the VICAR's application as
to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration
case (and two sets of plaintiffs in the two cases now at bar), the first lot being
presently occupied by the convent and the second by the women's dormitory and the
sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the
Court of Appeals to order the registration of Lot 3 in the names of the Heirs of
Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez
filed their motion for reconsideration praying that both Lots 2 and 3 be ordered
registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August
12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs

of Juan Valdez on the ground that there was "no sufficient merit to justify
reconsideration one way or the other ...," and likewise denied that of the Heirs of
Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari
of the decision of the Court of Appeals dismissing his (its) application for registration
of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of
the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs
of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme
Court a petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan
Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and
Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions
(of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the
other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R.
No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court
of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying
that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided
over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the
ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the
Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a
petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled
Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision
dated May 16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano
filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3;
and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership
of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano
(Exh. C ); his written demand (Exh. BB-4 ) to defendant Vicar for the return of the
land to them; and the reasonable rentals for the use of the land at P10,000.00 per
month. On the other hand, defendant Vicar presented the Register of Deeds for the
Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not
covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8).
The defendant dispensed with the testimony of Mons.William Brasseur when the
plaintiffs admitted that the witness if called to the witness stand, would testify that
defendant Vicar has been in possession of Lot 3, for seventy-five (75) years
continuously and peacefully and has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of
Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect
declared the plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting
up the defense of ownership and/or long and continuous possession of the two lots in
question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No.
038830-R under the principle of res judicata. Plaintiffs contend that the question of
possession and ownership have already been determined by the Court of Appeals
(Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh.
1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains
that the principle of res judicata would not prevent them from litigating the issues of
long possession and ownership because the dispositive portion of the prior judgment

in CA-G.R. No. 038830-R merely dismissed their application for registration and titling
of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the
decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner
are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3
WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE
PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND
3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE
FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE
RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST
FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT
APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN
1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN
RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE
PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA
G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED
ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND
THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A
CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS
2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN
GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS
BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA
G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148
and 05149, when it clearly held that it was in agreement with the findings of the trial
court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No.
38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court
of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private
respondents as owners of the land, neither was it declared that they were not owners
of the land, but it held that the predecessors of private respondents were possessors
of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When petitioner
applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept
of owner only for eleven years. Ordinary acquisitive prescription requires possession
for ten years, but always with just title. Extraordinary acquisitive prescription requires
30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of
Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in
respondent appellate court's ruling that said findings are res judicata between the
parties. They can no longer be altered by presentation of evidence because those

issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination
of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5
in CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding
petitioner to be entitled to register the lands in question under its ownership, on its
evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of
the absence of just title. The appellate court did not believe the findings of the trial
court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired
also by purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and
Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots
since 1906. The predecessors of private respondents, not petitioner Vicar, were in
possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in
question, but not Lots 2 and 3, because the buildings standing thereon were only
constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for
taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the
Bishop but said Bishop was appointed only in 1947, the church was constructed only
in 1951 and the new convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered
to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of
petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed
by petitioner Vicar after the church and the convent were destroyed. They never
asked for the return of the house, but when they allowed its free use, they became
bailors in commodatum and the petitioner the bailee. The bailees' failure to return the
subject matter of commodatum to the bailor did not mean adverse possession on the
part of the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it declared the
lots for taxation purposes. The action of petitioner Vicar by such adverse claim could
not ripen into title by way of ordinary acquisitive prescription because of the absence
of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents
were possessors under claim of ownership in good faith from 1906; that petitioner
Vicar was only a bailee in commodatum; and that the adverse claim and repudiation
of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CAG.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined
to review said decision, thereby in effect, affirming it. It has become final and
executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave
abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R.
No. 38830-R is governing, under the principle of res judicata, hence the rule, in the
present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported
by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for
lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by
respondent Court of Appeals is AFFIRMED, with costs against petitioner.

SO ORDERED.
G.R. No. 115324
February 19, 2003
PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK),
petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated
June 25, 1991 in CA-G.R. CV No. 11791 and of its Resolution2 dated May 5, 1994,
denying the motion for reconsideration of said decision filed by petitioner Producers
Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and
friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and Services ("Sterela" for brevity).
Specifically, Sanchez asked private respondent to deposit in a bank a certain amount
of money in the bank account of Sterela for purposes of its incorporation. She
assured private respondent that he could withdraw his money from said account
within a months time. Private respondent asked Sanchez to bring Doronilla to their
house so that they could discuss Sanchezs request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella
Dumagpi, Doronillas private secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account
in the name of Sterela in the Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla
authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to
open an account for Sterela Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were Inocencia Vives and/or Angeles
Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs.
Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in
the address previously given to him. Alarmed, he and his wife went to the Bank to
verify if their money was still intact. The bank manager referred them to Mr. Rufo
Atienza, the assistant manager, who informed them that part of the money in Savings
Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said
remaining amount because it had to answer for some postdated checks issued by
Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings
Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and
authorized the Bank to debit Savings Account No. 10-1567 for the amounts necessary
to cover overdrawings in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To
cover payment thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in
Savings Account No. 10-1567 because he was the sole proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29,
1979, he received a letter from Doronilla, assuring him that his money was intact and
would be returned to him. On August 13, 1979, Doronilla issued a postdated check for

Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent.

However, upon presentment thereof by private respondent to the drawee bank, the
check was dishonored. Doronilla requested private respondent to present the same
check on September 15, 1979 but when the latter presented the check, it was again
dishonored.6
Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his clients money. Doronilla issued another check for
P212,000.00 in private respondents favor but the check was again dishonored for
insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional
Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and
petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal
actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
passed away on March 16, 1985 while the case was pending before the trial court.
On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil
Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants
Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay
plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the
legal rate from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary
damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision
dated June 25, 1991, the appellate court affirmed in toto the decision of the RTC.9 It
likewise denied with finality petitioners motion for reconsideration in its Resolution
dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE
TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT
VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT
PETITIONERS BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE
OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE
RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD
LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE
RECORDS OF THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT
APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE
BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE
CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING
THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS
APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION
OF THE LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND

SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF

P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00
FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00
FOR ATTORNEYS FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its
Reply thereto on September 25, 1995. The Court then required private respondent to
submit a rejoinder to the reply. However, said rejoinder was filed only on April 21,
1997, due to petitioners delay in furnishing private respondent with copy of the
reply12 and several substitutions of counsel on the part of private respondent.13 On
January 17, 2001, the Court resolved to give due course to the petition and required
the parties to submit their respective memoranda.14 Petitioner filed its memorandum
on April 16, 2001 while private respondent submitted his memorandum on March 22,
2001.
Petitioner contends that the transaction between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a consumable thing; and
second, the transaction was onerous as Doronilla was obliged to pay interest, as
evidenced by the check issued by Doronilla in the amount of P212,000.00, or
P12,000 more than what private respondent deposited in Sterelas bank account.15
Moreover, the fact that private respondent sued his good friend Sanchez for his failure
to recover his money from Doronilla shows that the transaction was not merely
gratuitous but "had a business angle" to it. Hence, petitioner argues that it cannot be
held liable for the return of private respondents P200,000.00 because it is not privy to
the transaction between the latter and Doronilla.16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be
faulted for allowing Doronilla to withdraw from the savings account of Sterela since
the latter was the sole proprietor of said company. Petitioner asserts that Doronillas
May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to
open a savings account for Sterela, did not contain any authorization for these two to
withdraw from said account. Hence, the authority to withdraw therefrom remained
exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had
legal title to the savings account.17 Petitioner points out that no evidence other than
the testimonies of private respondent and Mrs. Vives was presented during trial to
prove that private respondent deposited his P200,000.00 in Sterelas account for
purposes of its incorporation.18 Hence, petitioner should not be held liable for allowing
Doronilla to withdraw from Sterelas savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts
decision since the findings of fact therein were not accord with the evidence
presented by petitioner during trial to prove that the transaction between private
respondent and Doronilla was a mutuum, and that it committed no wrong in allowing
Doronilla to withdraw from Sterelas savings account.19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is
not liable for the actual damages suffered by private respondent, and neither may it
be held liable for moral and exemplary damages as well as attorneys fees.20
Private respondent, on the other hand, argues that the transaction between him and
Doronilla is not a mutuum but an accommodation,21 since he did not actually part with
the ownership of his P200,000.00 and in fact asked his wife to deposit said amount in
the account of Sterela so that a certification can be issued to the effect that Sterela
had sufficient funds for purposes of its incorporation but at the same time, he retained
some degree of control over his money through his wife who was made a signatory to
the savings account and in whose possession the savings account passbook was
given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas
employer, is liable for the return of his money. He insists that Atienza, petitioners

assistant manager, connived with Doronilla in defrauding private respondent since it

was Atienza who facilitated the opening of Sterelas current account three days after
Mrs. Vives and Sanchez opened a savings account with petitioner for said company,
as well as the approval of the authority to debit Sterelas savings account to cover any
overdrawings in its current account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a
petition for review filed with this Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence presented by the parties
during trial.24 The Courts jurisdiction is in principle limited to reviewing errors of law
that might have been committed by the Court of Appeals.25 Moreover, factual findings
of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on
record.26 There is no showing of any misapprehension of facts on the part of the
Court of Appeals in the case at bar that would require this Court to review and
overturn the factual findings of that court, especially since the conclusions of fact of
the Court of Appeals and the trial court are not only consistent but are also amply
supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction
between private respondent and Doronilla was a commodatum and not a mutuum. A
circumspect examination of the records reveals that the transaction between them
was a commodatum. Article 1933 of the Civil Code distinguishes between the two
kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in
which case the contract is called a commodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However, there
are some instances where a commodatum may have for its object a consumable
thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract
is not the consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is a commodatum and not a
mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract.27 In case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such
determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence
shows that private respondent agreed to deposit his money in the savings account of
Sterela specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned
within thirty (30) days."29 Private respondent merely "accommodated" Doronilla by
lending his money without consideration, as a favor to his good friend Sanchez. It was
however clear to the parties to the transaction that the money would not be removed

from Sterelas savings account and would be returned to private respondent after
thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which
the latter deposited in Sterelas account together with an additional P12,000.00,
allegedly representing interest on the mutuum, did not convert the transaction from a
commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending of the
P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in
commodatum acquires the use of the thing loaned but not its fruits." Hence, it was
only proper for Doronilla to remit to private respondent the interest accruing to the
latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable
for the return of private respondents money because it was not privy to the
transaction between Doronilla and private respondent. The nature of said transaction,
that is, whether it is a mutuum or a commodatum, has no bearing on the question of
petitioners liability for the return of private respondents money because the factual
circumstances of the case clearly show that petitioner, through its employee Mr.
Atienza, was partly responsible for the loss of private respondents money and is
liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on
behalf of Sterela for Savings Account No. 10-1567 expressly states that
"2. Deposits and withdrawals must be made by the depositor personally or upon his
written authority duly authenticated, and neither a deposit nor a withdrawal will be
permitted except upon the production of the depositor savings bank book in which will
be entered by the Bank the amount deposited or withdrawn."30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the
Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom
even without presenting the passbook (which Atienza very well knew was in the
possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals
and the trial court found that Atienza allowed said withdrawals because he was party
to Doronillas "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge,
help and cooperation of Rufo Atienza, assistant manager and cashier of the Makati
(Buendia) branch of the defendant bank. Indeed, the evidence indicates that Atienza
had not only facilitated the commission of the fraud but he likewise helped in devising
the means by which it can be done in such manner as to make it appear that the
transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely
because Atienza was a key officer therein. The records show that plaintiff had
suggested that the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must be in defendants branch
in Makati for "it will be easier for them to get a certification". In fact before he was
introduced to plaintiff, Doronilla had already prepared a letter addressed to the
Buendia branch manager authorizing Angeles B. Sanchez and company to open a
savings account for Sterela in the amount of P200,000.00, as "per coordination with
Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This is a clear
manifestation that the other defendants had been in consultation with Atienza from
the inception of the scheme. Significantly, there were testimonies and admission that
Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business
associate of Doronilla.1awphi1.nt
Then there is the matter of the ownership of the fund. Because of the "coordination"
between Doronilla and Atienza, the latter knew before hand that the money deposited
did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was

explicitly told by Inocencia Vives that the money belonged to her and her husband
and the deposit was merely to accommodate Doronilla. Atienza even declared that
the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose
that the only ones empowered to withdraw the same were Inocencia Vives and
Angeles B. Sanchez. In the signature card pertaining to this account (Exh. J), the
authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated
that it is the usual banking procedure that withdrawals of savings deposits could only
be made by persons whose authorized signatures are in the signature cards on file
with the bank. He, however, said that this procedure was not followed here because
Sterela was owned by Doronilla. He explained that Doronilla had the full authority to
withdraw by virtue of such ownership. The Court is not inclined to agree with Atienza.
In the first place, he was all the time aware that the money came from Vives and did
not belong to Sterela. He was also told by Mrs. Vives that they were only
accommodating Doronilla so that a certification can be issued to the effect that
Sterela had a deposit of so much amount to be sued in the incorporation of the firm.
In the second place, the signature of Doronilla was not authorized in so far as that
account is concerned inasmuch as he had not signed the signature card provided by
the bank whenever a deposit is opened. In the third place, neither Mrs. Vives nor
Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been
presented. It is an accepted practice that whenever a withdrawal is made in a savings
deposit, the bank requires the presentation of the passbook. In this case, such
recognized practice was dispensed with. The transfer from the savings account to the
current account was without the submission of the passbook which Atienza had given
to Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella
Dumagpi that a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati branch in view of a loan
accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly
had a hand in the execution of this certification, was aware that the contents of the
same are not true. He knew that the passbook was in the hands of Mrs. Vives for he
was the one who gave it to her. Besides, as assistant manager of the branch and the
bank official servicing the savings and current accounts in question, he also was
aware that the original passbook was never surrendered. He was also cognizant that
Estrella Dumagpi was not among those authorized to withdraw so her certification
had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate
that Atienzas active participation in the perpetration of the fraud and deception that
caused the loss. The records indicate that this account was opened three days later
after the P200,000.00 was deposited. In spite of his disclaimer, the Court believes
that Atienza was mindful and posted regarding the opening of the current account
considering that Doronilla was all the while in "coordination" with him. That it was he
who facilitated the approval of the authority to debit the savings account to cover any
overdrawings in the current account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of
this case. x x x.31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily
liable for damages caused by their employees acting within the scope of their
assigned tasks. To hold the employer liable under this provision, it must be shown
that an employer-employee relationship exists, and that the employee was acting
within the scope of his assigned task when the act complained of was committed.32
Case law in the United States of America has it that a corporation that entrusts a
general duty to its employee is responsible to the injured party for damages flowing
from the employees wrongful act done in the course of his general authority, even

though in doing such act, the employee may have failed in its duty to the employer
and disobeyed the latters instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore,
petitioner did not deny that Atienza was acting within the scope of his authority as
Assistant Branch Manager when he assisted Doronilla in withdrawing funds from
Sterelas Savings Account No. 10-1567, in which account private respondents money
was deposited, and in transferring the money withdrawn to Sterelas Current Account
with petitioner. Atienzas acts of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioners interests34 even though in the process,
Atienza violated some of petitioners rules such as those stipulated in its savings
account passbook.35 It was established that the transfer of funds from Sterelas
savings account to its current account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was their connivance which
was the cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180
of the Civil Code, petitioner is liable for private respondents loss and is solidarily
liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear
that petitioner failed to prove that it exercised due diligence to prevent the
unauthorized withdrawals from Sterelas savings account, and that it was not
negligent in the selection and supervision of Atienza. Accordingly, no error was
committed by the appellate court in the award of actual, moral and exemplary
damages, attorneys fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution
of the Court of Appeals are AFFIRMED.
SO ORDERED.
G.R. No. 154878
March 16, 2007
CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and
August 20, 2002 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577
which set aside the February 28, 1997 decision of the Regional Trial Court (RTC) of
Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner
Carolyn M. Garcia a crossed check4 dated February 24, 1995 in the amount of US
$100,000 payable to the order of a certain Marilou Santiago.5 Thereafter, petitioner
received from respondent every month (specifically, on March 24, April 26, June 26
and July 26, all in 1995) the amount of US$3,0006 and P76,5007 on July 26,8 August
26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check9 dated
June 29, 1995 in the amount of P500,000, also payable to the order of Marilou
Santiago.10 Consequently, petitioner received from respondent the amount of P20,000
every month on August 5, September 5, October 5 and November 5, 1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996,
petitioner filed a complaint for sum of money and damages in the RTC of Makati City,
Branch 58 against respondent, seeking to collect the sums of US$100,000, with
interest thereon at 3% a month from October 26, 1995 and P500,000, with interest
thereon at 4% a month from November 5, 1995, plus attorneys fees and actual
damages.12

Petitioner alleged that on February 24, 1995, respondent borrowed from her the
amount of US$100,000 with interest thereon at the rate of 3% per month, which loan
would mature on October 26, 1995.13 The amount of this loan was covered by the first
check. On June 29, 1995, respondent again borrowed the amount of P500,000 at an
agreed monthly interest of 4%, the maturity date of which was on November 5,
1995.14 The amount of this loan was covered by the second check. For both loans, no
promissory note was executed since petitioner and respondent were close friends at
the time.15 Respondent paid the stipulated monthly interest for both loans but on their
maturity dates, she failed to pay the principal amounts despite repeated demands.
161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and countered
that it was Marilou Santiago to whom petitioner lent the money. She claimed she was
merely asked by petitioner to give the crossed checks to Santiago.17 She issued the
checks for P76,000 and P20,000 not as payment of interest but to accommodate
petitioners request that respondent use her own checks instead of Santiagos.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found
that respondent borrowed from petitioner the amounts of US$100,000 with monthly
interest of 3% and P500,000 at a monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint,
judgment is hereby rendered in favor of [petitioner], sentencing [respondent] to pay
the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from
October 26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until
fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no
contract of loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her
claim that [respondent] indeed borrowed money from her. There is nothing in the
record that shows that [respondent] received money from [petitioner]. What is
evident is the fact that [respondent] received a MetroBank [crossed] check dated
February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of
P500,000.00, again payable to the order of Marilou Santiago, both of which were
issued by [petitioner]. The checks received by [respondent], being crossed, may
not be encashed but only deposited in the bank by the payee thereof, that is, by
Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may not
be encashed but only deposited in the bank; (b) the check may be negotiated only
onceto one who has an account with the bank; (c) and the act of crossing the check
serves as warning to the holder that the check has been issued for a definite purpose
so that he must inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance
and delivery to the payee in contemplation of law since the latter is not the person
who could take the checks as a holder, i.e., as a payee or indorsee thereof, with intent
to transfer title thereto. Neither could she be deemed as an agent of Marilou Santiago
with respect to the checks because she was merely facilitating the transactions
between the former and [petitioner].

With the foregoing circumstances, it may be fairly inferred that there were really no
contracts of loan that existed between the parties. x x x (emphasis supplied)22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari
under Rule 45 of the Rules of Court. However, this case falls under one of the
exceptions, i.e., when the factual findings of the CA (which held that there were no
contracts of loan between petitioner and respondent) and the RTC (which held that
there were contracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract.25 This is evident in Art. 1934 of the Civil Code
which provides:
An accepted promise to deliver something by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by
the debtor when the checks were encashed) the debtor acquires ownership of such
money or loan proceeds and is bound to pay the creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these checks
were crossed and payable not to the order of respondent but to the order of a certain
Marilou Santiago. Thus the main question to be answered is: who borrowed money
from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were
made payable to Santiago.27 She maintains that it was also upon respondents
instruction that both checks were delivered to her (respondent) so that she could, in
turn, deliver the same to Santiago.28 Furthermore, she argues that once respondent
received the checks, the latter had possession and control of them such that she had
the choice to either forward them to Santiago (who was already her debtor), to retain
them or to return them to petitioner.29
We agree with petitioner. Delivery is the act by which the res or substance thereof is
placed within the actual or constructive possession or control of another.30 Although
respondent did not physically receive the proceeds of the checks, these instruments
were placed in her control and possession under an arrangement whereby she
actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago.31 It was
highly improbable that petitioner would grant two loans to a complete stranger without
requiring as much as promissory notes or any written acknowledgment of the debt
considering that the amounts involved were quite big. Respondent, on the other hand,
already had transactions with Santiago at that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name
appeared in both parties list of witnesses) testified that respondents plan was for
petitioner to lend her money at a monthly interest rate of 3%, after which respondent
would lend the same amount to Santiago at a higher rate of 5% and realize a profit of
2%.33 This explained why respondent instructed petitioner to make the checks
payable to Santiago. Respondent has not shown any reason why Ruiz testimony
should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the
amount of P76,000 each (peso equivalent of US$3,000) for eight months to cover the
monthly interest. For the P500,000 loan, she also issued her own checks in the
amount of P20,000 each for four months.34 According to respondent, she merely
accommodated petitioners request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with Santiago.35 She
claimed, however, that Santiago would replace the checks with cash.36 Her

explanation is simply incredible. It is difficult to believe that respondent would put

herself in a position where she would be compelled to pay interest, from her own
funds, for loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule
that for evidence to be believed, it must not only proceed from the mouth of a credible
witness, but must be credible in itself such as the common experience of mankind
can approve as probable under the circumstances. We have no test of the truth of
human testimony except its conformity to our knowledge, observation, and
experience. Whatever is repugnant to these belongs to the miraculous, and is outside
of juridical cognizance.37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was
respondent, not petitioner, who was listed as one of her (Santiagos) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate
her story.39 The presumption is that "evidence willfully suppressed would be adverse if
produced."40 Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not
borrow the amounts of US$100,000 and P500,000 from petitioner. We instead agree
with the ruling of the RTC making respondent liable for the principal amounts of the
loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly
interest for the US$100,000 and P500,000 loans respectively. There was no written
proof of the interest payable except for the verbal agreement that the loans would
earn 3% and 4% interest per month. Article 1956 of the Civil Code provides that "[n]o
interest shall be due unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest
pursuant to Article 2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.41
Hence, respondent is liable for the payment of legal interest per annum to be
computed from November 21, 1995, the date when she received petitioners demand
letter.42 From the finality of the decision until it is fully paid, the amount due shall earn
interest at 12% per annum, the interim period being deemed equivalent to a
forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees
is deleted since the RTC decision did not explain the factual bases for these
damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and
August 20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are
REVERSED and SET ASIDE. The February 28, 1997 decision of the Regional Trial
Court in Civil Case No. 96-266 is AFFIRMED with the MODIFICATION that
respondent is directed to pay petitioner the amounts of US$100,000 and P500,000 at
12% per annum interest from November 21, 1995 until the finality of the decision. The
total amount due as of the date of finality will earn interest of 12% per annum until
fully paid. The award of actual damages and attorneys fees is deleted.
SO ORDERED.

EN BANC
G.R. No. 144516
February 11, 2004
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner
vs.
COMMISSION ON AUDIT, respondent.
DECISION
CARPIO, J.:
The Case
In this special civil action for certiorari,1 the Development Bank of the Philippines
("DBP") seeks to set aside COA Decision No. 98-4032 dated 6 October 1998 ("COA
Decision") and COA Resolution No. 2000-2123 dated 1 August 2000 issued by the
Commission on Audit ("COA"). The COA affirmed Audit Observation Memorandum
("AOM") No. 93-2,4 which disallowed in audit the dividends distributed under the
Special Loan Program ("SLP") to the members of the DBP Gratuity Plan.
Antecedent Facts
The DBP is a government financial institution with an original charter, Executive Order
No. 81,5 as amended by Republic Act No. 85236 ("DBP Charter"). The COA is a
constitutional body with the mandate to examine and audit all government
instrumentalities and investment of public funds.7
The COA Decision sets forth the undisputed facts of this case as follows:
xxx [O]n February 20, 1980, the Development Bank of the Philippines (DBP) Board of
Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and
authorizing the setting up of a retirement fund to cover the benefits due to DBP
retiring officials and employees under Commonwealth Act No. 186, as amended. The
Gratuity Plan was made effective on June 17, 1967 and covered all employees of the
Bank as of May 31, 1977.
On February 26, 1980, a Trust Indenture was entered into by and between the DBP
and the Board of Trustees of the Gratuity Plan Fund, vesting in the latter the control
and administration of the Fund. The trustee, subsequently, appointed the DBP Trust
Services Department (DBP-TSD) as the investment manager thru an Investment
Management Agreement, with the end in view of making the income and principal of
the Fund sufficient to meet the liabilities of DBP under the Gratuity Plan.
In 1983, the Bank established a Special Loan Program availed thru the facilities of the
DBP Provident Fund and funded by placements from the Gratuity Plan Fund. This
Special Loan Program was adopted as "part of the benefit program of the Bank to
provide financial assistance to qualified members to enhance and protect the value of
their gratuity benefits" because "Philippine retirement laws and the Gratuity Plan do
not allow partial payment of retirement benefits." The program was suspended in
1986 but was revived in 1991 thru DBP Board Resolution No. 066 dated January 5,
1991.
Under the Special Loan Program, a prospective retiree is allowed the option to utilize
in the form of a loan a portion of his "outstanding equity" in the gratuity fund and to
invest it in a profitable investment or undertaking. The earnings of the investment
shall then be applied to pay for the interest due on the gratuity loan which was initially
set at 9% per annum subject to the minimum investment rate resulting from the
updated actuarial study. The excess or balance of the interest earnings shall then be
distributed to the investor-members.
Pursuant to the investment scheme, DBP-TSD paid to the investor-members a total of
P11,626,414.25 representing the net earnings of the investments for the years 1991
and 1992. The payments were disallowed by the Auditor under Audit Observation
Memorandum No. 93-2 dated March 1, 1993, on the ground that the distribution of
income of the Gratuity Plan Fund (GPF) to future retirees of DBP is irregular and
constituted the use of public funds for private purposes which is specifically
proscribed under Section 4 of P.D. 1445.8

AOM No. 93-2 did "not question the authority of the Bank to set-up the [Gratuity Plan]
Fund and have it invested in the Trust Services Department of the Bank."9 Apart from
requiring the recipients of the P11,626,414.25 to refund their dividends, the Auditor
recommended that the DBP record in its books as miscellaneous income the income
of the Gratuity Plan Fund ("Fund"). The Auditor reasoned that "the Fund is still owned
by the Bank, the Board of Trustees is a mere administrator of the Fund in the same
way that the Trust Services Department where the fund was invested was a mere
investor and neither can the employees, who have still an inchoate interest [i]n the
Fund be considered as rightful owner of the Fund."10
In a letter dated 29 July 1996,11 former DBP Chairman Alfredo C. Antonio requested
then COA Chairman Celso D. Gangan to reconsider AOM No. 93-2. Chairman
Antonio alleged that the express trust created for the benefit of qualified DBP
employees under the Trust Agreement12 ("Agreement") dated 26 February 1980 gave
the Fund a separate legal personality. The Agreement transferred legal title over the
Fund to the Board of Trustees and all earnings of the Fund accrue only to the Fund.
Thus, Chairman Antonio contended that the income of the Fund is not the income of
DBP.
Chairman Antonio also asked COA to lift the disallowance of the P11,626,414.25
distributed as dividends under the SLP on the ground that the latter was simply a
normal loan transaction. He compared the SLP to loans granted by other gratuity and
retirement funds, like the GSIS, SSS and DBP Provident Fund.
The Ruling of the Commission on Audit
On 6 October 1998, the COA en banc affirmed AOM No. 93-2, as follows:
The Gratuity Plan Fund is supposed to be accorded separate personality under the
administration of the Board of Trustees but that concept has been effectively
eliminated when the Special Loan Program was adopted. xxx
The Special Loan Program earns for the GPF an interest of 9% per annum, subject to
adjustment after actuarial valuation. The investment scheme managed by the TSD
accumulated more than that as evidenced by the payment of P4,568,971.84 in 1991
and P7,057,442,41 in 1992, to the member-borrowers. In effect, the program is
grossly disadvantageous to the government because it deprived the GPF of higher
investment earnings by the unwarranted entanglement of its resources under the loan
program in the guise of giving financial assistance to the availing employees. xxx
Retirement benefits may only be availed of upon retirement. It can only be demanded
and enjoyed when the employee shall have met the last requisite, that is, actual
retirement under the Gratuity Plan. During employment, the prospective retiree shall
only have an inchoate right over the benefits. There can be no partial payment or
enjoyment of the benefits, in whatever guise, before actual retirement. xxx
PREMISES CONSIDERED, the instant request for reconsideration of the
disallowance amounting to P11,626,414.25 has to be, as it is hereby, denied.13
In its Resolution of 1 August 2000, the COA also denied DBPs second motion for
reconsideration. Citing the Courts ruling in Conte v. COA,14 the COA concluded that
the SLP was actually a supplementary retirement benefit in the guise of "financial
assistance," thus:
At any rate, the Special Loan Program is not just an ordinary and regular transaction
of the Gratuity Plan Fund, as the Bank innocently represents. xxx It is a systematic
investment mix conveniently implemented in a special loan program with the least
participation of the beneficiaries, by merely filing an application and then wait for the
distribution of net earnings. The real objective, of course, is to give financial
assistance to augment the value of the gratuity benefits, and this has the same effect
as the proscribed supplementary pension/retirement plan under Section 28 (b) of
C(ommonwealth) A(ct) 186.
This Commission may now draw authority from the case of Conte, et al. v.
Commission on Audit (264 SCRA 19 [1996]) where the Supreme Court declared that

"financial assistance" granted to retiring employees constitute supplementary

retirement or pension benefits. It was there stated:
"xxx Said Sec. 28 (b) as amended by R.A. 4968 in no uncertain terms bars the
creation of any insurance or retirement plan other than the GSIS for government
officers and employees, in order to prevent the undue and iniquitous proliferation of
such plans. It is beyond cavil that Res. 56 contravenes the said provision of law and
is therefore, invalid, void and of no effect. To ignore this and rule otherwise would be
tantamount to permitting every other government office or agency to put up its own
supplementary retirement benefit plan under the guise of such "financial
assistance."15
Hence, the instant petition filed by DBP.
The Issues
The DBP invokes justice and equity on behalf of its employees because of prevailing
economic conditions. The DBP reiterates that the income of the Fund should be
treated and recorded as separate from the income of DBP itself, and charges that
COA committed grave abuse of discretion:
1. IN CONCLUDING THAT THE ADOPTION OF THE SPECIAL LOAN PROGRAM
CONSTITUTES A CIRCUMVENTION OF PHILIPPINE RETIREMENT LAWS;
2. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM IS GROSSLY
DISADVANTAGEOUS TO THE GOVERNMENT;
3. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM CONSTITUTES A
SUPPLEMENTARY RETIREMENT BENEFIT.16
The Office of the Solicitor General ("OSG"), arguing on behalf of the COA, questions
the standing of the DBP to file the instant petition. The OSG claims that the trustees
of the Fund or the DBP employees themselves should pursue this certiorari
proceeding since they would be the ones to return the dividends and not DBP.
The central issues for resolution are: (1) whether DBP has the requisite standing to
file the instant petition for certiorari; (2) whether the income of the Fund is income of
DBP; and (3) whether the distribution of dividends under the SLP is valid.
The Ruling of the Court
The petition is partly meritorious.
The standing of DBP to file this petition for certiorari
As DBP correctly argued, the COA en banc implicitly recognized DBPs standing
when it ruled on DBPs request for reconsideration from AOM No. 93-2 and motion for
reconsideration from the Decision of 6 October 1998. The supposed lack of standing
of the DBP was not even an issue in the COA Decision or in the Resolution of 1
August 2000.
The OSG nevertheless contends that the DBP cannot question the decisions of the
COA en banc since DBP is a government instrumentality. Citing Section 2, Article IXD of the Constitution,17 the OSG argued that:
Petitioner may ask the lifting of the disallowance by COA, since COA had not yet
made a definitive and final ruling on the matter in issue. But after COA denied with
finality the motion for reconsideration of petitioner, petitioner, being a government
instrumentality, should accept COAs ruling and leave the matter of questioning COAs
decision with the concerned investor-members.18
These arguments do not persuade us.
Section 2, Article IX-D of the Constitution does not bar government instrumentalities
from questioning decisions of the COA. Government agencies and governmentowned and controlled corporations have long resorted to petitions for certiorari to
question rulings of the COA.19 These government entities filed their petitions with this
Court pursuant to Section 7, Article IX of the Constitution, which mandates that
aggrieved parties may bring decisions of the COA to the Court on certiorari.20
Likewise, the Government Auditing Code expressly provides that a government
agency aggrieved by a COA decision, order or ruling may raise the controversy to the

Supreme Court on certiorari "in the manner provided by law and the Rules of Court."21
Rule 64 of the Rules of Court now embodies this procedure, to wit:
SEC 2. Mode of review. A judgment or final order or resolution of the Commission
on Elections and the Commission on Audit may be brought by the aggrieved party to
the Supreme Court on certiorari under Rule 65, except as hereinafter provided.
The novel theory advanced by the OSG would necessarily require persons not parties
to the present case the DBP employees who are members of the Plan or the
trustees of the Fund to avail of certiorari under Rule 65. The petition for certiorari
under Rule 65, however, is not available to any person who feels injured by the
decision of a tribunal, board or officer exercising judicial or quasi-judicial functions.
The "person aggrieved" under Section 1 of Rule 65 who can avail of the special civil
action of certiorari pertains only to one who was a party in the proceedings before the
court a quo,22 or in this case, before the COA. To hold otherwise would open the
courts to numerous and endless litigations.23 Since DBP was the sole party in the
proceedings before the COA, DBP is the proper party to avail of the remedy of
certiorari.
The real party in interest who stands to benefit or suffer from the judgment in the suit
must prosecute or defend an action.24 We have held that "interest" means material
interest, an interest in issue that the decision will affect, as distinguished from mere
interest in the question involved, or a mere incidental interest.25
As a party to the Agreement and a trustor of the Fund, DBP has a material interest in
the implementation of the Agreement, and in the operation of the Gratuity Plan and
the Fund as prescribed in the Agreement. The DBP also possesses a real interest in
upholding the legitimacy of the policies and programs approved by its Board of
Directors for the benefit of DBP employees. This includes the SLP and its
implementing rules, which the DBP Board of Directors confirmed.
The income of the Gratuity Plan Fund
The COA alleges that DBP is the actual owner of the Fund and its income, on the
following grounds: (1) DBP made the contributions to the Fund; (2) the trustees of the
Fund are merely administrators; and (3) DBP employees only have an inchoate right
to the Fund.
The DBP counters that the Fund is the subject of a trust, and that the Agreement
transferred legal title over the Fund to the trustees. The income of the Fund does not
accrue to DBP. Thus, such income should not be recorded in DBPs books of account.
26

A trust is a "fiduciary relationship with respect to property which involves the existence
of equitable duties imposed upon the holder of the title to the property to deal with it
for the benefit of another."27 A trust is either express or implied. Express trusts are
those which the direct and positive acts of the parties create, by some writing or deed,
or will, or by words evincing an intention to create a trust.28
In the present case, the DBP Board of Governors (now Board of Directors)
Resolution No. 794 and the Agreement executed by former DBP Chairman Rafael
Sison and the trustees of the Plan created an express trust, specifically, an
employees trust. An employees trust is a trust maintained by an employer to provide
retirement, pension or other benefits to its employees.29 It is a separate taxable
entity30 established for the exclusive benefit of the employees.31
Resolution No. 794 shows that DBP intended to establish a trust fund to cover the
retirement benefits of certain employees under Republic Act No. 161632 ("RA 1616").
The principal and income of the Fund would be separate and distinct from the funds
of DBP. We quote the salient portions of Resolution No. 794, as follows:
2. Trust Agreement designed for in-house trustees of three (3) to be appointed by
the Board of Governors and vested with control and administration of the funds
appropriated annually by the Board to be invested in selective investments so that the
income and principal of said contributions would be sufficient to meet the

required payments of benefits as officials and employees of the Bank retire

under the Gratuity Plan; xxx
The proposed funding of the gratuity plan has decided advantages on the part of the
Bank over the present procedure, where the Bank provides payment only when an
employee retires or on "pay as you go" basis:
1. It is a definite written program, permanent and continuing whereby the Bank
provides contributions to a separate trust fund, which shall be exclusively used
to meet its liabilities to retiring officials and employees; and
2. Since the gratuity plan will be tax qualified under the National Internal Revenue
Code and RA 4917, the Banks periodic contributions thereto shall be deductible for
tax purposes and the earnings therefrom tax free.33 (Emphasis supplied)
In a trust, one person has an equitable ownership in the property while another
person owns the legal title to such property, the equitable ownership of the former
entitling him to the performance of certain duties and the exercise of certain powers
by the latter.34 A person who establishes a trust is the trustor. One in whom
confidence is reposed as regards property for the benefit of another is the trustee.
The person for whose benefit the trust is created is the beneficiary.35
In the present case, DBP, as the trustor, vested in the trustees of the Fund legal title
over the Fund as well as control over the investment of the money and assets of the
Fund. The powers and duties granted to the trustees of the Fund under the
Agreement were plainly more than just administrative, to wit:
1. The BANK hereby vests the control and administration of the Fund in the
TRUSTEES for the accomplishment of the purposes for which said Fund is intended
in defraying the benefits of the PLAN in accordance with its provisions, and the
TRUSTEES hereby accept the trust xxx
2. The TRUSTEES shall receive and hold legal title to the money and/or property
comprising the Fund, and shall hold the same in trust for its beneficiaries, in
accordance with, and for the uses and purposes stated in the provisions of the PLAN.
3. Without in any sense limiting the general powers of management and
administration given to TRUSTEES by our laws and as supplementary thereto, the
TRUSTEES shall manage, administer, and maintain the Fund with full power and
authority:
xxx
b. To invest and reinvest at any time all or any part of the Fund in any real estate
(situated within the Philippines), housing project, stocks, bonds, mortgages, notes,
other securities or property which the said TRUSTEES may deem safe and proper,
and to collect and receive all income and profits existing therefrom;
c. To keep and maintain accurate books of account and/or records of the Fund xxx.
d. To pay all costs, expenses, and charges incurred in connection with the
administration, preservation, maintenance and protection of the Fund xxx to employ
or appoint such agents or employees xxx.
e. To promulgate, from time to time, such rules not inconsistent with the conditions of
this Agreement xxx.
f. To do all acts which, in their judgment, are needful or desirable for the proper
and advantageous control and management of the Fund xxx.36 (Emphasis
supplied)
Clearly, the trustees received and collected any income and profit derived from the
Fund, and they maintained separate books of account for this purpose. The principal
and income of the Fund will not revert to DBP even if the trust is subsequently
modified or terminated. The Agreement states that the principal and income must be
used to satisfy all of the liabilities to the beneficiary officials and employees under the
Gratuity Plan, as follows:
5. The BANK reserves the right at any time and from time to time (1) to modify or
amend in whole or in part by written directions to the TRUSTEES, any and all of the

provisions of this Trust Agreement, or (2) to terminate this Trust Agreement upon thirty
(30) days prior notice in writing to the TRUSTEES; provided, however, that no
modification or amendment which affects the rights, duties, or responsibilities of the
TRUSTEES may be made without the TRUSTEES consent; and provided, that such
termination, modification, or amendment prior to the satisfaction of all liabilities
with respect to eligible employees and their beneficiaries, does not permit any
part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of eligible employees and workers
as provided for in the PLAN. In the event of termination of this Trust Agreement, all
cash, securities, and other property then constituting the Fund less any amounts
constituting accrued benefits to the eligible employees, charges and expenses
payable from the Fund, shall be paid over or delivered by the TRUSTEES to the
members in proportion to their accrued benefits.37 (Emphasis supplied)
The resumption of the SLP did not eliminate the trust or terminate the transfer of legal
title to the Funds trustees. The records show that the Funds Board of Trustees
approved the SLP upon the request of the DBP Career Officials Association.38 The
DBP Board of Directors only confirmed the approval of the SLP by the Funds
trustees.
The beneficiaries or cestui que trust of the Fund are the DBP officials and employees
who will retire under Commonwealth Act No. 18639 ("CA 186"), as amended by RA
1616. RA 1616 requires the employer agency or government instrumentality to pay for
the retirement gratuity of its employees who rendered service for the required number
of years.40 The Government Service Insurance System Act of 199741 still allows
retirement under RA 1616 for certain employees.
As COA correctly observed, the right of the employees to claim their gratuities from
the Fund is still inchoate. RA 1616 does not allow employees to receive their
gratuities until they retire. However, this does not invalidate the trust created by DBP
or the concomitant transfer of legal title to the trustees. As far back as in Government
v. Abadilla,42 the Court held that "it is not always necessary that the cestui que trust
should be named, or even be in esse at the time the trust is created in his favor." It is
enough that the beneficiaries are sufficiently certain or identifiable.43
In this case, the GSIS Act of 1997 extended the option to retire under RA 1616 only to
employees who had entered government service before 1 June 1977.44 The DBP
employees who were in the service before this date are easily identifiable. As of the
time DBP filed the instant petition, DBP estimated that 530 of its employees could still
retire under RA 1616. At least 60 DBP employees had already received their
gratuities under the Fund.45
The Agreement indisputably transferred legal title over the income and properties of
the Fund to the Funds trustees. Thus, COAs directive to record the income of the
Fund in DBPs books of account as the miscellaneous income of DBP constitutes
grave abuse of discretion. The income of the Fund does not form part of the revenues
or profits of DBP, and DBP may not use such income for its own benefit. The principal
and income of the Fund together constitute the res or subject matter of the trust. The
Agreement established the Fund precisely so that it would eventually be sufficient to
pay for the retirement benefits of DBP employees under RA 1616 without additional
outlay from DBP. COA itself acknowledged the authority of DBP to set up the Fund.
However, COAs subsequent directive would divest the Fund of income, and defeat
the purpose for the Funds creation.
The validity of the Special Loan Program
and the disallowance of P11,626,414.25
In disallowing the P11,626,414.25 distributed as dividends under the SLP, the COA
relied primarily on Republic Act No. 4968 ("RA 4968") which took effect on 17 June
1967. RA 4968 added the following paragraph to Section 28 of CA 186, thus:

(b) Hereafter no insurance or retirement plan for officers or employees shall be

created by any employer. All supplementary retirement or pension plans heretofore in
force in any government office, agency, or instrumentality or corporation owned or
controlled by the government, are hereby declared inoperative or abolished:
Provided, That the rights of those who are already eligible to retire thereunder shall
not be affected.
Even assuming, however, that the SLP constitutes a supplementary retirement plan,
RA 4968 does not apply to the case at bar. The DBP Charter, which took effect on 14
February 1986, expressly authorizes supplementary retirement plans "adopted by and
effective in" DBP, thus:
SEC. 34. Separation Benefits. All those who shall retire from the service or are
separated therefrom on account of the reorganization of the Bank under the
provisions of this Charter shall be entitled to all gratuities and benefits provided
for under existing laws and/or supplementary retirement plans adopted by and
effective in the Bank: Provided, that any separation benefits and incentives which
may be granted by the Bank subsequent to June 1, 1986, which may be in addition to
those provided under existing laws and previous retirement programs of the Bank
prior to the said date, for those personnel referred to in this section shall be funded by
the National Government; Provided, further, that, any supplementary retirement plan
adopted by the Bank after the effectivity of this Chapter shall require the prior
approval of the Minister of Finance.
x x x.
SEC. 37. Repealing Clause. All acts, executive orders, administrative orders,
proclamations, rules and regulations or parts thereof inconsistent with any of the
provisions of this charter are hereby repealed or modified accordingly.46 (Emphasis
supplied)
Being a special and later law, the DBP Charter47 prevails over RA 4968. The DBP
originally adopted the SLP in 1983. The Court cannot strike down the SLP now based
on RA 4968 in view of the subsequent DBP Charter authorizing the SLP.
Nevertheless, the Court upholds the COAs disallowance of the P11,626,414.25 in
dividends distributed under the SLP.
According to DBP Board Resolution No. 0036 dated 25 January 1991, the "SLP
allows a prospective retiree to utilize in the form of a loan, a portion of their
outstanding equity in the Gratuity Plan Fund and to invest [the] proceeds in a
profitable investment or undertaking."48 The basis of the loanable amount was an
employees gratuity fund credit,49 that is to say, what an employee would receive if he
retired at the time he availed of the loan.
In his letter dated 26 October 1983 proposing the confirmation of the SLP, then DBP
Chairman Cesar B. Zalamea stated that:
The primary objective of this proposal therefore is to counteract the unavoidable
decrease in the value of the said retirement benefits through the following scheme:
I. To allow a prospective retiree the option to utilize in the form of a loan, a
portion of his standing equity in the Gratuity Fund and to invest it in a profitable
investment or undertaking. The income or appreciation in value will be for his own
account and should provide him the desired hedge against inflation or erosion in the
value of the peso. This is being proposed since Philippine retirement laws and the
Gratuity Plan do not allow partial payment of retirement benefits, even the
portion already earned, ahead of actual retirement.50 (Emphasis supplied)
As Chairman Zalamea himself noted, neither the Gratuity Plan nor our laws on
retirement allow the partial payment of retirement benefits ahead of actual retirement.
It appears that DBP sought to circumvent these restrictions through the SLP, which
released a portion of an employees retirement benefits to him in the form of a loan.
Certainly, the DBP did this for laudable reasons, to address the concerns of DBP

employees on the devaluation of their retirement benefits. The remaining question is

whether RA 1616 and the Gratuity Plan allow this scheme.
We rule that it is not allowed.
The right to retirement benefits accrues only upon certain prerequisites. First, the
conditions imposed by the applicable law in this case, RA 1616 must be fulfilled.51
Second, there must be actual retirement.52 Retirement means there is "a bilateral act
of the parties, a voluntary agreement between the employer and the employees
whereby the latter after reaching a certain age agrees and/or consents to severe his
employment with the former."53
Severance of employment is a condition sine qua non for the release of retirement
benefits. Retirement benefits are not meant to recompense employees who are still in
the employ of the government. That is the function of salaries and other emoluments.
54 Retirement benefits are in the nature of a reward granted by the State to a
government employee who has given the best years of his life to the service of his
country.55
The Gratuity Plan likewise provides that the gratuity benefit of a qualified DBP
employee shall only be released "upon retirement under th(e) Plan."56 As the COA
correctly pointed out, this means that retirement benefits "can only be demanded and
enjoyed when the employee shall have met the last requisite, that is, actual retirement
under the Gratuity Plan."57
There was thus no basis for the loans granted to DBP employees under the SLP. The
rights of the recipient DBP employees to their retirement gratuities were still inchoate,
if not a mere expectancy, when they availed of the SLP. No portion of their retirement
benefits could be considered as "actually earned" or "outstanding" before retirement.
Prior to retirement, an employee who has served the requisite number of years is only
eligible for, but not yet entitled to, retirement benefits.
The DBP contends that the SLP is merely a normal loan transaction, akin to the loans
granted by the GSIS, SSS and the DBP Provident Fund.
The records show otherwise.
In a loan transaction or mutuum, the borrower or debtor acquires ownership of the
amount borrowed.58 As the owner, the debtor is then free to dispose of or to utilize the
sum he loaned,59 subject to the condition that he should later return the amount with
the stipulated interest to the creditor.60
In contrast, the amount borrowed by a qualified employee under the SLP was not
even released to him. The implementing rules of the SLP state that:
The loan shall be available strictly for the purpose of investment in the following
investment instruments:
a. 182 or 364-day term Time deposits with DBP
b. 182 or 364-day T-bills /CB Bills
c. 182 or 364-day term DBP Blue Chip Fund
The investment shall be registered in the name of DBP-TSD in trust for availeeinvestor for his sole risk and account. Choice of eligible terms shall be at the option of
availee-investor. Investments shall be commingled by TSD and Participation
Certificates shall be issued to each availee-investor.
xxx
IV. LOANABLE TERMS
xxx
e. Allowable Investment Instruments Time Deposit DBP T-Bills/CB Bills and DBP
Blue Chip Fund. TSD shall purchase new securities and/or allocate existing
securities portfolio of GPF depending on liquidity position of the Fund xxx.
xxx
g. Security The loan shall be secured by GS, Certificate of Time Deposit and/or BCF
Certificate of Participation which shall be registered in the name of DBP-TSD in trust

for name of availee-investor and shall be surrendered to the TSD for safekeeping.61
(Emphasis supplied)
In the present case, the Fund allowed the debtor-employee to "borrow" a portion of
his gratuity fund credit solely for the purpose of investing it in certain instruments
specified by DBP. The debtor-employee could not dispose of or utilize the loan in any
other way. These instruments were, incidentally, some of the same securities where
the Fund placed its investments. At the same time the Fund obligated the debtoremployee to assign immediately his loan to DBP-TSD so that the amount could be
commingled with the loans of other employees. The DBP-TSD the same
department which handled and had custody of the Funds accounts then purchased
or re-allocated existing securities in the portfolio of the Fund to correspond to the
employees loans.
Simply put, the amount ostensibly loaned from the Fund stayed in the Fund, and
remained under the control and custody of the DBP-TSD. The debtor-employee never
had any control or custody over the amount he supposedly borrowed. However, DBPTSD listed new or existing investments of the Fund corresponding to the "loan" in the
name of the debtor-employee, so that the latter could collect the interest earned from
the investments.
In sum, the SLP enabled certain DBP employees to utilize and even earn from their
retirement gratuities even before they retired. This constitutes a partial release of their
retirement benefits, which is contrary to RA 1616 and the Gratuity Plan. As we have
discussed, the latter authorizes the release of gratuities from the earnings and
principal of the Fund only upon retirement.
The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released
prior to the retirement of the employees. The trust funds of employees other than
those of private employers are qualified for certain tax exemptions pursuant to
Section 60(B) formerly Section 53(b) of the National Internal Revenue Code.62
Section 60(B) provides:
Section 60. Imposition of Tax.
(A) Application of Tax. The tax imposed by this Title upon individuals shall apply to
the income of estates or of any kind of property held in trust, including:
xxx
(B) Exception. The tax imposed by this Title shall not apply to employees trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer for
the benefit of some or all of his employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose of distributing to such
employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under the
trust, for any part of the corpus or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the exclusive benefit of his
employees: xxx (Emphasis supplied)
The Gratuity Plan provides that the gratuity benefits of a qualified DBP employee
shall be released only "upon retirement under th(e) Plan." If the earnings and principal
of the Fund are distributed to DBP employees prior to their retirement, the Gratuity
Plan will no longer qualify for exemption under Section 60(B). To recall, DBP
Resolution No. 794 creating the Gratuity Plan expressly provides that "since the
gratuity plan will be tax qualified under the National Internal Revenue Code xxx, the
Banks periodic contributions thereto shall be deductible for tax purposes and the
earnings therefrom tax free." If DBP insists that its employees may receive the
P11,626,414.25 dividends, the necessary consequence will be the non-qualification of
the Gratuity Plan as a tax-exempt plan.
Finally, DBP invokes justice and equity on behalf of its affected employees. Equity
cannot supplant or contravene the law.63 Further, as evidenced by the letter of former

DBP Chairman Zalamea, the DBP Board of Directors was well aware of the
proscription against the partial release of retirement benefits when it confirmed the
SLP. If DBP wants "to enhance and protect the value of xxx (the) gratuity benefits" of
its employees, DBP must do so by investing the money of the Fund in the proper and
sound investments, and not by circumventing restrictions imposed by law and the
Gratuity Plan itself.
We nevertheless urge the DBP and COA to provide equitable terms and a sufficient
period within which the affected DBP employees may refund the dividends they
received under the SLP. Since most of the DBP employees were eligible to retire
within a few years when they availed of the SLP, the refunds may be deducted from
their retirement benefits, at least for those who have not received their retirement
benefits.
WHEREFORE, COA Decision No. 98-403 dated 6 October 1998 and COA Resolution
No. 2000-212 dated 1 August 2000 are AFFIRMED with MODIFICATION. The income
of the Gratuity Plan Fund, held in trust for the benefit of DBP employees eligible to
retire under RA 1616, should not be recorded in the books of account of DBP as the
income of the latter.
SO ORDERED.

G.R. No. 147758

June 26, 2002
SPOUSES ARSENIO R. REYES and NIEVES S. REYES, petitioners,
vs.
COURT OF APPEALS and PABLO V. REYES, respondents.
BELLOSILLO, J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals
promulgated on 14 July 2000 in CA-G.R. CV No. 51437 and its Resolution2 of 2 April
2001 denying reconsideration.
This petition arose from a civil case for collection of a sum of money with preliminary
attachment filed by respondent Pablo V. Reyes against his first cousin petitioner
Arsenio R. Reyes and spouse Nieves S. Reyes. According to private respondent,
petitioner-spouses borrowed from him P600,000.00 with interest at five percent (5%)
per month, which totalled P1,726,250.00 at the time of filing of the Complaint. The
loan was to be used supposedly to buy a lot in Paraaque. It was evidenced by an
acknowledgment receipt3 dated 15 July 1990 signed by the petitioner-spouses
Arsenio R. Reyes and Nieves S. Reyes and witness Romeo Rueda, which read:
This is to acknowledge receipt (of) the sum of Five hundred thousand pesos
(P500,000.00) from (?) broken down as follows:
3/16/90
-P300,000.00 7/19/90 chk.168514
7/14/90
-P200,000.00 + P100,000
Total amt. P500,000.00, with corresponding interest at five percent per month (5%)
due and payable every 15th day of the month for a period of six months.
Petitioners paid the interests on the loan with the following BPI Family Bank checks4
drawn against their personal account:
Check No. 147749 16 April 1990 P 15,000.00
Check No. 147827 17 May 1990 P 9,000.00
Check No. 147877 15 June 1990 P 9,000.00
Check No. 147862 13 July 1990 P 15,000.00
Check No. 159586 3 May 1991 P 36,000.00

TOTAL P 84,000.00
Petitioners also turned over to private respondent their Nissan pickup truck worth
P400,000.00 in partial payment of the loan, and on 30 January 1993 petitioner
Arsenio executed a deed of absolute sale5 over the vehicle in favor of respondent.
Respondent's wife Araceli Reyes issued an acknowledgment receipt6 therefor.
Subsequently, petitioners failed to make any further payments despite written demand
for payment on 24 August 1993.7
In their Answer petitioners admitted their loan from respondent but averred that there
was a novation so that the amount loaned was actually converted into respondent's
contribution to a partnership formed between them on 23 March 1990.8 According to
petitioner Nieves, sometime in 1989 respondent Pablo went to their house and
proposed to petitioner Arsenio the formation of a partnership to develop the property
petitioners planned to buy. He agreed and on 23 March 1990 they executed their
Articles of Partnership of Feliz Casa Realty Development, Ltd. Each partner was to
contribute a capital of P2,000,000.00. Arsenio's contribution was his P1,000,000.00
investment with the owner of the real property to be purchased. Respondent Pablo
contributed only P500,000.00.9
While the partnership existed, respondent received a total amount of P84,000.00 in
BPI Family Bank checks as advances from the partnership funds.10 In October 1990
respondent wanted to withdraw from the partnership and asked for the return of his
investment. Petitioners agreed to convert his contribution into a non-interest-bearing
loan of petitioners. In view of the conversion, the advances to respondent through the
BPI Family Bank checks would be deducted from his investment. Petitioners were
also forced to turn over their Nissan pickup truck to respondent to pay the obligation.11
Prior to the conversion of respondent's contribution into a loan, respondent
approached petitioner Nieves and asked her to write an acknowledgment receipt
dated 15 July 1990 for the sum of P500,000.00. According to respondent, the receipt
would be shown only to his family to assure them that he had invested the money
with petitioners. Petitioner Nieves agreed and respondent dictated the words of the
receipt to her. The five percent (5%) interest in the receipt would reflect the amount
respondent would receive in the profits of the investment. Later, respondent
intercalated the date "7/19/90" and the figures "P100,000.00" and "chk. 168514," to
reflect the check he issued to petitioner Nieves. Two (2) days later, respondent
retrieved the amount of P100,000.00 in cash from Nieves.12
On 30 August 1995 the trial court decided in favor of respondent Pablo V. Reyes. It
found that petitioners had incurred an obligation in his favor in the amount of
P600,000.00 evidenced by the promissory note dated 15 July 1990. The evidence
presented by petitioners failed to convince the trial court that the loan obligation was
novated into a contribution to the partnership. Petitioners were ordered to pay
respondent the amount of P1,472,850.00 with legal interest from the date of filing of
the complaint, P15,000.00 as attorney's fees plus P600.00 as appearance fee for
every hearing of the case, plus costs of suit.13
The Court of Appeals likewise found petitioners liable and held that they secured a
loan of P500,000.00 from respondent which was delivered to them on two (2)
separate occasions as reflected in their acknowledgment receipt: P300,000.00 on 16
March 1990 and P200,000.00 on 14 July 1990. On 15 July 1990 petitioner Nieves
wrote an acknowledgment receipt of the same date at respondent Pablo's request.
When the partnership was formed on 23 March 1990 the loan of P300,000.00
became part of respondent's capital contribution to the partnership. However, the
amount remained a loan as evidenced by the acknowledgment receipt and the bank
checks received from petitioners. The receipt was executed months after the
partnership was formed and was clearly valid and binding. The amounts of the checks
respondent received on 16 April 1990 and 13 July 1990, each for P15,000.00, were
equivalent to the five percent (5%) interest of the loan of P300,000.00. The amounts

received on 17 May 1990 and 15 June 1990, each for P9,000.00, were substantial
payments for the interest. At the time these payments were made, the interest for the
loan of P200,000.00 was not yet due. The appellate court further ruled that the
interest of five percent (5%) per month was not usurious as it was freely agreed upon
by the parties and expressly stipulated in writing.14
Hence, the Court of Appeals ordered petitioners to pay respondent P500,000.00 with
interest at five percent (5%) per month from 15 July 1990. The amount of
P400,000.00 was to be deducted from the principal loan beginning 5 February 1993,
less the interest payments in the total amount of P69,000.00 when final payment of
the total amount would be made.15
In this petition for review, petitioners allege that there was a grave misapprehension
of facts on the part of the appellate court because it failed to consider the following
established facts and events and relate these events to the dates when they
occurred: (a) That as of 23 March 1990, a partnership was forged between the
parties; (b) That the P500,000.00 given by respondent to petitioners was originally his
capital contribution to the partnership; (c) That the receipt dated 15 July 1990 is a
simulated document and therefore should not be given any evidentiary weight and
should be declared invalid and legally non-existent; (d) That the checks issued from
16 April 1990 to 13 July 1990 in the total amount of P48,000.00 should be considered
as advances from petitioners to respondent during the time the partnership was
existing and there was no conversion yet of respondent's contribution of P500,000.00
into a loan obligation of petitioners; (e) That respondent's initial capital contribution of
P500,000.00 was converted into a non-interest-bearing loan only in October 1990; (f)
Hence, the check for P36,000.00 issued to respondent by petitioners on 3 May 1991
was plainly in payment of subject loan agreed on by the parties after respondent's
withdrawal of his mentioned investment in the partnership in October 1990; (g) That
during the existence of the partnership from 23 March 1990 to September 1990, there
was definitely no loan to speak of; and, (h) That the total amount of the payments
made by petitioners to respondent as of the date of filing of the complaint is
P484,000.00 and therefore the unpaid balance is only P16,000.00.16
In opposing the petition, respondent states that it raises questions of fact which are
not allowed in a petition for review on certiorari. The findings of fact of the Court of
Appeals are final and conclusive and cannot be reviewed by the Court. Petitioners are
changing their theory of defense this late in the proceedings because they have
alleged different defenses before the courts below.
Petitioners alleged in their Answer that there was originally a loan of P600,000.00
which was later converted into respondent's contribution to the partnership. But in
their appeal to the appellate court and in the present petition, they contend that the
amount involved is only P500,000.00 which was respondent's contribution to the
partnership, later converted into a non-interest-bearing loan. Further, petitioners are
precluded from arguing that the promissory note does not reflect the true intent of the
parties since this issue was not raised in their answer but only for the first time on
appeal to the Court of Appeals.17
While it is true that petitioners failed to raise the question of the genuineness of the
acknowledgment receipt, respondent also failed to timely object to the parol evidence
consisting of the testimony of petitioner Nieves during the trial to prove that the
acknowledgment receipt was a simulated document. In fact, respondent participated
in the trial and even cross-examined petitioner Nieves on this point.
Under the Rules of Court, any objection to the admissibility of evidence should be
made at the time such evidence is offered or soon thereafter as the objection to its
admissibility becomes apparent,18 otherwise the objection will be considered waived
and such evidence will form part of the records of the case as competent and
admissible.19 Failure to object to the parol evidence constitutes a waiver to its
admissibility.20 By his cross-examination, respondent has waived his right to object to

parol evidence.21 He cannot now contend that this issue was not raised before the
trial court as this was threshed out during the trial.
The general rule is that only questions of law may be raised in a petition for review on
certiorari. The appellate jurisdiction of this Court in cases brought to it from the Court
of Appeals is limited to reviewing and revising the errors of law incurred by the latter,
the findings of fact of the Court of Appeals being final as to the former. Its only power
will be to determine if the legal conclusions drawn from the findings of fact are correct.
Barring a showing that the findings complained of are totally devoid of support in the
record, such findings must stand, for the Court is not expected or required to examine
or refute the oral and documentary evidence submitted by the parties.22 This is the
general rule, which in the instant case, we are not inclined to disturb.
In civil cases, the party having the burden of proof must establish his case by
preponderance of evidence,23 or that evidence which is of greater weight or is more
convincing than that which is in opposition to it. It does not mean absolute truth;
rather, it means that the testimony of one side is more believable than the other side,
and that the probability of truth is on one side than on the other.24 In the case at bar,
respondent has successfully overcome the burden of proof.
The Court of Appeals relied on the acknowledgment receipt to hold petitioners liable
for the amount of money loaned, finding it to be a valid and binding promissory note.
We agree. It is valid and binding between the parties who executed it, as a document
evidencing the loan agreement they had entered into. Petitioners' defense that it is a
simulated document which does not reflect the true intent and agreement of the
parties is not persuasive. Petitioners' testimonial evidence cannot stand against the
acknowledgment receipt presented by respondent.
In their Answer in the court below, petitioners alleged that they first obtained a loan
and this was subsequently converted to respondent's contribution to the partnership.
25 Nieves' testimony that the amount was originally respondent's partnership
contribution which was later converted into a loan contradicts this. It has been ruled
that an allegation in a pleading is not evidence but is a declaration that has to be
proved by evidence.26 If evidence contrary to the allegation is presented, such
evidence controls, not the allegation in the pleading itself, although admittedly it may
dent the credibility of the witness,27 as in this case. Variance between petitioners'
allegations and Nieves' testimony convinced the trial court that she was an unreliable
witness. It was precisely for this reason that the trial court rejected her testimony on
this point and resolved that the evidence did not support petitioners' allegation that
there was a novation of the loan.28 The trial court concluded that the money in
question was the object of a loan between the parties and this loan was never the
subject of any novation.
The Court of Appeals likewise found that there was no novation, which is defined as
the extinguishment of an obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, by substituting a new debtor in place of the
old one, or by subrogating a third person to the rights of the creditor.29 For novation to
take place, the following requisites must concur: (a) there must be a previous valid
obligation; (b) there must be an agreement of the parties concerned to a new
contract; (c) there must be the extinguishment of the old contract; and, (d) there must
be the validity of the new contract.30
In the case at bar, the third requisite is not present. The parties did agree that the
amount loaned would be converted into respondent's contribution to the partnership,
but this conversion did not extinguish the loan obligation. The date when the
acknowledgment receipt/promissory note was made negates the claim that the loan
agreement was extinguished through novation since the note was made while the
partnership was in existence.
Significantly, novation is never presumed. It must appear by express agreement of
the parties, or by their acts that are too clear and unequivocal to be mistaken for

anything else. An obligation to pay a sum of money is not novated in a new

instrument wherein the old is ratified by changing only the terms of payment and
adding other obligations not incompatible with the old one, or wherein the old contract
is merely supplemented by the new one.31
When questioned as to why she executed the acknowledgment receipt, Nieves
answered that she did so only at respondent's request, allowing the latter to dictate
the contents of the receipt. The execution of the receipt was supposedly for the
reason that respondent needed to reassure his family that he had indeed invested his
money in a profitable venture. If that was the case, Nieves should have objected to
the inclusion of the statement of interest payments in the receipt. There was no need
to disguise the intended profits as interest payments. Using petitioners' reasoning,
they belonged to the same family so there was no need to conceal the true nature of
the transaction. The statement of the interest payments negates the allegation that it
is merely an acknowledgment receipt and not a promissory note. The appellate court
was correct in concluding that the amount remained a loan despite the partnership
agreement.
But as to the amount of the loan, the trial court and the Court of Appeals differed. The
trial court held it to be P600,000.00 while the appellate court fixed it at P500,000.00.
We agree with the appellate court. The promissory note shows that the amount of
P100,000.00 was merely intercalated by respondent in his own handwriting and was
not initialed by petitioners to show their conformity thereto.
However, we cannot agree with the disposition of the appellate court to apply the
payment of P400,000.00 to the principal of the loan. Instead, the amount should first
be applied to the unpaid interest in accordance with the application of payments
provided in Art. 1253 of the Civil Code.32
WHEREFORE, the assailed Decision of 14 July 2000 in CA-G.R. CV No. 51437 and
the Resolution of 2 April 2001 of respondent Court of Appeals are MODIFIED.
Petitioner-spouses Arsenio R. Reyes and Nieves S. Reyes are ordered to pay
respondent Pablo V. Reyes P500,000.00 with interest at five percent (5%) per month
from 15 July 1990, minus the P484,000.00 corresponding to the value of the pickup
truck of P400,000.00 and the interest payments of P84,000.00 previously paid. No
costs.
SO ORDERED.

G.R. No. 114398 October 24, 1997

CARMEN LIWANAG, petitioner,
vs.
THE HON. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES,
represented by the Solicitor General, respondents.
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 19, 1988 and August, 1988 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 ISIDORA 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 ISIDORA 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 Isidora 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, 1991,
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 Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS
AND TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14)
YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR AS MAXIMUM, 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, 1993, 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: SIX
(6) YEARS, EIGHT (8) MONTHS and TWENTY ONE (21) DAYS of prision mayor, as
minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS of reclusion
temporal, as maximum. In all other respects, the decision is AFFIRMED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution of March 16,
1994, Liwanag filed the instant petition, submitting the following assignment of errors:
1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN THE AFFIRMING THE
CONVICTION OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA,
WHEN CLEARLY THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSEDPETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT
OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE
MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT
CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING
THE ACCUSED-PETITIONER ON GROUNDS OF REASONABLE DOUBT BY
APPLYING THE "EQUIPOISE 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. 1 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: (1) 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 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX
THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency,
to purchase cigarrets (sic) (Philip & Marlboro) to be sold to customers. In the event
the said cigarrets (sic) are not sold, the proceeds of the sale or the said products
(shall) be returned to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or
the said items on or before August 30, 1988.
(SGD & Thumbedmarked) (sic)
CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City
Signed in the presence of:
(Sgd) Illegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. It 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.
In 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. 315, 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, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 186738

September 27, 2010
PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE
ISLANDS,1) Petitioner,
vs.
LIWAYWAY ABASOLO, Respondent.
DECISION
CARPIO MORALES, J.:
Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta.
Cruz, Laguna (the properties), registered as Original Certificates of Title Nos. RO-527
and RO-528. After she passed away, her heirs executed on June 14, 1993 a Special
Power of Attorney (SPA) in favor of Liwayway Abasolo (respondent) empowering her
to sell the properties.2
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which
were being sold for P2,448,960, but as she had no available cash, she broached the
idea of first mortgaging the properties to petitioner Prudential Bank and Trust
Company (PBTC), the proceeds of which would be paid directly to respondent.
Respondent agreed to the proposal.
On Corazon and respondents consultation with PBTCs Head Office, its employee,
Norberto Mendiola (Mendiola), allegedly advised respondent to issue an authorization
for Corazon to mortgage the properties, and for her (respondent) to act as one of the
co-makers so that the proceeds could be released to both of them.
To guarantee the payment of the property, Corazon executed on August 25, 1995 a
Promissory Note for P2,448,960 in favor of respondent.
By respondents claim, in October 1995, Mendiola advised her to transfer the
properties first to Corazon for the immediate processing of Corazons loan application
with assurance that the proceeds thereof would be paid directly to her (respondent),
and the obligation would be reflected in a bank guarantee.
Heeding Mendiolas advice, respondent executed a Deed of Absolute Sale over the
properties in favor of Corazon following which or on December 4, 1995, Transfer
Certificates of Title Nos. 164159 and 164160 were issued in the name of Corazon.
Corazons application for a loan with PBTCs Tondo Branch was approved on
December 1995. She thereupon executed a real estate mortgage covering the
properties to secure the payment of the loan. In the absence of a written request for a
bank guarantee, the PBTC released the proceeds of the loan to Corazon.
Respondent later got wind of the approval of Corazons loan application and the
release of its proceeds to Corazon who, despite repeated demands, failed to pay the
purchase price of the properties.
Respondent eventually accepted from Corazon partial payment in kind consisting of
one owner type jeepney and four passenger jeepneys,3 plus installment payments,
which, by the trial courts computation, totaled P665,000.
In view of Corazons failure to fully pay the purchase price, respondent filed a
complaint for collection of sum of money and annulment of sale and mortgage with
damages, against Corazon and PBTC (hereafter petitioner), before the Regional Trial
Court (RTC) of Sta. Cruz, Laguna.4
In her Answer,5 Corazon denied that there was an agreement that the proceeds of the
loan would be paid directly to respondent. And she claimed that the vehicles
represented full payment of the properties, and had in fact overpaid P76,040.
Petitioner also denied that there was any arrangement between it and respondent
that the proceeds of the loan would be released to her.6 It claimed that it "may
process a loan application of the registered owner of the real property who requests
that proceeds of the loan or part thereof be payable directly to a third party [but] the
applicant must submit a letter request to the Bank."7
On pre-trial, the parties stipulated that petitioner was not a party to the contract of
sale between respondent and Corazon; that there was no written request that the

proceeds of the loan should be paid to respondent; and that respondent received five
vehicles as partial payment of the properties.8
Despite notice, Corazon failed to appear during the trial to substantiate her claims.
By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC rendered
judgment in favor of respondent and against Corazon who was made directly liable to
respondent, and against petitioner who was made subsidiarily liable in the event that
Corazon fails to pay. Thus the trial court disposed:
WHEREFORE, premises considered, finding the plaintiff has established her claim
against the defendants, Corazon Marasigan and Prudential Bank and Trust Company,
judgment is hereby rendered in favor of the plaintiff ordering:
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus
three percent (3%) monthly interest per month from August 25, 1995 until fully paid.
Further, to pay the plaintiff the sum equivalent to twenty percent five [sic] (25%) of
P1,783,960.00 as attorneys fees.
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of
P1,783,960.00 or a portion thereof plus the legal rate of interest per annum until fully
paid in the event that Defendant Corazon Marasigan fails to pay the said amount
or a portion thereof.
Other damages claimed not duly proved are hereby dismissed.
So Ordered.10 (emphasis in the original; underscoring partly in the original, partly
supplied)
In finding petitioner subsidiarily liable, the trial court held that petitioner breached its
understanding to release the proceeds of the loan to respondent:
Liwayway claims that the bank should also be held responsible for breach of its
obligation to directly release to her the proceeds of the loan or part thereof as
payment for the subject lots. The evidence shows that her claim is valid. The Bank
had such an obligation as proven by evidence. It failed to rebut the credible testimony
of Liwayway which was given in a frank, spontaneous, and straightforward manner
and withstood the test of rigorous cross-examination conducted by the counsel of the
Bank. Her credibility is further strengthened by the corroborative testimony of Miguela
delos Reyes who testified that she went with Liwayway to the bank for several times.
In her presence, Norberto Mendiola, the head of the loan department, instructed
Liwayway to transfer the title over the subject lots to Corazon to facilitate the release
of the loan with the guarantee that Liwayway will be paid upon the release of the
proceeds.
Further, Liwayway would not have executed the deed of sale in favor of Corazon had
Norberto Mendiola did not promise and guarantee that the proceeds of the loan would
be directly paid to her. Based on ordinary human experience, she would not have
readily transferred the title over the subject lots had there been no strong and reliable
guarantee. In this case, what caused her to transfer title is the promise and guarantee
made by Norberto Mendiola that the proceeds of the loan would be directly paid to
her. 11 (emphasis underscoring supplied)
On appeal, the Court of Appeals by Decision of January 14, 200812, affirmed the trial
courts decision with modification on the amount of the balance of the purchase price
which was reduced from P1,783,960 to P1,753,960. It disposed:
WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of
the Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH
MODIFICATION as to the amount to be paid which is P1,753,960.00.
SO ORDERED.13 (emphasis in the original; underscoring supplied)
Petitioners motion for reconsideration having been denied by the appellate court by
Resolution of February 23, 2009, the present petition for review was filed.
The only issue petitioner raises is whether it is subsidiarily liable.
The petition is meritorious.

In the absence of a lender-borrower relationship between petitioner and Liwayway,

there is no inherent obligation of petitioner to release the proceeds of the loan to her.
To a banking institution, well-defined lending policies and sound lending practices are
essential to perform its lending function effectively and minimize the risk inherent in
any extension of credit.
Thus, Section X302 of the Manual of Regulations for Banks provides:
X-302. To ensure that timely and adequate management action is taken to maintain
the quality of the loan portfolio and other risk assets and that adequate loss reserves
are set up and maintained at a level sufficient to absorb the loss inherent in the loan
portfolio and other risk assets, each bank shall establish a system of identifying and
monitoring existing or potential problem loans and other risk assets and of evaluating
credit policies vis--vis prevailing circumstances and emerging portfolio trends.
Management must also recognize that loss reserve is a stabilizing factor and that
failure to account appropriately for losses or make adequate provisions for estimated
future losses may result in misrepresentation of the banks financial condition.
In order to identify and monitor loans that a bank has extended, a system of
documentation is necessary. Under this fold falls the issuance by a bank of a
guarantee which is essentially a promise to repay the liabilities of a debtor, in this
case Corazon. It would be contrary to established banking practice if Mendiola issued
a bank guarantee, even if no request to that effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports
petitioners cause:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor before
its revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person. (underscoring supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of
conferring a favor upon her must be present. A written request would have sufficed to
prove this, given the nature of a banking business, not to mention the amount
involved.
Since it has not been established that petitioner had an obligation to Liwayway, there
is no breach to speak of. Liwayways claim should only be directed against Corazon.
Petitioner cannot thus be held subisidiarily liable.
To the Court, Liwayway did not rely on Mendiolas representations, even if he indeed
made them. The contract for Liwayway to sell to Corazon was perfected from the
moment there was a meeting of minds upon the properties-object of the contract and
upon the price. Only the source of the funds to pay the purchase price was yet to be
resolved at the time the two inquired from Mendiola. Consider Liwayways testimony:
Q: We are referring to the promissory note which you aforementioned a while ago,
why did this promissory note come about?
A: Because the negotiation was already completed, sir, and the deed of sale will have
to be executed, I asked the defendant (Corazon) to execute the promissory note first
before I could execute a deed of absolute sale, for assurance that she really pay me,
sir.14 (emphasis and underscoring supplied)
That it was on Corazons execution of a promissory note that prompted Liwayway to
finally execute the Deed of Sale is thus clear.
The trial Courts reliance on the doctrine of apparent authority that the principal, in
this case petitioner, is liable for the obligations contracted by its agent, in this case
Mendiola, does not lie. Prudential Bank v. Court of Appeals15 instructs:

[A] banking corporation is liable to innocent third persons where the representation is
made in the course of its business by an agent acting within the general scope of his
authority even though, in the particular case, the agent is secretly abusing his
authority and attempting to perpetuate fraud upon his principal or some person, for
his own ultimate benefit.16 (underscoring supplied)
The onus probandi that attempt to commit fraud attended petitioners employee
Mendiolas acts and that he abused his authority lies on Liwayway. She, however,
failed to discharge the onus. It bears noting that Mendiola was not privy to the
approval or disallowance of Corazons application for a loan nor that he would benefit
by the approval thereof.
Aside from Liwayways bare allegations, evidence is wanting to show that there was
collusion between Corazon and Mendiola to defraud her. Even in Liwayways
Complaint, the allegation of fraud is specifically directed against Corazon.17
IN FINE, Liwayways cause of action lies against only Corazon.
WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as
it holds petitioner, Prudential Bank and Trust Company (now Bank of the Philippine
Islands), subsidiary liable in case its co-defendant Corazon Marasigan, who did not
appeal the trial courts decision, fails to pay the judgment debt, is REVERSED and
SET ASIDE. The complaint against petitioner is accordingly DISMISSED.
SO ORDERED.
G.R. No. 146918
May 2, 2006
CITIBANK, N.A., Petitioner,
vs.
S P S . L U I S a n d C A R M E L I TA C A B A M O N G A N a n d t h e i r s o n s
LUISCABAMONGAN, JR. and LITO CABAMONGAN, Respondents.
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated January
26, 2001 and the Resolution2 dated July 30, 2001 of the Court of Appeals (CA) in CAG.R. CV No. 59033.
The factual background of the case is as follows:
On August 16, 1993, spouses Luis and Carmelita Cabamongan opened a joint "and/
or" foreign currency time deposit in trust for their sons Luis, Jr. and Lito at the
Citibank, N.A., Makati branch, with Reference No. 60-22214372, in the amount of
$55,216.69 for a term of 182 days or until February 14, 1994, at 2.5625 per cent
interest per annum.3 Prior to maturity, or on November 10, 1993, a person claiming to
be Carmelita went to the Makati branch and pre-terminated the said foreign currency
time deposit by presenting a passport, a Bank of America Versatele Card, an ATM
card and a Mabuhay Credit Card.4 She filled up the necessary forms for pretermination of deposits with the assistance of Account Officer Yeye San Pedro. While
the transaction was being processed, she was casually interviewed by San Pedro
about her personal circumstances and investment plans.5 Since the said person failed
to surrender the original Certificate of Deposit, she had to execute a notarized release
and waiver document in favor of Citibank, pursuant to Citibank's internal procedure,
before the money was released to her.6 The release and waiver document7 was not
notarized on that same day but the money was nonetheless given to the person
withdrawing.8 The transaction lasted for about 40 minutes.9
After said person left, San Pedro realized that she left behind an identification card.10
Thus, San Pedro called up Carmelita's listed address at No. 48 Ranger Street,
Moonwalk Village, Las Pinas, Metro Manila on the same day to have the card picked
up.11 Marites, the wife of Lito, received San Pedro's call and was stunned by the news
that Carmelita preterminated her foreign currency time deposit because Carmelita
was in the United States at that time.12 The Cabamongan spouses work and reside in

California. Marites made an overseas call to Carmelita to inform her about what
happened.13 The Cabamongan spouses were shocked at the news. It seems that
sometime between June 10 and 16, 1993, an unidentified person broke in at the
couple's residence at No. 3268 Baldwin Park Boulevard, Baldwin Park, California.
Initially, they reported that only Carmelita's jewelry box was missing, but later on, they
discovered that other items, such as their passports, bank deposit certificates,
including the subject foreign currency deposit, and identification cards were also
missing.14 It was only then that the Cabamongan spouses realized that their
passports and bank deposit certificates were lost.15
Through various overseas calls, the Cabamongan spouses informed Citibank, thru
San Pedro, that Carmelita was in the United States and did not preterminate their
deposit and that the person who did so was an impostor who could have also been
involved in the break-in of their California residence. San Pedro told the spouses to
submit the necessary documents to support their claim but Citibank concluded
nonetheless that Carmelita indeed preterminated her deposit. In a letter dated
September 16, 1994, the Cabamongan spouses, through counsel, made a formal
demand upon Citibank for payment of their preterminated deposit in the amount of
$55,216.69 with legal interests.16 In a letter dated November 28, 1994, Citibank,
through counsel, refused the Cabamongan spouses' demand for payment, asserting
that the subject deposit was released to Carmelita upon proper identification and
verification.17
On January 27, 1995, the Cabamongan spouses filed a complaint against Citibank
before the Regional Trial Court of Makati for Specific Performance with Damages,
docketed as Civil Case No 95-163 and raffled to Branch 150 (RTC).18
In its Answer dated April 20, 1995, Citibank insists that it was not negligent of its
duties since the subject deposit was released to Carmelita only upon proper
identification and verification.19
At the pre-trial conference the parties failed to arrive at an amicable settlement.20
Thus, trial on the merits ensued.
For the plaintiffs, the Cabamongan spouses themselves and Florenda G. Negre,
Documents Examiner II of the Philippine National Police (PNP) Crime Laboratory in
Camp Crame, Quezon City, testified. The Cabamongan spouses, in essence, testified
that Carmelita could not have preterminated the deposit account since she was in
California at the time of the incident.21 Negre testified that an examination of the
questioned signature and the samples of the standard signatures of Carmelita
submitted in the RTC showed a significant divergence. She concluded that they were
not written by one and the same person.22
For the respondent, Citibank presented San Pedro and Cris Cabalatungan, VicePresident and In-Charge of Security and Management Division. Both San Pedro and
Cabalatungan testified that proper bank procedure was followed and the deposit was
released to Carmelita only upon proper identification and verification.23
On July 1, 1997, the RTC rendered a decision in favor of the Cabamongan spouses
and against Citibank, the dispositive portion of which reads, thus:
WHEREFORE, premises considered, defendant Citibank, N.A., is hereby ordered to
pay the plaintiffs the following:
1) the principal amount of their Foreign Currency Deposit (Reference No.
6022214372) amounting to $55,216.69 or its Phil. Currency equivalent plus interests
from August 16, 1993 until fully paid;
2) Moral damages of P50,000.00;
3) Attorney's fees of P50,000.00; and
4) Cost of suit.
SO ORDERED.24
The RTC reasoned that:

xxx Citibank, N.A., committed negligence resulting to the undue suffering of the
plaintiffs. The forgery of the signatures of plaintiff Carmelita Cabamongan on the
questioned documents has been categorically established by the handwriting expert.
xxx Defendant bank was clearly remiss in its duty and obligations to treat plaintiff's
account with the highest degree of care, considering the nature of their relationship.
Banks are under the obligation to treat the accounts of their depositors with
meticulous care. This is the reason for their established procedure of requiring
several specimen signatures and recent picture from potential depositors. For every
transaction, the depositor's signature is passed upon by personnel to check and
countercheck possible irregularities and therefore must bear the blame when they fail
to detect the forgery or discrepancy.25
Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a
motion to partially reconsider the decision by praying for an increase of the amount of
the damages awarded.26 Citibank opposed the motion.27 On November 19, 1997, the
RTC granted the motion for partial reconsideration and amended the dispositive
portion of the decision as follows:
From the foregoing, and considering all the evidence laid down by the parties, the
dispositive portion of the court's decision dated July 1, 1997 is hereby amended and/
or modified to read as follows:
WHEREFORE, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the
following:
1) the principal amount of their foreign currency deposit (Reference No. 6022214372)
amounting to $55,216.69 or its Philippine currency equivalent (at the time of its actual
payment or execution) plus legal interest from Aug. 16, 1993 until fully paid.
2) moral damages in the amount of P200,000.00;
3) exemplary damages in the amount of P100,000.00;
4) attorney's fees of P100,000.00;
5) litigation expenses of P200,000.00;
6) cost of suit.
SO ORDERED.28
Dissatisfied, Citibank filed an appeal with the CA, docketed as CA-G.R. CV No.
59033.29 On January 26, 2001, the CA rendered a decision sustaining the finding of
the RTC that Citibank was negligent, ratiocinating in this wise:
In the instant case, it is beyond dispute that the subject foreign currency deposit was
pre-terminated on 10 November 1993. But Carmelita Cabamongan, who works as a
nursing aid (sic) at the Sierra View Care Center in Baldwin Park, California, had
shown through her Certificate of Employment and her Daily Time Record from the
[sic] January to December 1993 that she was in the United States at the time of the
incident.
Defendant Citibank, N.A., however, insists that Carmelita was the one who preterminated the deposit despite claims to the contrary. Its basis for saying so is the fact
that the person who made the transaction on the incident mentioned presented a
valid passport and three (3) other identification cards. The attending account officer
examined these documents and even interviewed said person. She was satisfied that
the person presenting the documents was indeed Carmelita Cabamongan. However,
such conclusion is belied by these following circumstances.
First, the said person did not present the certificate of deposit issued to Carmelita
Cabamongan. This would not have been an insurmountable obstacle as the bank, in
the absence of such certificate, allows the termination of the deposit for as long as the
depositor executes a notarized release and waiver document in favor of the bank.
However, this simple procedure was not followed by the bank, as it terminated the
deposit and actually delivered the money to the impostor without having the said
document notarized on the flimsy excuse that another department of the bank was in
charge of notarization. The said procedure was obviously for the protection of the

bank but it deliberately ignored such precaution. At the very least, the conduct of the
bank amounts to negligence.
Second, in the internal memorandum of Account Officer Yeye San Pedro regarding
the incident, she reported that upon comparing the authentic signatures of Carmelita
Cabamongan on file with the bank with the signatures made by the person claiming to
be Cabamongan on the documents required for the termination of the deposit, she
noticed that one letter in the latter [sic] signatures was different from that in the
standard signatures. She requested said person to sign again and scrutinized the
identification cards presented. Presumably, San Pedro was satisfied with the second
set of signatures made as she eventually authorized the termination of the deposit.
However, upon examination of the signatures made during the incident by the
Philippine National Police (PNP) Crime Laboratory, the said signatures turned out to
be forgeries. As the qualifications of Document Examiner Florenda Negre were
established and she satisfactorily testified on her findings during the trial, we have no
reason to doubt the validity of her findings. Again, the bank's negligence is patent.
San Pedro was able to detect discrepancies in the signatures but she did not exercise
additional precautions to ascertain the identity of the person she was dealing with. In
fact, the entire transaction took only 40 minutes to complete despite the anomalous
situation. Undoubtedly, the bank could have done a better job.
Third, as the bank had on file pictures of its depositors, it is inconceivable how bank
employees could have been duped by an impostor. San Pedro admitted in her
testimony that the woman she dealt with did not resemble the pictures appearing on
the identification cards presented but San Pedro still went on with the sensitive
transaction. She did not mind such disturbing anomaly because she was convinced of
the validity of the passport. She also considered as decisive the fact that the impostor
had a mole on her face in the same way that the person in the pictures on the
identification cards had a mole. These explanations do not account for the disparity
between the pictures and the actual appearance of the impostor. That said person
was allowed to withdraw the money anyway is beyond belief.
The above circumstances point to the bank's clear negligence. Bank transactions
pass through a successive [sic] of bank personnel, whose duty is to check and
countercheck transactions for possible errors. While a bank is not expected to be
infallible, it must bear the blame for failing to discover mistakes of its employees
despite established bank procedure involving a battery of personnel designed to
minimize if not eliminate errors. In the instant case, Yeye San Pedro, the employee
who primarily dealt with the impostor, did not follow bank procedure when she did not
have the waiver document notarized. She also openly courted disaster by ignoring
discrepancies between the actual appearance of the impostor and the pictures she
presented, as well as the disparities between the signatures made during the
transaction and those on file with the bank. But even if San Pedro was negligent, why
must the other employees in the hierarchy of the bank's work flow allow such thing to
pass unnoticed and unrectified?30
The CA, however, disagreed with the damages awarded by the RTC. It held that,
insofar as the date from which legal interest of 12% is to run, it should be counted
from September 16, 1994 when extrajudicial demand was made. As to moral
damages, the CA reduced it to P100,000.00 and deleted the awards of exemplary
damages and litigation expenses. Thus, the dispositive portion of the CA decision
reads:
WHEREFORE, the decision of the trial court dated 01 July 1997, and its order dated
19 November 1997, are hereby AFFIRMED with the MODIFICATION that the legal
interest for actual damages awarded in the amount of $55,216.69 shall run from 16
September 1994; exemplary damages amounting to P100,000.00 and litigation
expenses amounting to P200,000.00 are deleted; and moral damages is reduced to
P100,000.00.

Costs against defendant.

SO ORDERED.31
The Cabamongan spouses filed a motion for partial reconsideration on the matter of
the award of damages in the decision.32 On July 30, 2001, the
CA granted in part said motion and modified its decision as follows:
1. The actual damages in amount of $55,216.69, representing the amount of
appellees' foreign currency time deposit shall earn an interest of 2.5625% for the
period 16 August 1993 to 14 February 1994, as stipulated in the contract;
2. From 16 September 1994 until full payment, the amount of $55,216.69 shall earn
interest at the legal rate of 12% per annum, and;
3. The award of moral damages is reduced to P50,000.00.33
Dissatisfied, both parties filed separate petitions for review on certiorari with this
Court. The Cabamongan spouses' petition, docketed as G.R. No. 149234, was
denied by the Court per its Resolution dated October 17, 2001.34 On the other hand,
Citibank's petition was given due course by the Court per Resolution dated December
10, 2001 and the parties were required to submit their respective memoranda.35
Citibank poses the following errors for resolution:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND GRAVELY
ABUSED ITS DISCRETION IN UPHOLDING THE LOWER COURT'S DECISION
W H I C H I S N O T B A S E D O N C L E A R E V I D E N C E B U T O N G R AV E
MISAPPREHENSION OF FACTS.
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING
THE DECISION OF THE TRIAL COURT AWARDING MORAL DAMAGES WHEN IN
FACT THERE IS NO BASIS IN LAW AND FACT FOR SAID AWARD.
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT
THE PRINCIPAL AMOUNT OF US$55,216.69 SHOULD EARN INTEREST AT THE
RATE OF 12% PER ANNUM FROM 16 SEPTEMBER 1994 UNTIL FULL PAYMENT.
36

Anent the first ground, Citibank contends that the CA erred in affirming the RTC's
finding that it was negligent since the said courts failed to appreciate the extra
diligence of a good father of a family exercised by Citibank thru San Pedro.
As to the second ground, Citibank argues that the Cabamongan spouses are not
entitled to moral damages since moral damages can be awarded only in cases of
breach of contract where the bank has acted willfully, fraudulently or in bad faith. It
submits that it has not been shown in this case that Citibank acted willfully,
fraudulently or in bad faith and mere negligence, even if the Cabamongan spouses
suffered mental anguish or serious anxiety on account thereof, is not a ground for
awarding moral damages.
On the third ground, Citibank avers that the interest rate should not be 12% but the
stipulated rate of 2.5625% per annum. It adds that there is no basis to pay the interest
rate of 12% per annum from September 16, 1994 until full payment because as of
said date there was no legal ground yet for the Cabamongan spouses to demand
payment of the principal and it is only after a final judgment is issued declaring that
Citibank is obliged to return the principal amount of US$55,216.69 when the right to
demand payment starts and legal interest starts to run.
On the other hand, the Cabamongan spouses contend that Citibank's negligence has
been established by evidence. As to the interest rate, they submit that the stipulated
interest of 2.5635% should apply for the 182-day contract period from August 16,
1993 to February 14, 1993; thereafter, 12% should apply. They further contend that
the RTC's award of exemplary damages of P100,000.00 should be maintained. They
submit that the CA erred in treating the award of litigation expenses as lawyer's fees
since they have shown that they incurred actual expenses in litigating their claim
against Citibank. They also contend that the CA erred in reducing the award of moral

damages in view of the degree of mental anguish and emotional fears, anxieties and
nervousness suffered by them.37
Subsequently, Citibank, thru a new counsel, submitted a Supplemental Memorandum,
38 wherein it posits that, assuming that it was negligent, the Cabamongan spouses
were guilty of contributory negligence since they failed to notify Citibank that they had
migrated to the United States and were residents thereat and after having been
victims of a burglary, they should have immediately assessed their loss and informed
Citibank of the disappearance of the bank certificate, their passports and other
identification cards, then the fraud would not have been perpetuated and the losses
avoided. It further argues that since the Cabamongan spouses are guilty of
contributory negligence, the doctrine of last clear chance is inapplicable.
Citibank's assertion that the Cabamongan spouses are guilty of contributory
negligence and non-application of the doctrine of last clear chance cannot pass
muster since these contentions were raised for the first time only in their
Supplemental Memorandum. Indeed, the records show that said contention were
neither pleaded in the petition for review and the memorandum nor in Citibank's
Answer to the complaint or in its appellant's brief filed with the CA. To consider the
alleged facts and arguments raised belatedly in a supplemental pleading to herein
petition for review at this very late stage in the proceedings would amount to
trampling on the basic principles of fair play, justice and due process.391avvphil.net
The Court has repeatedly emphasized that, since the banking business is impressed
with public interest, of paramount importance thereto is the trust and confidence of
the public in general. Consequently, the highest degree of diligence40 is expected,41
and high standards of integrity and performance are even required, of it.42 By the
nature of its functions, a bank is "under obligation to treat the accounts of its
depositors with meticulous care,43 always having in mind the fiduciary nature of their
relationship."44
In this case, it has been sufficiently shown that the signatures of Carmelita in the
forms for pretermination of deposits are forgeries. Citibank, with its signature
verification procedure, failed to detect the forgery. Its negligence consisted in the
omission of that degree of diligence required of banks. The Court has held that a
bank is "bound to know the signatures of its customers; and if it pays a forged check,
it must be considered as making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose name was
forged."45 Such principle equally applies here.
Citibank cannot label its negligence as mere mistake or human error. Banks handle
daily transactions involving millions of pesos.46 By the very nature of their works the
degree of responsibility, care and trustworthiness expected of their employees and
officials is far greater than those of ordinary clerks and employees.47 Banks are
expected to exercise the highest degree of diligence in the selection and supervision
of their employees.48
The Court agrees with the observation of the CA that Citibank, thru Account Officer
San Pedro, openly courted disaster when despite noticing discrepancies in the
signature and photograph of the person claiming to be Carmelita and the failure to
surrender the original certificate of time deposit, the pretermination of the account
was allowed. Even the waiver document was not notarized, a procedure meant to
protect the bank. For not observing the degree of diligence required of banking
institutions, whose business is impressed with public interest, Citibank is liable for
damages.
As to the interest rate, Citibank avers that the claim of the Cabamongan spouses
does not constitute a loan or forbearance of money and therefore, the interest rate of
6%, not 12%, applies.
The Court does not agree.

The time deposit subject matter of herein petition is a simple loan. The provisions of
the New Civil Code on simple loan govern the contract between a bank and its
depositor. Specifically, Article 1980 thereof categorically provides that ". . . savings . . .
deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan." Thus, the relationship between a bank and its
depositor is that of a debtor-creditor, the depositor being the creditor as it lends the
bank money, and the bank is the debtor which agrees to pay the depositor on
demand.
The applicable interest rate on the actual damages of $55,216.69, should be in
accordance with the guidelines set forth in Eastern Shipping Lines, Inc. v. Court of
Appeals49 to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest, in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.50
Thus, in a loan or forbearance of money, the interest due should be that stipulated in
writing, and in the absence thereof, the rate shall be 12% per annum counted from
the time of demand. Accordingly, the stipulated interest rate of 2.562% per annum
shall apply for the 182-day contract period from August 16, 1993 to February 14,
1994. For the period from the date of extra-judicial demand, September 16, 1994,
until full payment, the rate of 12% shall apply. As for the intervening period between
February 15, 1994 to September 15, 1994, the rate of interest then prevailing granted
by Citibank shall apply since the time deposit provided for roll over upon maturity of
the principal and interest.51
As to moral damages, in culpa contractual or breach of contract, as in the case before
the Court, moral damages are recoverable only if the defendant has acted
fraudulently or in bad faith,52 or is found guilty of gross negligence amounting to bad

faith, or in wanton disregard of his contractual obligations.53 The act of Citibank's

employee in allowing the pretermination of Cabamongan spouses' account despite
the noted discrepancies in Carmelita's signature and photograph, the absence of the
original certificate of time deposit and the lack of notarized waiver dormant,
constitutes gross negligence amounting to bad faith under Article 2220 of the Civil
Code.
There is no hard-and-fast rule in the determination of what would be a fair amount of
moral damages since each case must be governed by its own peculiar facts. The
yardstick should be that it is not palpably and scandalously excessive.54 The amount
of P50,000.00 awarded by the CA is reasonable and just. Moreover, said award is
deemed final and executory insofar as respondents are concerned considering that
their petition for review had been denied by the Court in its final and executory
Resolution dated October 17, 2001 in G.R. No. 149234.
Finally, Citibank contends that the award of attorney's fees should be deleted since
such award appears only in the dispositive portion of the decision of the RTC and the
latter failed to elaborate, explain and justify the same.
Article 2208 of the New Civil Code enumerates the instances where such may be
awarded and, in all cases, it must be reasonable, just and equitable if the same were
to be granted. Attorney's fees as part of damages are not meant to enrich the winning
party at the expense of the losing litigant. They are not awarded every time a party
prevails in a suit because of the policy that no premium should be placed on the right
to litigate.55 The award of attorney's fees is the exception rather than the general rule.
As such, it is necessary for the court to make findings of facts and law that would
bring the case within the exception and justify the grant of such award. The matter of
attorney's fees cannot be mentioned only in the dispositive portion of the decision.56
They must be clearly explained and justified by the trial court in the body of its
decision. Consequently, the award of attorney's fees should be deleted.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision
and Resolution are AFFIRMED with MODIFICATIONS, as follows:
1. The interest shall be computed as follows:
a. The actual damages in principal amount of $55,216.69, representing the amount of
foreign currency time deposit shall earn interest at the stipulated rate of 2.5625% for
the period August 16, 1993 to February 14, 1994;
b. From February 15, 1994 to September 15, 1994, the principal amount of
$55,216.69 and the interest earned as of February 14, 1994 shall earn interest at the
rate then prevailing granted by Citibank;
c. From September 16, 1994 until full payment, the principal amount of $55,216.69
and the interest earned as of September 15, 1994, shall earn interest at the legal rate
of 12% per annum;
2. The award of attorney's fees is DELETED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 159912
August 17, 2007
UNITED COCONUT PLANTERS BANK, Petitioner,
vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which
seeks to annul the Court of Appeals Decision1 dated 21 January 2003 and its
Resolution2 dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court
of Appeals Decision and Resolution affirmed in turn the Decision3 dated 23 March

2000 and Order4 dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of
Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in the
promissory notes executed by the respondents Spouses Samuel and Odette Beluso
(spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under
a Credit Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The
spouses Beluso constituted, other than their promissory notes, a real estate mortgage
over parcels of land in Roxas City, covered by Transfer Certificates of Title No.
T-31539 and T-27828, as additional security for the obligation. The Credit Agreement
was subsequently amended to increase the amount of the Promissory Notes Line to a
maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following
Promissory Notes: toinks
The three promissory notes were renewed several times. On 30 April 1997, the
payment of the principal and interest of the latter two promissory notes were debited
from the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3
Million was again released to the spouses Beluso under one promissory note with a
due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by
UCPB, the spouses Beluso executed two more promissory notes for a total of
P350,000.00: toinks
However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus, claimed
that the principal indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes ranging
from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay
the total sum of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
penalty on the obligations of the spouses Beluso, as follows:toinks
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed
to comply therewith. On 28 December 1998, UCPB foreclosed the properties
mortgaged by the spouses Beluso to secure their credit line, which, by that time,
already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting
and Damages against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the
case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate
used by [UCPB] void and the foreclosure and Sheriffs Certificate of Sale void.
[UCPB] is hereby ordered to return to [the spouses Beluso] the properties subject of
the foreclosure; to pay [the spouses Beluso] the amount of P50,000.00 by way of
attorneys fees; and to pay the costs of suit. [The spouses Beluso] are hereby ordered
to pay [UCPB] the sum of P1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,6 prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of Appeals
affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the
Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby
AFFIRMED subject to the modification that defendant-appellant UCPB is not liable for
attorneys fees or the costs of suit.7

On 9 September 2003, the Court of Appeals denied UCPBs Motion for

Reconsideration for lack of merit. UCPB thus filed the present petition, submitting the
following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST
RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION
BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS AND ORDERED
RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION
FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS
(P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF
TH E SU B J E C T P R OPERTIES D U E TO AN AL L EGED "IN C OR R EC T
COMPUTATION" OF RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF
THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF
THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision
found in the promissory notes of the spouses Beluso is void, as the interest rates and
the bases therefor were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND
ODETTE BELUSO (BORROWER), jointly and severally promise to pay to UNITED
COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue,
Makati City, Philippines, the sum of ______________ PESOS, (P_____), Philippine
Currency, with interest thereon at the rate indicative of DBD retail rate or as
determined by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate was
not numerically quantified in the face of the promissory notes, it was nonetheless
categorically fixed, at the time of execution thereof, at the "rate indicative of the DBD
retail rate." UCPB contends that said provision must be read with another stipulation
in the promissory notes subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions;
or the rate of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or the resulting profitability to the
LENDER after due consideration of all dealings with the BORROWER.10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing
rate" or "prime rate" allowed by this Court in Polotan v. Court of Appeals.11
Furthermore, UCPB argues that even if the proviso "as determined by the branch

head" is considered void, such a declaration would not ipso facto render the
connecting clause "indicative of DBD retail rate" void in view of the separability clause
of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in
this AGREEMENT, or documents executed in connection herewith shall be declared
invalid, illegal or unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions hereof shall not in any way be affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not infringe on
the principle of mutuality of contracts, because the spouses Beluso had the liberty to
choose whether or not to renew their credit line at the new interest rates pegged by
petitioner.13 UCPB also claims that assuming there was any defect in the mutuality of
the contract at the time of its inception, such defect was cured by the subsequent
conduct of the spouses Beluso in availing themselves of the credit line from April
1996 to February 1998 without airing any protest with respect to the interest rates
imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in
estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals,15 where we
held:
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality.
A contract containing a condition which makes its fulfillment dependent exclusively
upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita
Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of
the loan, that license would have been null and void for being violative of the principle
of mutuality essential in contracts. It would have invested the loan agreement with the
character of a contract of adhesion, where the parties do not bargain on equal footing,
the weaker party's (the debtor) participation being reduced to the alternative "to take it
or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is
a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate
or as determined by the Branch Head" is indeed dependent solely on the will of
petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the
interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head. As UCPB is given this choice, the rate should be
categorically determinable in both choices. If either of these two choices presents an
opportunity for UCPB to fix the rate at will, the bank can easily choose such an option,
thus making the entire interest rate provision violative of the principle of mutuality of
contracts.
Not just one, but rather both, of these choices are dependent solely on the will of
UCPB. Clearly, a rate "as determined by the Branch Head" gives the latter unfettered
discretion on what the rate may be. The Branch Head may choose any rate he or she
desires. As regards the rate "indicative of the DBD retail rate," the same cannot be
considered as valid for being akin to a "prevailing rate" or "prime rate" allowed by this
Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. x x x.16

In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus,
the parties can easily determine the interest rate by applying simple arithmetic. On
the other hand, the provision in the case at bar does not specify any margin above or
below the DBD retail rate. UCPB can peg the interest at any percentage above or
below the DBD retail rate, again giving it unfettered discretion in determining the
interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not
render the imposition by UCPB of interest rates on the obligations of the spouses
Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the
LENDER considering among others the prevailing financial and monetary conditions;
or the rate of interest and charges which other banks or financial institutions charge or
offer to charge for similar accommodations; and/or the resulting profitability to the
LENDER after due consideration of all dealings with the BORROWER.17
It should be pointed out that the authority to review the interest rate was given UCPB
alone as the lender. Moreover, UCPB may apply the considerations enumerated in
this provision as it wishes. As worded in the above provision, UCPB may give as
much weight as it desires to each of the following considerations: (1) the prevailing
financial and monetary condition; (2) the rate of interest and charges which other
banks or financial institutions charge or offer to charge for similar accommodations;
and/or (3) the resulting profitability to the LENDER (UCPB) after due consideration of
all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the
interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options
of UCPB as to the interest to be imposed, as both options violate the principle of
mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or is against public
policy.18
The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed
later, because they violate the Truth in Lending Act. Not disclosing the true finance
charges in connection with the extensions of credit is, furthermore, a form of
deception which we cannot countenance. It is against the policy of the State as stated
in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to
protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the
offending provisions are found in the promissory notes themselves, not in the credit
line. In fixing the interest rates in the promissory notes to cover the renewed credit
line, UCPB still reserved to itself the same two options (1) a rate indicative of the
DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest
rates imposed by UCPB, both failed to include in their computation of the outstanding
obligation of the spouses Beluso the legal rate of interest of 12% per annum.
Furthermore, the penalty charges were also deleted in the decisions of the RTC and
the Court of Appeals. Section 2.04, Article II on "Interest and other Bank Charges" of
the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01
of this ARTICLE, any principal obligation of the CLIENT hereunder which is not paid

when due shall be subject to a penalty charge of one percent (1%) of the amount of
such obligation per month computed from due date until the obligation is paid in full. If
the bank accelerates teh (sic) payment of availments hereunder pursuant to ARTICLE
VIII hereof, the penalty charge shall be used on the total principal amount outstanding
and unpaid computed from the date of acceleration until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and
severally, agree to pay an additional sum equivalent to twenty-five percent (25%) of
the total due on the Note as attorneys fee, aside from the expenses and costs of
collection whether actually incurred or not, and a penalty charge of one percent (1%)
per month on the total amount due and unpaid from date of default until fully paid.21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to
Section 9.06 of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights
under this AGREEMENT, the Note(s), the collaterals and other related documents,
the BANK shall be entitled to recover attorneys fees equivalent to not less than
twenty-five percent (25%) of the total amounts due and outstanding exclusive of costs
and other expenses.22
Another alleged computational error pointed out by UCPB is the negation of the
Compounding Interest agreed upon by the parties under Section 2.02 of the Credit
Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the
principal and shall be subject to the same interest rate as herein stipulated.23 and
paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal and
shall likewise bear interest at the same rate.24
UCPB lastly avers that the application of the spouses Belusos payments in the
disputed computation does not reflect the parties agreement.1avvphi1 The RTC
deducted the payment made by the spouses Beluso amounting to P763,693.00 from
the principal of P2,350,000.00. This was allegedly inconsistent with the Credit
Agreement, as well as with the agreement of the parties as to the facts of the case. In
paragraph 7 of the spouses Belusos Manifestation and Motion on Proposed
Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties agreed
that the amount of P763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on "Order of the
Application of Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied
in accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees
had been erroneously excluded by the RTC and the Court of Appeals from the
computation of the total amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by
UCPB is for a considerably bigger amount and, therefore, the demand should be
considered void. There being no valid demand, according to the spouses Beluso,
there would be no default, and therefore the interests and penalties would not

commence to run. As it was likewise improper to foreclose the mortgaged properties

or file a case against the spouses Beluso, attorneys fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial
demand.26 The excess amount in such a demand does not nullify the demand itself,
which is valid with respect to the proper amount. A contrary ruling would put
commercial transactions in disarray, as validity of demands would be dependent on
the exactness of the computations thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses
Beluso are considered in default with respect to the proper amount and, therefore, the
interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: "There being no valid
stipulation as to interest, the legal rate of interest shall be charged."27 It seems that
the RTC inadvertently overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate
of interest in both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the
respondent Bank is null and void, only the legal rate of interest which is 12% per
annum can be legally charged and imposed by the bank, which would amount to only
about P599,000.00 since 1996 up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair advantage
of the weaker party to their contract, declaring the legal rate of 12% per annum, as
the imposable rate of interest up to February 28, 1999 on the loan of 2.350 million.28
All these show that the spouses Beluso had acknowledged before the RTC their
obligation to pay a 12% legal interest on their loans. When the RTC failed to include
the 12% legal interest in its computation, however, the spouses Beluso merely
defended in the appellate courts this non-inclusion, as the same was beneficial to
them. We see, however, sufficient basis to impose a 12% legal interest in favor of
petitioner in the case at bar, as what we have voided is merely the stipulated rate of
interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of
interest. The provisions in the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither nullified by the RTC or the
Court of Appeals, nor assailed by the spouses Beluso in their petition with the RTC.
The compounding of interests has furthermore been declared by this Court to be
legal. We have held in Tan v. Court of Appeals,29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not
earn interest. However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise upholding
the imposition thereof in the contract, we find the rate iniquitous. Like in the case of
grossly excessive interests, the penalty stipulated in the contract may also be
reduced by the courts if it is iniquitous or unconscionable.30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous
considering the fact that this penalty is already over and above the compounded
interest likewise imposed in the contract. If a 36% interest in itself has been declared
unconscionable by this Court,31 what more a 30.41% to 36% penalty, over and above
the payment of compounded interest? UCPB itself must have realized this, as it gave
us a sample computation of the spouses Belusos obligation if both the interest and
the penalty charge are reduced to 12%.

As regards the attorneys fees, the spouses Beluso can actually be liable therefor
even if there had been no demand. Filing a case in court is the judicial demand
referred to in Article 116932 of the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the
spouses Beluso were forced to litigate the issue on the illegality of the interest rate
provision of the promissory notes. The award of attorneys fees, it must be recalled,
falls under the sound discretion of the court.33 Since both parties were forced to
litigate to protect their respective rights, and both are entitled to the award of
attorneys fees from the other, practical reasons dictate that we set off or compensate
both parties liabilities for attorneys fees. Therefore, instead of awarding attorneys
fees in favor of petitioner, we shall merely affirm the deletion of the award of
attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded
legal interest of 12% per annum and a penalty charge of 12% per annum. We also
hold that, instead of awarding attorneys fees in favor of petitioner, we shall merely
affirm the deletion of the award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been
consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the
spouses Beluso failed to exercise their right of redemption which expired on 25 March
2000. The RTC, however, annulled the foreclosure of mortgage based on an alleged
incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are
present in the case at bar. Furthermore, the annulment of the foreclosure proceedings
and the certificates of sale were mooted by the subsequent issuance of new
certificates of title in the name of said bank. UCPB claims that the spouses Belusos
action for annulment of foreclosure constitutes a collateral attack on its certificates of
title, an act proscribed by Section 48 of Presidential Decree No. 1529, otherwise
known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not
be subject to collateral attack. It cannot be altered, modified or cancelled except in a
direct proceeding in accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an
excessive demand on their account, they cannot be said to be in default for refusing
to pay the same. Consequently, according to the spouses Beluso, the "enforcement of
such illegal and overcharged demand through foreclosure of mortgage" should be
voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we
already found that a valid demand was made by UCPB upon the spouses Beluso,
despite being excessive, the spouses Beluso are considered in default with respect to
the proper amount of their obligation to UCPB and, thus, the property they mortgaged
to secure such amounts may be foreclosed. Consequently, proceeds of the
foreclosure sale should be applied to the extent of the amounts to which UCPB is
rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are
present in this case. The grounds for the proper annulment of the foreclosure sale are
the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of
trust or misconduct by the purchaser; (2) that the sale had not been fairly and
regularly conducted; or (3) that the price was inadequate and the inadequacy was so
great as to shock the conscience of the court.34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs
alleged violation of Republic Act No. 3765, otherwise known as the Truth in Lending
Act.

UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in
Lending Act which mandates the filing of an action to recover such penalty must be
made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation issued
thereunder shall be liable to such person in the amount of P100 or in an amount
equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not exceed P2,000 on
any credit transaction. Action to recover such penalty may be brought by such person
within one year from the date of the occurrence of the violation, in any court of
competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original
complaint did not explicitly allege a violation of the Truth in Lending Act and no action
to formally admit the amended petition [which expressly alleges violation of the Truth
in Lending Act] was made either by [respondents] spouses Beluso and the lower
court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the Truth
in Lending Act had been barred by the one-year prescriptive period provided for in the
Act. UCPB asserts that per the records of the case, the latest of the subject
promissory notes had been executed on 2 January 1998, but the original petition of
the spouses Beluso was filed before the RTC on 9 February 1999, which was after
the expiration of the period to file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of
Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in
Lending Act and no action to formally admit the amended petition was made either by
[respondents] spouses Beluso and the lower court. In such transactions, the debtor
and the lending institutions do not deal on an equal footing and this law was intended
to protect the public from hidden or undisclosed charges on their loan obligations,
requiring a full disclosure thereof by the lender. We find that its infringement may be
inferred or implied from allegations that when [respondents] spouses Beluso executed
the promissory notes, the interest rate chargeable thereon were left blank. Thus,
[petitioner] UCPB failed to discharge its duty to disclose in full to [respondents]
Spouses Beluso the charges applicable on their loans.36
We agree with the Court of Appeals. The allegations in the complaint, much more
than the title thereof, are controlling. Other than that stated by the Court of Appeals,
we find that the allegation of violation of the Truth in Lending Act can also be inferred
from the same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has
relied on the provision of their promissory note granting respondent bank the power to
unilaterally fix the interest rates, which rate was not determined in the promissory
note but was left solely to the will of the Branch Head of the respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the
interest rates certainly also means that the promissory notes do not contain a "clear
statement in writing" of "(6) the finance charge expressed in terms of pesos and
centavos; and (7) the percentage that the finance charge bears to the amount to be
financed expressed as a simple annual rate on the outstanding unpaid balance of the
obligation."38 Furthermore, the spouses Belusos prayer "for such other reliefs just
and equitable in the premises" should be deemed to include the civil penalty provided
for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the Truth
in Lending Act has already prescribed is likewise without merit. The penalty for the
violation of the act is P100 or an amount equal to twice the finance charge required
by such creditor in connection with such transaction, whichever is greater, except that

such liability shall not exceed P2,000.00 on any credit transaction.39 As this penalty
depends on the finance charge required of the borrower, the borrowers cause of
action would only accrue when such finance charge is required. In the case at bar, the
date of the demand for payment of the finance charge is 2 September 1998, while the
foreclosure was made on 28 December 1998. The filing of the case on 9 February
1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense,
cannot be inferred nor implied from the allegations made in the complaint.40 Pertinent
provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose
to any person any information in violation of this Act or any regulation issued
thereunder shall be liable to such person in the amount of P100 or in an amount
equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. Action to recover such penalty may be brought by
such person within one year from the date of the occurrence of the violation, in any
court of competent jurisdiction. In any action under this subsection in which any
person is entitled to a recovery, the creditor shall be liable for reasonable attorneys
fees and court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,000 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation
of the said Act gives rise to both criminal and civil liabilities. Section 6(c) considers a
criminal offense the willful violation of the Act, imposing the penalty therefor of fine,
imprisonment or both. Section 6(a), on the other hand, clearly provides for a civil
cause of action for failure to disclose any information of the required information to
any person in violation of the Act. The penalty therefor is an amount of P100 or in an
amount equal to twice the finance charge required by the creditor in connection with
such transaction, whichever is greater, except that the liability shall not exceed
P2,000.00 on any credit transaction. The action to recover such penalty may be
instituted by the aggrieved private person separately and independently from the
criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a)
of the Truth in Lending Act had been jointly instituted with (1) the action to declare the
interests in the promissory notes void, and (2) the action to declare the foreclosure
void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which
provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an
opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of
parties;
(b) The joinder shall not include special civil actions or actions governed by special
rules;
(c) Where the causes of action are between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed in the Regional Trial Court
provided one of the causes of action falls within the jurisdiction of said court and the
venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money,
the aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the
same was not alleged in the complaint, UCPB is actually asserting a violation of due

process. Indeed, due process mandates that a defendant should be sufficiently

apprised of the matters he or she would be defending himself or herself against.
However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before the
RTC, the claim for civil sanctions for violation of the Truth in Lending Act was
expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in
not informing the borrower in writing before the execution of the Promissory Notes of
the interest rate expressed as a percentage of the total loan, the respondent bank
instead is liable to pay petitioners double the amount the bank is charging petitioners
by way of sanction for its violation.41
In the same pre-trial brief, the spouses Beluso also expressly raised the following
issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in
Lending Act provision to express the interest rate as a simple annual percentage of
the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign
ignorance of the assertion of this issue in this case as to prevent it from putting up a
defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to
try and adjudicate the alleged violation of the Truth in Lending Act, considering that
the present action allegedly involved a single credit transaction as there was only one
Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the action
to declare the interests in the promissory notes void, and (2) the action to declare the
foreclosure void. There had been no question that the above actions belong to the
jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of
Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different
venues or jurisdictions, the joinder may be allowed in the Regional Trial Court
provided one of the causes of action falls within the jurisdiction of said court and the
venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or
mutuum, since the former is merely a preparatory contract to the contract of loan or
mutuum. Under such credit line, the bank is merely obliged, for the considerations
specified therefor, to lend to the other party amounts not exceeding the limit provided.
The credit transaction thus occurred not when the credit line was opened, but rather
when the credit line was availed of. In the case at bar, the violation of the Truth in
Lending Act allegedly occurred not when the parties executed the Credit Agreement,
where no interest rate was mentioned, but when the parties executed the promissory
notes, where the allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the
subject promissory notes after their execution, then they were duly notified of the
terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that
the disclosure statement must be furnished prior to the consummation of the
transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to
the consummation of the transaction, a clear statement in writing setting forth, to the
extent applicable and in accordance with rules and regulations prescribed by the
Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)

(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of
the true cost thereof, proceeding from the experience that banks are able to conceal
such true cost by hidden charges, uncertainty of interest rates, deduction of interests
from the loaned amount, and the like. The law thereby seeks to protect debtors by
permitting them to fully appreciate the true cost of their loan, to enable them to give
full consent to the contract, and to properly evaluate their options in arriving at
business decisions. Upholding UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of the true cost of
credit will too often not be able to reverse the ill effects of an already consummated
business decision.
In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed,
the interest rate provision therein does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC,
Makati City) on the ground that the spouses Beluso instituted another case (Civil
Case No. V-7227) before the RTC of Roxas City, involving the same parties and
issues. UCPB claims that while Civil Case No. V-7227 initially appears to be a
different action, as it prayed for the issuance of a temporary restraining order and/or
injunction to stop foreclosure of spouses Belusos properties, it poses issues which
are similar to those of the present case.43 To prove its point, UCPB cited the spouses
Belusos Amended Petition in Civil Case No. V-7227, which contains similar
allegations as those in the present case. The RTC of Makati denied UCPBs Motion to
Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue
with the Court of Appeals, and is raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of
Roxas City, a Petition for Injunction Against Foreclosure, is the propriety of the
foreclosure before the true account of spouses Beluso is determined. On the other
hand, the issue in Case No. 99-314 before the RTC of Makati City is the validity of the
interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has
become moot because, before the RTC of Roxas City could act on the restraining
order, UCPB proceeded with the foreclosure and auction sale. As the act sought to be
restrained by Civil Case No. V-7227 has already been accomplished, the spouses
Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case
No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action
is involved in the two civil actions, namely, the violation of the right of the spouses
Beluso not to have their property foreclosed for an amount they do not owe, the Rules
of Court nevertheless allows the filing of the second action. Civil Case No. V-7227
was dismissed by the RTC of Roxas City before the filing of Case No. 99-314 with the
RTC of Makati City, since the venue of litigation as provided for in the Credit
Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the
following instances:

SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a

motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the
refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of
Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of
the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same
cause;
(f) That the cause of action is barred by a prior judgment or by the statute of
limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid,
waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the
provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with.44
(Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when the
ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the
action cannot be refiled. As regards all the other grounds, the complainant is allowed
to file same action, but should take care that, this time, it is filed with the proper court
or after the accomplishment of the erstwhile absent condition precedent, as the case
may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration
filed by the spouses Beluso on 15 January 1999 with the RTC of Roxas City, which
Motion had not yet been ruled upon when the spouses Beluso filed Civil Case No.
99-314 with the RTC of Makati. Hence, there were allegedly two pending actions
between the same parties on the same issue at the time of the filing of Civil Case No.
99-314 on 9 February 1999 with the RTC of Makati. This will still not change our
findings. It is indeed the general rule that in cases where there are two pending
actions between the same parties on the same issue, it should be the later case that
should be dismissed. However, this rule is not absolute. According to this Court in
Allied Banking Corporation v. Court of Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of
the later action and the purpose is to preempt the later suit or provide a basis for
seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be
dismissed if the later action is the more appropriate vehicle for the ventilation of the
issues between the parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the
earlier case. What is required merely is that there be another pending action, not a
prior pending action. Considering the broader scope of inquiry involved in Civil Case
No. 4102 and the location of the property involved, no error was committed by the
lower court in deferring to the Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant
considerations in determining which action should be dismissed: (1) the date of filing,
with preference generally given to the first action filed to be retained; (2) whether the
action sought to be dismissed was filed merely to preempt the later action or to

anticipate its filing and lay the basis for its dismissal; and (3) whether the action is the
appropriate vehicle for litigating the issues between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action
for injunction against a foreclosure sale that has already been held, while Civil Case
No. 99-314 before the RTC of Makati City includes an action for the annulment of said
foreclosure, an action certainly more proper in view of the execution of the foreclosure
sale. The former case was improperly filed in Roxas City, while the latter was filed in
Makati City, the proper venue of the action as mandated by the Credit Agreement. It is
evident, therefore, that Civil Case No. 99-314 is the more appropriate vehicle for
litigating the issues between the parties, as compared to Civil Case No. V-7227.
Thus, we rule that the RTC of Makati City was not in error in not dismissing Civil Case
No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the
following MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo,
respondent spouses Samuel and Odette Beluso are also liable for the following
amounts:
a. Penalty of 12% per annum on the amount due46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due47 from date of
demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel
and Odette Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments
shall be applied to the date of actual payment of the following in the order that they
are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount
shall be deducted from the liability of the spouses Samuel and Odette Beluso on 9
February 1999 to the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts
which the Regional Trial Court and the Court of Appeals ordered respondents to pay,
as modified in this Decision, shall be deducted from the proceeds of the foreclosure
sale.
SO ORDERED.