G.R. No.

59255 December 29, 1995

OLIVIA M. NAVOA and ERNESTO NAVOA, petitioners,

vs.
COURT OF APPEALS, TERESITA DOMDOMA and EDUARDO DOMDOMA, respondents.

BELLOSILLO, J.:

Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision of the Court of
Appeals which "modified" the order of the trial court dismissing the complaint for lack of cause of
1

action. The appellate court remanded the case to the court a quo for private respondents to file their
responsive pleading and for trial on the merits.

On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action
against petitioners for collection of various sums of money based on loans obtained by the latter. On
3 January 1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint
stated no cause of action and that plaintiffs had no capacity to sue.

After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the
trial court dismissed the case. A motion to reconsider the dismissal was denied.

On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December
1980 modified the order of dismissal "by returning the records of this case for trial on the merits,
upon filing of an answer subject to the provisions of Articles 1182 and 1197 of the Civil Code for the
first cause of action. The other causes of action should be tried on the merits subject to the defenses
the defendants may allege in their answer."

The instant petition alleges that respondent court erred: (a) in not dismissing the appeal for lack of
appellate jurisdiction over the case which involves merely a question of law; (b) in not affirming the
order of dismissal for lack of cause of action; and, (c) in holding that private respondents have a
cause of action under the second to the sixth causes of action of the complaint. 2

We cannot sustain the petition. Petitioners are now estopped from assailing the appellate jurisdiction
of the Court of Appeals after receiving an adverse judgment therefrom. Having participated actively
3

in the proceedings before the appellate court, petitioners can no longer question its authority.

Petitioners submit that private respondents failed to specify in their complaint a fixed period within
which petitioners should pay their obligations; that instead of stating that petitioners failed to
discharge their obligations upon maturity private respondents sought to collect on the checks which
were issued to them merely as security for the loans; and, that private respondents failed to make a
formal demand on petitioners to satisfy their obligations before filing the action.

For a proper determination of whether the complaint filed by private respondents sufficiently stated a
cause of action, we shall examine the relevant allegations in the complaint, to wit:

Allegations Common To All Causes of Actions

xxx xxx xxx

3. That sometime in . . . February, 1977, when the Reycard Duet was in Manila,
plaintiff Teresita got acquainted with defendant Olivia in the jewelry business, the
former selling the jewelries of the latter; that to the Reycard Duet alone, plaintiff
Teresita sold jewelries worth no less than ONE HUNDRED TWENTY THOUSAND
(P120,000.00) PESOS in no less than twenty (20) transactions; that even when the
Reycards have already left, their association continued, and up to the month of
August, 1977, plaintiff Teresita sold for defendant Olivia jewelries worth no less than
TWENTY THOUSAND (P20,000.00) PESOS, in ten (10) transactions more or less;

xxx xxx xxx

5. That sometime in the month of June and July of 1977, defendant Olivia, on two
occasions, asked for a loan from plaintiff Teresita, for the purpose of investing the
same in the purchase of jewelries, which loan were secured by personal checks of
the former; that in connection with these loans, defendant promised plaintiff a
participation in an amount equivalent to one half (1/2) of the profit to be realized; that
on these loans, plaintiff was given a share in the amount of P1,200.00 in the first
transaction, and in the second transaction, the sum of P950.00;

First Cause of Action

6. That on August 15, 1977, defendant Olivia got from plaintiff Teresita, one diamond
ring, one and one half (1-1/2) karats, heart shape, valued in the amount of Fifteen
thousand (P15,000.00) Pesos; that as a security for the said ring, Olivia issued a
Philippine Commercial and Industrial Bank Check, San Sebastian Branch, dated
August 15, 1977, No. 13894, copy of which is hereto attached and made a part
hereof as Annex "A";

7. That the condition of the issuance of the check was if the ring is not returned
within fifteen (15) days from August 15, 1977, the ring is considered sold; that after
fifteen days, plaintiff Teresita asked defendant Olivia if she could deposit the check,
and the answer of defendant Olivia was hold it for sometime, until I tell you to
deposit the same; that the check was held until the month of November, 1977, and
when deposited, it was dishonored for lack of sufficient funds; that for the reason that
the aforementioned check was not honored when deposited, defendant Olivia should
be held liable for interest at the rate of one percent a month, from date of issue, until
the same is fully paid;

Second Cause of Action

8. That on August 25, 1977, plaintiff Teresita extended a loan to the herein defendant
Olivia in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No.
14307, dated Sept. 25, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "B";

9. That this loan was extended upon representation of defendant Olivia that she
needed money to pay for jewelries which she can resell for a big profit; that having
established her goodwill, by reason of the transaction mentioned in par. "5" hereof,
the loan was extended by plaintiff;
10. That this check, Annex "B", when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest at the rate of one percent (1%) per month, from the date of issue
until fully paid;

Third Cause of Action

11. That on August 27, 1977, plaintiff extended to defendant Olivia a loan in the
amount of FIVE THOUSAND PESOS (P5,000.00), secured by a Philippine
Commercial & Industrial Bank check, PCIBANK Singalong Branch, No. 14308, dated
Sept. 27, 1977, photo copy of which is hereto attached and made a part hereof as
Annex "C";

12. That this loan was extended on the same representation made by defendant
Olivia, stated in par. "9", under the terms and conditions stated in par. "5" hereof;

13. That the check Annex "C", has not as yet been paid up to now, hence, defendant
Olivia should be held liable for interest at the rate of one percent (1%) monthly, from
date of issue, until fully paid;

Fourth Cause of Action

14. That on August 30, 1977, plaintiff Teresita, extended a loan in favor of defendant
Olivia, in the amount of Five Thousand (P5,000.00) Pesos, secured by a Philippine
Commercial and Industrial Bank Check, PCIBANK Singalong Branch, No. 14311,
dated Sept. 30, 1977, photo copy of which is hereto attached and made a part hereof
as Annex "D";

15. That this loan was extended on the same representation made by defendant
Olivia, as stated in par. "9" hereof, under the terms and conditions stated in par. "5"
hereof;

16. That this check, Annex "D" has not as yet been paid up to now, hence, she
should be held liable for interest thereon at the rate of one percent (1%) per month,
from date of issue, until fully paid;

Fifth Cause of Action

17. That on Sept. 15, 1977, plaintiff Teresita extended a loan in favor of defendant
Olivia, in the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a
Philippine Commercial & Industrial Bank check, PCIBANK Singalong Branch, No.
14320, dated October 15, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "E";

18. That this loan was given on the same representation made by defendant Olivia,
stated on par. "9" hereof, and under the terms and conditions stated in par. "5"
hereof;

19. That this check Annex "E" when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest at the rate of one percent (1%) monthly, from date of issue, until
fully paid;

Sixth Cause of Action

20. That on Sept. 27, 1977, plaintiff Teresita extended a loan to defendant Olivia, in
the amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine
Commercial & Industrial Bank check, No. 14325, dated October 27, 1977, photo
copy of which is hereto attached and made a part hereof as Annex "F";

21. That this loan was given on the same representation made by defendant Olivia,
stated in par. "9" hereof, and under the terms and conditions stated in par. "5" hereof;

22. That this check, Annex F, when deposited was dishonored; that for the reason
that the check was dishonored when deposited, defendant Olivia should be held
liable for interest thereon, at the rate of one percent (1%) monthly, from date of issue,
until fully paid;

Seventh Cause of Action

23. That plaintiff, by reason of the two transactions in par. "5" hereof, reposed trust
and confidence on defendant Olivia, however, by virtue of these trust and confidence,
she availed of the same in securing the loans aforementioned by misrepresentations,
and as a direct consequence thereof, the loans have not as yet been settled up to
now, for which plaintiff Teresita suffered sleepless nights, mental torture and
wounded feelings, for the reason that the money used in said transactions do all
belong to her; that this situation is further aggravated by the malicious act of
defendant Olivia, by having filed a complaint with the Manila Police, to the effect that
she (Teresita) stole the checks involved in this case; that as a consequence thereof,
she was investigated and she suffered besmirched reputation, social humiliation,
wounded feelings, moral shock and similar injuries, for which defendant Olivia should
be held liable, as and by way of moral damages in the amount of EIGHTY
THOUSAND (P80,000.00) PESOS;

Eight Cause of Action

24. That as and by way of exemplary or corrective damages, to serve as an example

or correction for the public good, defendant Olivia should be held liable to pay to the
herein plaintiff Teresita, the amount of Ten Thousand Pesos, as exemplary damages;

Ninth Cause of Action

25. That plaintiff, in order to protect her rights and interests, engaged the services of
the undersigned, and she committed herself to pay the following:

a. The amount of P200.00 for every appearance in the trial of this case.

b. The amount of P2,000.00 as retainers fees.

c. An amount equivalent to ten percent of any recover from defendant.

On the basis of the allegations under the heading Allegations Common to all Causes of Action above
stated as well as those found under the First Cause of Action to the Ninth Cause of Action, should
the complaint be dismissed for want of cause of action?

A cause of action is the fact or combination of facts which affords a party a right to judicial
interference in his behalf. The requisites for a cause of action are: (a) a right in favor of the plaintiff
by whatever means and under whatever law it arises or is created, (b) an obligation on the part of
the defendant to respect and not to violate such right; and, (c) an act or omission on the part of the
defendant constituting a violation of the plaintiff's right or breach of the obligation of the defendant to
the plaintiff. Briefly stated, it is the reason why the litigation has come about; it is the act or omission
4

of defendant resulting in the violation of someone's right. 5

In determining the existence of a cause of action, only the statements in the complaint may properly
be considered. Lack of cause of action must appear on the face of the complaint and its existence
may be determined only by the allegations of the complaint, consideration of other facts being
proscribed and any attempt to prove extraneous circumstances not being allowed.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what
petitioners did in the case at bar, he is regarded as having hypothetically admitted all the averments
thereof. The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant and material
facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the
allegations in a complaint furnish sufficient basis by which the complaint can be maintained, the
same should not be dismissed regardless of the defense that may be assessed by the defendants. 6

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that
petitioner Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security
therefor a check for the same amount dated 15 August 1977 with the condition that if the ring was
not returned within fifteen (15) days the ring would be considered sold; and, after the lapse of the
period, private respondent Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa
requested the former not to deposit it in the meantime; that when Teresita Domdoma deposited the
check after holding it for sometime the same was dishonored for lack of funds. Private respondent
Teresita Domdoma sought to collect the amount of P15,000.00 plus interest from 15 August 1977
until fully paid.

From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August
1977 and despite the sale the latter failed to pay the price therefor even as the former was given
ample time to pay the agreed amount covered by a check. Clearly, respondent Teresita Domdoma's
right under the agreement with petitioner Olivia Navoa was violated by the latter.

In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates. All these loans were secured by separate checks
intended for each amount of loan obtained and dated one month after the contracts of loan were
executed. That when these checks were deposited on their due dates they were all dishonored by
the bank. As a consequence, private respondents prayed that petitioners be ordered to pay the
amounts of the loans granted to them plus one percent interest monthly from the dates the checks
were dishonored until fully paid.

Culled from the above, the right of private respondents to recover the amounts loaned to petitioners
is clear. Moreover, the corresponding duty of petitioners to pay private respondents is undisputed.
The question now is whether Petitioners committed an act or omission constituting a violation of the
right of private respondents.

All the loans granted to petitioners are secured by corresponding checks dated a month after each
loan was obtained. In this regard, the term security is defined as a means of ensuring the
enforcement of an obligation or of protecting some interest in property. It may be personal, as when
an individual becomes a surety or a guarantor; or a property security, as when a mortgage, pledge,
charge, lien, or other device is used to have property held, out of which the person to be made
secure can be compensated for loss. Security is something to answer for as a promissory
7

note. That is why a secured creditor is one who holds a security from his debtor for payment of a
8

debt. From the allegations in the complaint there is no other fair inference than that the loans were
9

payable one month after they were contracted and the checks issued by petitioners were drawn to
answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations.
Hence, private respondents filed the action with the trial court precisely to compel petitioners to pay
their due and demandable obligations. Art. 1169 of the Civil Code is explicit those obliged to
deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation. The continuing refusal of petitioners to heed
the demand of private respondents stated in their complaint unmistakably shows the existence of a
cause of action on the part of the latter against the former.

Quite obviously, the trial court erred in dismissing the case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in remanding the case to the trial court for the filing
of an answer by petitioners and to try the case on the merits.

WHEREFORE, the petition is DENIED. The judgment of the Court of Appeals dated 11 December
1980 remanding the case to the trial court for the filing of petitioners' answer and thereafter for trial
on the merits is AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant.

Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine
National Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10,
1919, and May 7, 1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C."
in the amount of P300,000. This special authorization was essential in view of the memorandum
order of President Concepcion dated May 17, 1918, limiting the discretional power of the local
manager at Aparri, Cagayan, to grant loans and discount negotiable documents to P5,000, which, in
certain cases, could be increased to P10,000. Pursuant to this authorization, credit aggregating
P300,000, was granted the firm of "Puno y Concepcion, S. en C.," the only security required
consisting of six demand notes. The notes, together with the interest, were taken up and paid by July
17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion

contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente
Puno, P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000.
Member Miguel S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as
member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan
with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V.
Filamor, Judge of First Instance, and was sentenced to imprisonment for one year and six months, to
pay a fine of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must
hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly,
grant loans to any of the members of the board of directors of the bank nor to agents of the branch
banks." Section 49 of the same Act provides: "Any person who shall violate any of the provisions of
this Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to
exceed five years, or by both such fine and imprisonment." These two sections were in effect in 1919
when the alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January
30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These errors
they have argued adroitly and exhaustively in their printed brief, and again in oral argument.
Attorney-General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the
proposition of appellant one by one.

The question presented are reduced to their simplest elements in the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of
section 35 of Act No. 2747?

Counsel argue that the documents of record do not prove that authority to make a loan was given,
but only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits
in question speak of a "credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490;
Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other
party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned,
with or without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit,"

II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by
Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not
prohibit what is commonly known as a "discount."

In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the
Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to
loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said
section referred to loans alone, and placed no restriction upon discount transactions. It becomes
material, therefore, to discover the distinction between a "loan" and a "d iscount," and to ascertain if
the instant transaction comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an
actual, live, transaction. But in its last analysis, to discount a paper is only a mode of loaning money,
with, however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan,
interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan
is generally on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not
discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y
Concepcion, S. en C." were not discount paper but were mere evidences of indebtedness, because
(1) interest was not deducted from the face of the notes, but was paid when the notes fell due; and
(2) they were single-name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially
different from the facts in the Binalbagan Estate case. Just as there it was declared that the
operations constituted a loan and not a discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the
meaning of section 35 of Act No. 2747?

Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect
loan." In this connection, it should be recalled that the wife of the defendant held one-half of the
capital of this partnership.
In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to
the intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a
wall of safety against temptation for a director of the bank. The prohibition against indirect loans is a
recognition of the familiar maxim that no man may serve two masters that where personal interest
clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband
is financially interested in the success or failure of his wife's business venture, a loan to partnership
of which the wife of a director is a member, falls within the prohibition.

Various provisions of the Civil serve to establish the familiar relationship called a conjugal
partnership. (Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of a director of a bank is a member, is an indirect loan to
such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant was tempted to mingle his personal and family
affairs with his official duties, and to permit the loan P300,000 to a partnership of no established
reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the
Supreme Court of Maryland said:

What then was the purpose of the law when it declared that no director or officer should
borrow of the bank, and "if any director," etc., "shall be convicted," etc., "of directly or
indirectly violating this section he shall be punished by fine and imprisonment?" We say to
protect the stockholders, depositors and creditors of the bank, against the temptation to
which the directors and officers might be exposed, and the power which as such they must
necessarily possess in the control and management of the bank, and the legislature unwilling
to rely upon the implied understanding that in assuming this relation they would not acquire
any interest hostile or adverse to the most exact and faithful discharge of duty, declared in
express terms that they should not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate
decision, it was said:

We are of opinion the statute forbade the loan to his copartnership firm as well as to himself
directly. The loan was made indirectly to him through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a
violation of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these
portions of Act No. 2747 were repealed by Act No. 2938, prior to the finding of the information and
the rendition of the judgment?

As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section
35 of the s ame Act, provides a punishment for any person who shall violate any of the provisions of
the Act. It is contended, however, by the appellant, that the repeal of these sections of Act No. 2747
by Act No. 2938 has served to take away the basis for criminal prosecution.

This same question has been previously submitted and has received an answer adverse to such
contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs.
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910],
218 U. S., 272; 40 Phil., 1046). In other words, it has been the holding, and it must again be the
holding, that where an Act of the Legislature which penalizes an offense, such repeals a former Act
which penalized the same offense, such repeal does not have the effect of thereafter depriving the
courts of jurisdiction to try, convict, and sentenced offenders charged with violations of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No.
2747, penalized by this law?

Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and
since section 49 of said Act provides a punishment not on the bank when it violates any provisions of
the law, but on a personviolating any provisions of the same, and imposing imprisonment as a part of
the penalty, the prohibition contained in said section 35 is without penal sanction. lawph!l.net

The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the
board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)

VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank,
in extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a
legal defense?

Counsel argue that if defendant committed the acts of which he was convicted, it was because he
was misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans
made to the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered
by the Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant
has violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on
account of public policy and public interest, constitutes the crime. And, in this instance, as previously
demonstrated, the acts of the President of the Philippine National Bank do not fall within the purview
of the rulings of the Insular Auditor, even conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the
other stockholders. The law will not allow private profit from a trust, and will not listen to any
proof of honest intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the trial court, and the errors
assigned by the appellant, and with reference to previous decisions of this court on the same
subject, we are irresistibly led to the conclusion that no reversible error was committed in the trial of
this case, and that the defendant has been proved guilty beyond a reasonable doubt of the crime
charged in the information. The penalty imposed by the trial judge falls within the limits of the
punitive provisions of the law.

Judgment is affirmed, with the costs of this instance against the appellant. So ordered.
G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.

Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of
Manila a complaint for escheat of certain unclaimed bank deposits balances under the provisions of
Act No. 3936 against several banks, among them the First National City Bank of New York. It is
alleged that pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the
Philippines a statement under oath of their respective managing officials of all the credits and
deposits held by them in favor of persons known to be dead or who have not made further deposits
or withdrawals during the period of 10 years or more. Wherefore, it is prayed that said credits and
deposits be escheated to the Republic of the Philippines by ordering defendant banks to deposit
them to its credit with the Treasurer of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits that various
savings deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted
to the Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which
remained dormant for 10 years or more, are subject to escheat however, it has inadvertently
included in said report certain items amounting to P18,589.89 which, properly speaking, are not
credits or deposits within the contemplation of Act No. 3936. Hence, it prayed that said items be not
included in the claim of plaintiff.

After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and
demand drafts as those which defendant wants excluded from the complaint come within the
purview of Act No. 3936, but not the telegraphic transfer payment which orders are of different
category. Consequently, the complaint was dismissed with regard to the latter. But, after a motion to
reconsider was filed by defendant, the court a quo changed its view and held that even said demand
drafts do not come within the purview of said Act and so amended its decision accordingly. Plaintiff
has appealed. lawphil.net

Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or
deposits of money, bullion, security or other evidence of indebtedness of any kind, and
interest thereon with banks, as hereinafter defined, in favor of any person unheard from for a
period of ten years or more. Such unclaimed balances, together with the increase and
proceeds thereof, shall be deposited with the Insular Treasure to the credit of the
Government of the Philippine Islands to be as the Philippine Legislature may direct.

It would appear that the term "unclaimed balances" that are subject to escheat include credits or
deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person
unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term
"credit" in its usual meaning is a sum credited on the books of a company to a person who appears
to be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by
reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, a distinguished from that
which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1,
4; See also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson,
101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term "deposits"
in banks where the relationship created between the depositor and the bank is that of creditor and
debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs.
Pacific Coast Biscuit Co., et al., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come within the meaning
of the term "credits" or "deposits" employed in the law? Can their import be considered as a sum
credited on the books of the bank to a person who appears to be entitled to it? Do they create a
creditor-debtor relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of said banking
terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs.
Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs.
Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the
former, an open letter of request from, and an order by, one person on another to pay a sum of
money therein mentioned to a third person, on demand or at a future time therein specified (13
Words and Phrases, 371). As a matter of fact, the term "draft" is often used, and is the common
term, for all bills of exchange. And the words "draft" and "bill of exchange" are used indiscriminately
(Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101;
Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No.
2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on
the instrument until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange
of itself does not operate as an assignment of the funds in the hands of the drawee available for the
payment thereon and the drawee is not liable on the bill unless and until he accepts the same." In
other words, in order that a drawee may be liable on the draft and then become obligated to the
payee it is necessary that he first accepts the same. In fact, our law requires that with regard to
drafts or bills of exchange there is need that they be presented either for acceptance or for payment
within a reasonable time after their issuance or after their last negotiation thereof as the case may be
(Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or
to the extent of the loss caused by the delay (Section 186, Ibid.)

Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any
chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee
concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's
pretense, for it has been held that the latter is a primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. Thus, a cashier's check has been clearly
characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of
exchange payable demand. It is an order upon a third party purporting to drawn upon a
 deposit of funds. Drinkall v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95
Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42
A.L.R. 1347. A cashier's check is of a very different character. It is the primary obligation of
the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes its
written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W. 734).... lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill
of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10
C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalent of a certified

check and the deposit represented by the check passes to the credit of the checkholder, who
is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756,
195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in
advance by the act of issuance, is not subject to countermand by the payee after
indorsement, and has the same legal effects as a certificate deposit or a certified check
(Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should come within
the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said that as the
transaction is for the establishment of a telegraphic or cable transfer the agreement to remit creates
a contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The
purchaser of a telegraphic transfer upon making payment completes the transaction insofar as he is
concerned, though insofar as the remitting bank is concerned the contract is executory until the
credit is established (Ibid.) We agree with the following comment the Solicitor General: "This is so
because the drawer bank was already paid the value of the telegraphic transfer payment order. In
the particular cases under consideration it appears in the books of the defendant bank that the
amounts represented by the telegraphic payment orders appear in the names of the respective
payees. If the latter choose to demand payment of their telegraphic transfers at the time the same
was (were) received by the defendant bank, there could be no question that this bank would have to
pay them. Now, the question is, if the payees decide to have their money remain for sometime in the
defendant bank, can the latter maintain that the ownership of said telegraphic payment orders is now
with the drawer bank? The latter was already paid the value of the telegraphic payment orders
otherwise it would not have transmitted the same to the defendant bank. Hence, it is absurd to say
that the drawer banks are still the owners of said telegraphic payment orders."

WHEREFORE, the decision of the trial court is hereby modified in the sense that the items
specifically referred to and listed under paragraph 3 of appellee bank's answer representing
telegraphic transfer payment orders should be escheated in favor of the Republic of the Philippines.
No costs.
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.

DECISION
QUISUMBING, J.:

This petition for certiorari assails the decision dated February 28, 1997, of
the Court of Appeals and its resolution dated April 21, 1998, in CA-G.R. CV
No. 38887. The appellate court affirmed the judgment of the Regional Trial
Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of
mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against
private respondents ALS Management and Development Corporation and
Antonio K. Litonjua, consolidated with (b) Civil Case No. 52093, for damages
[1]

with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
The trial court had held that private respondents were not in default in the
payment of their monthly amortization, hence, the extrajudicial foreclosure
conducted by BPIIC was premature and made in bad faith. It awarded private
respondents the amount of P300,000 for moral damages, P50,000 for
exemplary damages, and P50,000 for attorneys fees and expenses for
litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from
Ayala Investment and Development Corporation (AIDC), the predecessor of
petitioner BPIIC, for the construction of a house on his lot
in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to
AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to
private respondents ALS and Antonio Litonjua for P850,000. They
paid P350,000 in cash and assumed the P500,000 balance of Roas
indebtedness with AIDC. The latter, however, was not willing to extend the old
interest rate to private respondents and proposed to grant them a new loan
of P500,000 to be applied to Roas debt and secured by the same property, at
an interest rate of 20% per annum and service fee of 1% per annum on the
outstanding principal balance payable within ten years in equal monthly
amortization of P9,996.58 and penalty interest at the rate of 21% per annum
per day from the date the amortization became due and payable.
 Consequently, in March 1981, private respondents executed a mortgage
deed containing the above stipulations with the provision that payment of the
monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by
paying BPIIC the sum of P190,601.35. This reduced Roas principal balance
to P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the
proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of their loan after full
payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private
respondents on the ground that they failed to pay the mortgage indebtedness
which from May 1, 1981 to June 30, 1984, amounted to Four Hundred
Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos
(P475,585.31). A notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093
against BPIIC. They alleged, among others, that they were not in arrears in
their payment, but in fact made an overpayment as of June 30, 1984. They
maintained that they should not be made to pay amortization before the actual
release of the P500,000 loan in August and September 1982. Further, out of
the P500,000 loan, only the total amount of P464,351.77 was released to
private respondents. Hence, applying the effects of legal compensation, the
balance of P35,648.23 should be applied to the initial monthly amortization for
the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case
Nos. 11831 and 52093, thus:

WHEREFORE, judgment is hereby rendered in favor of ALS Management and

Development Corporation and Antonio K. Litonjua and against BPI Investment
Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was
only in the principal sum of P464,351.77, with interest at 20% plus service charge of
1% per annum, payable on equal monthly and successive amortizations at P9,283.83
for ten (10) years or one hundred twenty (120) months. The amortization schedule
attached as Annex A to the Deed of Mortgage is correspondingly reformed as
aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when
BPI caused their publication in a newspaper of general circulation as defaulting
debtors, and therefore orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorneys fees and expenses of litigation.

The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being
premature.

Costs against BPI.

SO ORDERED. [2]

Both parties appealed to the Court of Appeals. However, private

respondents appeal was dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the
dispositive portion reads:

WHEREFORE, finding no error in the appealed decision the same is hereby

AFFIRMED in toto.

SO ORDERED. [3]

In its decision, the Court of Appeals reasoned that a simple loan is

perfected only upon the delivery of the object of the contract. The contract of
loan between BPIIC and ALS & Litonjua was perfected only on September 13,
1982, the date when BPIIC released the purported balance of the P500,000
loan after deducting therefrom the value of Roas indebtedness. Thus,
payment of the monthly amortization should commence only a month after the
said date, as can be inferred from the stipulations in the contract. This, despite
the express agreement of the parties that payment shall commence on May 1,
1981. From October 1982 to June 1984, the total amortization due was
only P194,960.43. Evidence showed that private respondents had an
overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially
foreclose the mortgage and cause the publication in newspapers concerning
private respondents delinquency in the payment of their loan. This fact
constituted sufficient ground for moral damages in favor of private
respondents.
 The motion for reconsideration filed by petitioner BPIIC was likewise
denied, hence this petition, where BPIIC submits for resolution the following
issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN
THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS,
125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IN THE FACE OF IRREGULAR
PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID DOWN
IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.

On the first issue, petitioner contends that the Court of Appeals erred in
ruling that because a simple loan is perfected upon the delivery of the object
of the contract, the loan contract in this case was perfected only
on September 13, 1982. Petitioner claims that a contract of loan is a
consensual contract, and a loan contract is perfected at the time the contract
of mortgage is executed conformably with our ruling in Bonnevie v. Court of
Appeals, 125 SCRA 122. In the present case, the loan contract was perfected
on March 31, 1981, the date when the mortgage deed was executed, hence,
the amortization and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was
released only on August 1982, the loan was actually released on March 31,
1981, when BPIIC issued a cancellation of mortgage of Frank Roas loan. This
finds support in the registration on March 31, 1981 of the Deed of Absolute
Sale executed by Roa in favor of ALS, transferring the title of the property to
ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover,
petitioner claims, the delay in the release of the loan should be attributed to
private respondents. As BPIIC only agreed to extend a P500,000 loan, private
respondents were required to reduce Frank Roas loan below said
amount. According to petitioner, private respondents were only able to do so
in August 1982.
In their comment, private respondents assert that based on Article 1934 of
the Civil Code, a simple loan is perfected upon the delivery of the object of
[4]

the contract, hence a real contract. In this case, even though the loan contract
was signed on March 31, 1981, it was perfected only on September 13, 1982,
when the full loan was released to private respondents.They submit that
petitioner misread Bonnevie. To give meaning to Article 1934, according to
private respondents, Bonnevie must be construed to mean that the contract to
extend the loan was perfected on March 31, 1981 but the contract of loan
itself was only perfected upon the delivery of the full loan to private
respondents on September 13, 1982.
 Private respondents further maintain that even granting, arguendo, that
the loan contract was perfected on March 31, 1981, and their payment did not
start a month thereafter, still no default took place. According to private
respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the other
party. In this case, the consideration for BPIIC in entering into the loan
contract is the promise of private respondents to pay the monthly
amortization. For the latter, it is the promise of BPIIC to deliver the money. In
reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him.Therefore, private respondents conclude, they did not incur in delay
when they did not commence paying the monthly amortization on May 1,
1981, as it was only on September 13, 1982when petitioner fully complied
with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual
contract but a real contract. It is perfected only upon the delivery of the object
of the contract. Petitioner
[5]
misapplied Bonnevie. The contract
in Bonnevie declared by this Court as a perfected consensual contract falls
under the first clause of Article 1934, Civil Code. It is an accepted promise to
deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the
Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with
respondent bank. The latter approved the application through a board
resolution. Thereafter, the corresponding mortgage was executed and
registered. However, because of acts attributable to petitioner, the loan was
not released. Later, petitioner instituted an action for damages. We recognized
in this case, a perfected consensual contract which under normal
circumstances could have made the bank liable for not releasing the
loan. However, since the fault was attributable to petitioner therein, the court
did not award it damages.
A perfected consensual contract, as shown above, can give rise to an
action for damages. However, said contract does not constitute the real
contract of loan which requires the delivery of the object of the contract for its
perfection and which gives rise to obligations only on the part of the borrower. [6]

In the present case, the loan contract between BPI, on the one hand, and
ALS and Litonjua, on the other, was perfected only on September 13, 1982,
the date of the second release of the loan. Following the intentions of the
parties on the commencement of the monthly amortization, as found by the
Court of Appeals, private respondents obligation to pay commenced only on
October 13, 1982, a month after the perfection of the contract. [7]

We also agree with private respondents that a contract of loan involves a

reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other. As averred by private respondents, the
[8]

promise of BPIIC to extend and deliver the loan is upon the consideration that
ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle
in reciprocal obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. Only when a party has performed his part of the contract can he
[9]

demand that the other party also fulfills his own obligation and if the latter fails,
default sets in. Consequently, petitioner could only demand for the payment of
the monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in computing
the amount due as of the date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is October 13, 1982 and
not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as
the date of actual release of the loan and whether private respondents were
the cause of the delay in the release of the loan, are factual. Since petitioner
has not shown that the instant case is one of the exceptions to the basic rule
that only questions of law can be raised in a petition for review under Rule 45
of the Rules of Court, factual matters need not tarry us now. On these points
[10]

we are bound by the findings of the appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for
moral and exemplary damages for it did not act maliciously when it initiated
the foreclosure proceedings. It merely exercised its right under the mortgage
contract because private respondents were irregular in their monthly
amortization. It invoked our ruling in Social Security System vs. Court of
Appeals, 120 SCRA 707, where we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the
Court of Appeals the negligence of the appellant is not so gross as to warrant moral
and temperate damages, except that, said Court reduced those damages by only
P5,000.00 instead of eliminating them. Neither can we agree with the findings of both
the Trial Court and respondent Court that the SSS had acted maliciously or in bad
faith. The SSS was of the belief that it was acting in the legitimate exercise of its right
under the mortgage contract in the face of irregular payments made by private
respondents and placed reliance on the automatic acceleration clause in the contract.
The filing alone of the foreclosure application should not be a ground for an award of
moral damages in the same way that a clearly unfounded civil action is not among the
grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should
be liable for said damages because it insisted on the payment of amortization
on the loan even before it was released. Further, it did not make the
corresponding deduction in the monthly amortization to conform to the actual
amount of loan released, and it immediately initiated foreclosure proceedings
when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in
their payment of monthly amortization. Conformably with our ruling in SSS, we
can not properly declare BPIIC in bad faith. Consequently, we should rule out
the award of moral and exemplary damages. [11]

However, in our view, BPIIC was negligent in relying merely on the entries
found in the deed of mortgage, without checking and correspondingly
adjusting its records on the amount actually released to private respondents
and the date when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages should be given
in recognition of their rights which were violated by BPIIC. For this purpose,
[12]

the amount of P25,000 is sufficient.

Lastly, as in SSS where we awarded attorneys fees because private
respondents were compelled to litigate, we sustain the award of P50,000 in
favor of private respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of
Appeals and its resolution dated April 21, 1998, are AFFIRMED WITH
MODIFICATION as to the award of damages. The award of moral and
exemplary damages in favor of private respondents is DELETED, but the
award to them of attorneys fees in the amount of P50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private respondents P25,000 as
nominal damages. Costs against petitioner.
SO ORDERED.

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

GUERRERO, J:

Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals,
now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs.
Philippine Bank of Commerce, et al.," promulgated August 11, 1978 as well as the Resolution
1

denying the motion for reconsideration.

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First
Instance of Rizal against respondent Philippine Bank of Commerce sought the annulment of the
Deed of Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce
by the spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made
on September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration
and (b) the mortgage was executed by one who was not the owner of the mortgaged property. It
further alleged that the property in question was foreclosed pursuant to Act No. 3135 as amended,
without, however, complying with the condition imposed for a valid foreclosure. Granting the validity
of the mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should have
accepted petitioner's offer to redeem the property under the principle of equity said justice.

On the other hand, the answer of defendant Bank, now private respondent herein, specifically
denied most of the allegations in the complaint and raised the following affirmative defenses: (a) that
the defendant has not given its consent, much less the requisite written consent, to the sale of the
mortgaged property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that
the demand letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was
notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that
the law on contracts requires defendant's consent before Jose Lozano can be released from his
bilateral agreement with the former and doubly so, before plaintiff may be substituted for Jose
Lozano and Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two
renewals remain unpaid despite countless reminders and demands; of that the property in question
remained registered in the name of Jose M. Lozano in the land records of Rizal and there was no
entry, notation or indication of the alleged sale to plaintiff; (g) that it is an established banking
practice that payments against accounts need not be personally made by the debtor himself; and (h)
that it is not true that the mortgage, at the time of its execution and registration, was without
consideration as alleged because the execution and registration of the securing mortgage, the
signing and delivery of the promissory note and the disbursement of the proceeds of the loan are
mere implementation of the basic consensual contract of loan.

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a
motion for intervention. The intervention was premised on the Deed of Assignment executed by
petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and
interests of petitioner Honesto Bonnevie over the subject property. The intervention was ultimately
granted in order that all issues be resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:

WHEREFORE, all the foregoing premises considered, judgment is hereby rendered

dismissing the complaint with costs against the plaintiff and the intervenor.

After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:

1. The lower court erred in not finding that the real estate mortgage executed by Jose
Lozano was null and void;

2. The lower court erred in not finding that the auction sale decide on August 19,
1968 was null and void;

3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the
property;

4. The lower court erred in not finding that the defendant acted in bad faith; and

5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming the decision of the
lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present
petition for review.

The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby
adopt the facts found the trial court and found by the Court of Appeals to be consistent with the
evidence adduced during trial, to wit:

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the
owners of the property which they mortgaged on December 6, 1966, to secure the
payment of the loan in the principal amount of P75,000.00 they were about to obtain
from defendant-appellee Philippine Bank of Commerce; that on December 8, 1966,
executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in
consideration of the sum of P100,000.00, P25,000.00 of which amount being payable
to the Lozano spouses upon the execution of the document, and the balance of
P75,000.00 being payable to defendant- appellee; that on December 6, 1966, when
the mortgage was executed by the Lozano spouses in favor of defendant-appellee,
the loan of P75,000.00 was not yet received them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the promissory note for that
amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments
to defendant-appellee on the mortgage in the total amount of P18,944.22; that on
May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10,
1968, defendant-appellee applied for the foreclosure of the mortgage, and notice of
sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14,
1968; that auction sale was conducted on August 19, 1968, and the property was
sold to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to
repurchase the property failed, and on October 9, 1969, he caused an adverse claim
to be annotated on the title of the property. (Decision of the Court of Appeals, p. 5).
Presented for resolution in this review are the following issues:

Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.

II

Whether the extrajudicial foreclosure of the said mortgage was validly and legally
effected.

III

Whether petitioners had a right to redeem the foreclosed property.

IV

Granting that petitioners had such a right, whether respondent was justified in
refusing their offers to repurchase the property.

As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They
primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent
Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that when it was executed
on December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was
not received by the Lozano spouses "So much so that in the absence of a principal obligation, there
is want of consideration in the accessory contract, which consequently impairs its validity and fatally
affects its very existence." (Petitioners' Brief, par. 1, p. 7).

This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly
seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano
spouses. The fact that the latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract,
the herein contract of loan was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does
not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void,

This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent
of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is
constituted. These provisions are expressly made part and parcel of the Deed of Sale with
Assumption of Mortgage.

Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that
the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned,
the Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every
right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the
mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48).
Another argument for the respondent Bank is that a mortgage follows the property whoever the
possessor may be and subjects the fulfillment of the obligation for whose security it was constituted.
Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered into
the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its
validity whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following
grounds:

a) petitioners were never notified of the foreclosure sale.

b) The notice of auction sale was not posted for the period required by law.

c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not
being a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not
aware of the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner
Honesto Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred
and assigned all his rights and interests over the property in favor of intervenor Raoul Bonnevie and
respondent Bank not likewise informed of the same. For the same reason, Raoul Bonnevie is not
entitled to notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor.
The requirement on notice is that:

Section 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city

In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July
14, 1968 and notices of the sale were posted for not less than twenty days in at least three (3) public
places in the Municipality where the property is located. Petitioners were thus placed on constructive
notice.

The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said
case involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly
registered making the mortgaged privy to the sale.

As regards the claim that the period of publication of the notice of auction sale was not in
accordance with law, namely: once a week for at least three consecutive weeks, the Court of
Appeals ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the
publication requirement under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only
14 days. We agree. Act No. 3135 merely requires that such notice shall be published once a week
for at least three consecutive weeks." Such phrase, as interpreted by this Court in Basa vs.
Mercado, 61 Phil. 632, does not mean that notice should be published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance
with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit
of publication, executed by the Publisher, business/advertising manager of the Luzon Weekly
Courier, stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of
Sheriff's sale was published in said paper on June 30, July 7 and July 14, 1968. This constitutes
prima facie evidence of compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).

To be a newspaper of general circulation, it is enough that "it is published for the dissemination of
local news and general information; that it has a bona fide subscription list of paying subscribers;
that it is published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not
have the largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67).
The testimony of three witnesses that they do read the Luzon Weekly Courier is no proof that said
newspaper is not a newspaper of general circulation in the province of Rizal.

Whether or not the notice of auction sale was posted for the period required by law is a question of
fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126).
Nevertheless, the records show that copies of said notice were posted in three conspicuous places
in the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig
Municipal Hall. In the same manner, copies of said notice were also posted in the place where the
property was located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and
on Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal department of
respondent bank, namely:

Q How many days were the notices posted in these two places, if you
know?

A We posted them only once in one day. (TSN, p. 45, July 25, 1973)

is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before the
expiration of the twenty- day period. A single act of posting (which may even extend beyond the
period required by law) satisfies the requirement of law. The burden of proving that the posting
requirement was not complied with is now shifted to the one who alleges non-compliance.

On the question of whether or not the petitioners had a right to redeem the property, We hold that the
Court of Appeals did not err in ruling that they had no right to redeem. No consent having been
secured from respondent Bank to the sale with assumption of mortgage by petitioners, the latter
were not validly substituted as debtors. In fact, their rights were never recorded and hence,
respondent Bank is charged with the obligation to recognize the right of redemption only of the
Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may
be, the petitioners had acquired a right to redeem the property, petitioners failed to exercise said
right within the period granted by law. Thru certificate of sale in favor of appellee was registered on
September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not
until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at that time already
transferred his rights to intervenor Raoul Bonnevie.

On the question of whether or not respondent Court of Appeals erred in holding that respondent
Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to
respondent Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized
to make payments for the amount secured by the mortgage on the subject property, to receive
acknowledgment of payments, obtain the Release of the Mortgage after full payment of the
obligation and to take delivery of the title of said property. On the assumption that the letter was
received by respondent Bank, a careful reading of the same shows that the plaintiff was merely
authorized to do acts mentioned therein and does not mention that petitioner is the new owner of the
property nor request that all correspondence and notice should be sent to him.

The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the
maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied for
the foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect and
misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968,
when respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners'
payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan
may be effected, not only the payment of the accrued interest is necessary but also the payment of
interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed
does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank
may not be, therefore, charged of bad faith.

WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.

SO ORDERED.

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF
THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory
receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent
Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with
preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the
loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo,
Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the
said title the next day. The approved loan application called for a lump sum P80,000.00 loan,
repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.

On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at
12% annual interest, payable within 3 years from the date of execution of the contract at semi-
annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering
a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But
this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being
informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the
P63,000.00 balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its
deposit liabilities, the Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments
in government securities] excluding extensions or renewals of already approved
loans, provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to
take charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind
the real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court
of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the

promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate
mortgage be foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is not
ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to
furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take
over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265,
which took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of
the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be
legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less
neutralize, the exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's responsibility to conduct its
own investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned
by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the
same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to
pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil
Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is,
Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of
P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he
cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration
of his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release
on the loan, does not make the real estate mortgage void for lack of consideration. It is not
necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter.
But when the consideration is subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p.
583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs.
Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually
owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage
cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol.
19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is
78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to
the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of other heirs who have not been
paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN

PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE

COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

G.R. No. L-8321 October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,

vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.
N. Segundo for appellants.
Iigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his
lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of
Ilocos Norte, the property having been awarded to him through its purchase at a public auction held
by the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15.

Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the
said lot, embracing 14 meters of its frontage by 11 meters of its depth.

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et
al., were recognized without discussion as his heirs.

Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta
Pascual were recognized likes without discussion, though it is not said how, and consequently are
entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-
half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-
seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is
that the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse;
while the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well
as of the remainder thereof.

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor
children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization
to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot."
The plaintiffs that is Alejandra Mina, et al. opposed the petition of Ruperta Pascual for the
reason that the latter had included therein the lot occupied by the warehouse, which they claimed
was their exclusive property. All this action was taken in a special proceeding in reguardianship.

The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to
decide the question of the ownership of the lot before it pass upon the petition for the sale of the
warehouse. But the court before determining the matter of the ownership of the lot occupied by the
warehouse, ordered the sale of this building, saying:

While the trial continues with respect to the ownership of the lot, the court orders the sale at
public auction of the said warehouse and of the lot on which it is built, with the present
boundaries of the land and condition of the building, at a price of not less than P2,890
Philippine currency . . . .

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other
defendant in this case, for the price mentioned.

The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court
decided it by holding that this land belonged to the owner of the warehouse which had been built
thereon thirty years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question. 1

When the judgment became final and executory, a writ of execution issued and the plaintiffs were
given possession of the lot; but soon thereafter the trial court annulled this possession for the reason
that it affected Cu Joco, who had not been a party to the suit in which that writ was served.

It was then that the plaintiffs commenced the present action for the purpose of having the sale of the
said lot declared null and void and of no force and effect.

An agreement was had ad to the facts, the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the
Supreme Court which found for them by holding that they are the owners of the lot in
question, although there existed and still exists a commodatum by virtue of which the
guardianship (meaning the defendants) had and has the use, and the plaintiffs the
ownership, of the property, with no finding concerning the decree of the lower court that
ordered the sale.

The obvious purport of the cause "although there existed and still exists a commodatum," etc.,
appears to be that it is a part of the decision of the Supreme Court and that, while finding the
plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum
under which the defendants held the lot. Nothing could be more inexact. Possibly, also, the meaning
of that clause is that, notwithstanding the finding made by the Supreme Court that the plaintiffs were
the owners, these former and the defendants agree that there existed, and still exists, a
commodatum, etc. But such an agreement would not affect the truth of the contents of the decision
of this court, and the opinions held by the litigants in regard to this point could have no bearing
whatever on the present decision.

Nor did the decree of the lower court that ordered the sale have the least influence in our previous
decision to require our making any finding in regard thereto, for, with or without that decree, the
Supreme Court had to decide the ownership of the lot consistently with its titles and not in
accordance with the judicial acts or proceedings had prior to the setting up of the issue in respect to
the ownership of the property that was the subject of the judicial decree.

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have
the ownership, and they themselves only the use, of the said lot.

On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the
manner in which the sale was effected, whether judicially or extrajudicially.

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a
transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing
cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and
void. The defendants never were the owners of the lot sold. The sale of it by them is necessarily null
and void. On cannot convey to another what he has never had himself.

The returns of the auction contain the following statements:

I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred
upon me on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded
 with the sale at public auction of the six-sevenths part of the one-half of the warehouse
constructed of rubble stone, etc.

Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the
land and all the rights title, interest, and ownership in the said property to Cu Joco, who was
the highest bidder, etc.

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and
assigns, all the interest, ownership and inheritance rights and others that, as the guardian of
the said minors, I have and may have in the said property, etc.

The purchaser could not acquire anything more than the interest that might be held by a person to
whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is
disposed of. What the minor children of Ruperta Pascual had in their possession was the ownership
of the six-sevenths part of one-half of the warehouse and the use of the lot occupied by his building.
This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the
lot; neither the other half, nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of one-half and the entire other half of the
building was null and void, and likewise with still more reason the sale of the lot the building
occupies.

The purchaser could and should have known what it was that was offered for sale and what it was
that he purchased. There is nothing that can justify the acquisition by the purchaser of the
warehouse of the ownership of the lot that this building occupies, since the minors represented by
Ruperta Pascual never were the owners of the said lot, nor were they ever considered to be such.

The trial court, in the judgment rendered, held that there were no grounds for the requested
annulment of the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the
court as the value of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu
Joco, were absolved from the complaint, without express finding as to costs.

The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept
the price set on the lot by expert appraisers, not even though the plaintiffs be considered as coowner
of the warehouse. It would be much indeed that, on the ground of coownership, they should have to
abide by and tolerate the sale of the said building, which point this court does not decide as it is not
a question submitted to us for decision, but, as regards the sale of the lot, it is in all respects
impossible to hold that the plaintiffs must abide by it and tolerate, it, and this conclusion is based on
the fact that they did not give their consent (art. 1261, Civil Code), and only the contracting parties
who have given it are obliged to comply (art. 1091, idem).

The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but
subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense
that the action should be deemed to be one for the recovery of possession of a lot and for the
annulment of its sale. The plaintiff's petition was opposed by the defendant's attorney, but was
allowed by the court; therefore the complaint seeks, after the judicial annulment of the sale of the lot,
to have the defendants sentenced immediately to deliver the same to the plaintiffs.

Such a finding appears to be in harmony with the decision rendered by the Supreme Court in
previous suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason
steps were taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was
not a party to that suit, the present action is strictly one for recover against Cu Joco to compel him,
once the sale has been annulled, to deliver the lot to its lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that
Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot,
some thirty years ago, with the explicit consent of his brother Francisco Fontanilla, the
plaintiff's predecessor in interest.

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the
coowners of the warehouse.

3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his
successors paid any consideration or price whatever for the use of the lot occupied by the
said building; whence it is, perhaps, that both parties have denominated that use a
commodatum.

Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the
defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial
declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot,
made in the present case.

The defendants do not hold lawful possession of the lot in question. 1awphil.net

But, although both litigating parties may have agreed in their idea of the commodatum, on account of
its not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to
the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable.
Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give
them, but must be construed, duly considering their constitutive elements, as they are defined and
denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during the certain period and return it to the
former, in which case it is called commodatum . . . (art. 1740, Civil Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to
another shall for a certain period. Francisco Fontanilla did not fix any definite period or time during
which Andres Fontanilla could have the use of the lot whereon the latter was to erect a stone
warehouse of considerable value, and so it is that for the past thirty years of the lot has been used
by both Andres and his successors in interest. The present contention of the plaintiffs that Cu Joco,
now in possession of the lot, should pay rent for it at the rate of P5 a month, would destroy the
theory of the commodatum sustained by them, since, according to the second paragraph of the
aforecited article 1740, "commodatum is essentially gratuitous," and, if what the plaintiffs themselves
aver on page 7 of their brief is to be believed, it never entered Francisco's mind to limit the period
during which his brother Andres was to have the use of the lot, because he expected that the
warehouse would eventually fall into the hands of his son, Fructuoso Fontanilla, called the adopted
son of Andres, which did not come to pass for the reason that Fructuoso died before his uncle
Andres. With that expectation in view, it appears more likely that Francisco intended to allow his
brother Andres a surface right; but this right supposes the payment of an annual rent, and Andres
had the gratuitous use of the lot.

Hence, as the facts aforestated only show that a building was erected on another's ground, the
question should be decided in accordance with the statutes that, thirty years ago, governed
accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly
identical with the provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to article
361, the owner of the land on which a building is erected in good faith has a right to appropriate such
edifice to himself, after payment of the indemnity prescribed in articles 453 and 454, or to oblige the
builder to pay him the value of the land. Such, and no other, is the right to which the plaintiff are
entitled.

For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by
Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the
use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article
361 of the Civil Code. 1awphil.net

The judgment appealed from is reversed and the sale of the lot in question is held to be null and void
and of no force or effect. No special finding is made as to the costs of both instances.

Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

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 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R.
1

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 judicatabetween 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 in CA-G.R. No.
5

38830-R, shows that it reversed the trial court's Decision finding petitioner to be entitled to register
6

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 CA-G.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. 26085 August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.
JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees
to pay a certain amount per month as rent, may such rent render such a contract usurious
when the amount paid as rent, computed upon the purchase price, amounts to a higher rate
of interest upon said amount than that allowed by law?

(c) May the contract in the present case may be modified by parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice
Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality of
Tarlac of the Province of Tarlac for the price of P25,000, promising to pay therefor in three
installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the
second installment of P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at
12 per cent interest was due and payable on or about the 30th day of November, 1922. One of the
conditions of that contract of purchase was that on failure of the purchaser (plaintiffs and appellants)
to pay the balance of said purchase price or any of the installments on the date agreed upon, the
property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the
record shows upon the due dates. The balance of P15,000 due on said contract of purchase was
paid on or about the 1st day of December, 1922, in the manner which will be explained below. On
the date when the balance of P15,000 with interest was paid, the vendor of said property had issued
to the purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title
(No. 528) was transfer certificate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, 1913.

PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote
a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of
said indebtedness was not paid, an action would be brought for the purpose of recovering the
property, together with damages for non compliance with the condition of the contract of purchase.
The pertinent parts of said letter read as follows:

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente,
procederemos judicialmente contra Vd. para reclamar la devolucion del camarin y los
daos y perjuicios ocasionados a la compaia por su incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

 By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due
and payable upon said contract of purchase on the 30th day of November, 1922, the sum
P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began
to make an effort to borrow money with which to pay the balance due, began to make an effort to
borrow money with which to pay the balance of their indebtedness on the purchase price of the
property involved. Finally an application was made to the defendant for a loan for the purpose of
satisfying their indebtedness to the vendor of said property. After some negotiations the defendants
agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs
execute and deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum
of P16,965.09. The defendant, in addition to said amount paid by check, delivered to the plaintiffs the
sum of P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for drafting
said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and for the
plaintiffs of P17,500 upon the execution and delivery of said contract. Said contracts was dated the
28th day of November, 1922, and is in the words and figures following:

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores
de edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios
y transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy
Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta
Ciudad de Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en

consideracion a la cantidad de diecisiete mil quinientos pesos (P17,500) moneda
filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don Benito
Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho Don
Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que, segun
el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de
Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited" que
al incorporarse se donomino y se denomina "Luzon Rice Mills Inc.," y que esta
corporacion nos ha transferido en venta absoluta, se describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el

Municipio de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E.
con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de un
punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del
mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto
1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al
punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto
S. 2 gds. 42' E., 61.48 m. al punto de partida; midiendo una extension superficcial de
cuatro mil doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos los
puntos nombrados se hallan marcados en el plano y sobre el terreno los puntos 1 y
2 estan determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los
puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera,
siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de
febrero de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia 1. de diciembre de 1922, devolvemos al expresado Don
Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos
(P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la
finca arriba descrita; pero si transcurre dicho plazo de cinco aos sin ejercitar el
derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento

la finca arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don
Benito Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y
cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don

Benito Gonzalez Sy Chiam, asi como tambien la prima del seguro contra
incendios, si el conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar
dicha finca.

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos
dara lugar a la terminacion de este arrendamieno y a la perdida del derecho
de retracto que nos hemos reservado, como si naturalmente hubiera
expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy
Chiam tomar posesion de la finca y desahuciarnos de la misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta
escritura en los precisos terminos en que la dejan otorgada los conyuges Severino
Tolentino y Potenciana Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por

cuadruplicado en Manila, hoy a 28 de noviembre de 1922.

(Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

 (Fdos.) MOISES M. BUHAIN

B. S. BANAAG

An examination of said contract of sale with reference to the first question above, shows clearly that
it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that said
contract, standing alone, is a mortgage. The pertinent language of the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia 1. de diciembre de 1922, devolvemos al expresado Don Benito
Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero
si transcurre dicho plazo de cinco (5) aos sin ejercitar al derecho de retracto que nos
hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that
there can certainly be not doubt as to the purpose of the plaintiff to sell the property in question,
reserving the right only to repurchase the same. The intention to sell with the right to repurchase
cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which she
became the "tenant" of the purchaser. That contract of rent appears in said quoted document above
as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca
arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez
Sy Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al referido
Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.

From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de
retro is an absolute sale of the property with the right to repurchase and not a mortgage; and,
second, that by virtue of the said contract the vendor became the tenant of the purchaser, under the
conditions mentioned in paragraph 3 of said contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to
declare the same to be a mortgage and not a sale whenever the interpretation of such a contract
justifies that conclusion. There must be something, however, in the language of the contract or in the
conduct of the parties which shows clearly and beyond doubt that they intended the contract to be a
"mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252;
Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil.,
379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs.Santiago, 38
Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will
not construe an instrument to one of sale with pacto de retro, with the stringent and onerous effect
which follows, unless the terms of the document and the surrounding circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a
contract, but when an issue is squarely presented that a contract does not express the intention of
the parties, courts will, when a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de
retro. They admit that they signed it. They admit they sold the property in question with the right to
repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a "sale"
with pacto de retro, and the plaintiffs have shown no circumstance whatever which would justify us in
construing said contract to be a mere "loan" with guaranty. In every case in which this court has
construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done so,
either because the terms of such contract were incompatible or inconsistent with the theory that said
contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra;
Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the
conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while
the vendor used to the terms "sale and transfer with the right to repurchase," yet in said contract he
described himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage". In the
case of Rodriguez vs. Pamintuan and De Jesus the person who executed the instrument, purporting
on its face to be a deed of sale of certain parcels of land, had merely acted under a power of
attorney from the owner of said land, "authorizing him to borrow money in such amount and upon
such terms and conditions as he might deem proper, and to secure payment of the loan by a
mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a
deed of sale was executed, the supposed vendor remained in possession of the land and invested
the money he had obtained from the supposed vendee in making improvements thereon, which fact
justified the court in holding that the transaction was a mere loan and not a sale. In the case
of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor,
and such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of
the title of ownership of the purchaser at the expiration of the term stipulated in the original contract
for the exercise of the right of repurchase."

Referring again to the right of the parties to vary the terms of written contract, we quote from the
dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine
Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the Supreme
Court of the United States and the contention of the Chief Justice in his dissenting opinion was
affirmed and the decision of the Supreme Court of the Philippine Islands was reversed. (See
decision of the Supreme Court of the United States, June 3, 1918.)1 The Chief Justice said in
discussing that question:

According to article 1282 of the Civil Code, in order to judge of the intention of the contracting
parties, consideration must chiefly be paid to those acts executed by said parties which are
contemporary with and subsequent to the contract. And according to article 1283, however general
the terms of a contract may be, they must not be held to include things and cases different from
those with regard to which the interested parties agreed to contract. "The Supreme Court of the
Philippine Islands held the parol evidence was admissible in that case to vary the terms of the
contract between the Government of the Philippine Islands and the Philippine Sugar Estates
Development Co. In the course of the opinion of the Supreme Court of the United States Mr. Justice
Brandeis, speaking for the court, said:

It is well settled that courts of equity will reform a written contract where, owing to mutual
mistake, the language used therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction of a contract presents a
question of law and that, therefore, the mistake was one of law is not a bar to granting
relief. . . . This court is always disposed to accept the construction which the highest court of
a territory or possession has placed upon a local statute. But that disposition may not be
yielded to where the lower court has clearly erred. Here the construction adopted was rested
upon a clearly erroneous assumption as to an established rule of equity. . . . The burden of
proof resting upon the appellant cannot be satisfied by mere preponderance of the evidence.
It is settled that relief by way of reformation will not be granted unless the proof of mutual
mistake be of the clearest and most satisfactory character.

The evidence introduced by the appellant in the present case does not meet with that stringent
requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which
justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale with
the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are clear
and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations
shall be followed." Article 1282 provides: "in order to judge as to the intention of the contracting
parties, attention must be paid principally to their conduct at the time of making the contract and
subsequently thereto."

We cannot thereto conclude this branch of our discussion of the question involved, without quoting
from that very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of
his time. He said, in discussing the question whether or not the contract, in the case of Lichauco vs.
Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares
and states that he is the proprietor in fee simple of two parcels of fallow unappropriated
crown land situated within the district of his pueblo. The first has an area of 73 quiones,
8 balitas and 8 loanes, located in the sitio of Batasan, and its boundaries are, etc., etc. The
second is in the sitio of Panantaglay, barrio of Calumpang has as area of 73 hectares, 22
ares, and 6 centares, and is bounded on the north, etc., etc."

In the executory part of the said instrument, it is stated:

'That under condition of right to repurchase (pacto de retro) he sells the said
properties to the aforementioned Doa Cornelia Laochangco for P4,000 and upon
the following conditions: First, the sale stipulated shall be for the period of two years,
counting from this date, within which time the deponent shall be entitled to
repurchase the land sold upon payment of its price; second, the lands sold shall,
during the term of the present contract, be held in lease by the undersigned who
shall pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in
sugar at the option of the vendor; third, all the fruits of the said lands shall be
deposited in the sugar depository of the vendee, situated in the district of Quiapo of
this city, and the value of which shall be applied on account of the price of this sale;
fourth, the deponent acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender currency of this
country . . .; fifth, all the taxes which may be assessed against the lands surveyed by
competent authority, shall be payable by and constitute a charge against the vendor;
 sixth, if, through any unusual event, such as flood, tempest, etc., the properties
hereinbefore enumerated should be destroyed, wholly or in part, it shall be
incumbent upon the vendor to repair the damage thereto at his own expense and to
put them into a good state of cultivation, and should he fail to do so he binds himself
to give to the vendee other lands of the same area, quality and value.'

xxx xxx xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's
contract with Laochangco was not one of sale with right of repurchase, but merely one of
loan secured by those properties, and, consequently, that the ownership of the lands in
questions could not have been conveyed to Laochangco, inasmuch as it continued to be
held by Berenguer, as well as their possession, which he had not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the instrument, Exhibit C. Not
because the lands may have continued in possession of the vendor, not because the latter
may have assumed the payment of the taxes on such properties, nor yet because the same
party may have bound himself to substitute by another any one of the properties which might
be destroyed, does the contract cease to be what it is, as set forth in detail in the public
instrument. The vendor continued in the possession of the lands, not as the owner thereof as
before their sale, but as the lessee which he became after its consummation, by virtue of a
contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of ownership
is not implied by the circumstance of the lessee's assuming the responsibility of the payment
is of the taxes on the property leased, for their payment is not peculiarly incumbent upon the
owner, nor is such right implied by the obligation to substitute the thing sold for another while
in his possession under lease, since that obligation came from him and he continues under
another character in its possessiona reason why he guarantees its integrity and obligates
himself to return the thing even in a case of force majeure. Such liability, as a general rule, is
foreign to contracts of lease and, if required, is exorbitant, but possible and lawful, if
voluntarily agreed to and such agreement does not on this account involve any sign of
ownership, nor other meaning than the will to impose upon oneself scrupulous diligence in
the care of a thing belonging to another.

The purchase and sale, once consummated, is a contract which by its nature transfers the
ownership and other rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the vendee and the vendor, to
the end that the latter may again acquire the ownership of the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method of
loan; it is likewise true that in practice many cases occur where the consummation of a pacto
de retro sale means the financial ruin of a person; it is also, unquestionable that in pacto de
retro sales very important interests often intervene, in the form of the price of the lease of the
thing sold, which is stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale with
right of repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to
secure a loan.
We come now to a discussion of the second question presented above, and that is, stating the same
in another form: May a tenant charge his landlord with a violation of the Usury Law upon the ground
that the amount of rent he pays, based upon the real value of the property, amounts to a usurious
rate of interest? When the vendor of property under a pacto de retro rents the property and agrees to
pay a rental value for the property during the period of his right to repurchase, he thereby becomes a
"tenant" and in all respects stands in the same relation with the purchaser as a tenant under any
other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right to
repurchase, or the sum of P375 per month, based upon the value of the property, amounted to
usury. Usury, generally speaking, may be defined as contracting for or receiving something in excess
of the amount allowed by law for the loan or forbearance of moneythe taking of more interest for
the use of money than the law allows. It seems that the taking of interest for the loan of money, at
least the taking of excessive interest has been regarded with abhorrence from the earliest times.
(Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England, and
especially the English Church, entertained the opinion, then, current in Europe, that the taking of any
interest for the loan of money was a detestable vice, hateful to man and contrary to the laws of God.
(3 Coke's Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we
shall find that there is scarcely any people, ancient or modern, that have not had usury laws. . . . The
Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It will be
deemed a little singular, that the same voice against usury should have been raised in the laws of
China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the
laws of all nations that we know of, whether Greek or Barbarian."

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine
Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter
into a contract with the tenant for the payment of a specific amount of rent for the use and
occupation of said property, even though the amount paid as "rent," based upon the value of the
property, might exceed the rate of interest allowed by law? That question has never been decided in
this jurisdiction. It is one of first impression. No cases have been found in this jurisdiction answering
that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of
receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money,
goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term is used
in the statute, signifies the giving of a sum of money, goods or credits to another, with a promise to
repay, but not a promise to return the same thing. To "loan," in general parlance, is to deliver to
another for temporary use, on condition that the thing or its equivalent be returned; or to deliver for
temporary use on condition that an equivalent in kind shall be returned with a compensation for its
use. The word "loan," however, as used in the statute, has a technical meaning. It never means the
return of the same thing. It means the return of an equivalent only, but never the same thing loaned.
A "loan" has been properly defined as an advance payment of money, goods or credits upon a
contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with
the terms of the contract. Under the contract of "loan," as used in said statute, the moment the
contract is completed the money, goods or chattels given cease to be the property of the former
owner and becomes the property of the obligor to be used according to his own will, unless the
contract itself expressly provides for a special or specific use of the same. At all events, the money,
goods or chattels, the moment the contract is executed, cease to be the property of the former
owner and becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the
property does not lose his ownership. He simply loses his control over the property rented during the
period of the contract. In a contract of "loan" the thing loaned becomes the property of the obligor. In
a contract of "rent" the thing still remains the property of the lessor. He simply loses control of the
same in a limited way during the period of the contract of "rent" or lease. In a contract of "rent" the
relation between the contractors is that of landlord and tenant. In a contract of "loan" of money,
goods, chattels or credits, the relation between the parties is that of obligor and obligee. "Rent" may
be defined as the compensation either in money, provisions, chattels, or labor, received by the owner
of the soil from the occupant thereof. It is defined as the return or compensation for the possession
of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return for their
use. It is that, which is to paid for the use of land, whether in money, labor or other thing agreed
upon. A contract of "rent" is a contract by which one of the parties delivers to the other some
nonconsumable thing, in order that the latter may use it during a certain period and return it to the
former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of the same
kind or quantity, in which cases it is called merely a "loan." In the case of a contract of "rent," under
the civil law, it is called a "commodatum."

From the foregoing it will be seen that there is a while distinction between a contract of "loan," as
that word is used in the statute, and a contract of "rent" even though those words are used in
ordinary parlance as interchangeable terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the
use and occupation of the property may depend upon a thousand different conditions; as for
example, farm lands of exactly equal productive capacity and of the same physical value may have a
different rental value, depending upon location, prices of commodities, proximity to the market, etc.
Houses may have a different rental value due to location, conditions of business, general prosperity
or depression, adaptability to particular purposes, even though they have exactly the same original
cost. A store on the Escolta, in the center of business, constructed exactly like a store located
outside of the business center, will have a much higher rental value than the other. Two places of
business located in different sections of the city may be constructed exactly on the same
architectural plan and yet one, due to particular location or adaptability to a particular business which
the lessor desires to conduct, may have a very much higher rental value than one not so located and
not so well adapted to the particular business. A very cheap building on the carnival ground may rent
for more money, due to the particular circumstances and surroundings, than a much more valuable
property located elsewhere. It will thus be seen that the rent to be paid for the use and occupation of
property is not necessarily fixed upon the value of the property. The amount of rent is fixed, based
upon a thousand different conditions and may or may not have any direct reference to the value of
the property rented. To hold that "usury" can be based upon the comparative actual rental value and
the actual value of the property, is to subject every landlord to an annoyance not contemplated by
the law, and would create a very great disturbance in every business or rural community. We cannot
bring ourselves to believe that the Legislature contemplated any such disturbance in the equilibrium
of the business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only to
repurchase. During the period of redemption the purchaser was the absolute owner of the property.
During the period of redemption the vendor was not the owner of the property. During the period of
redemption the vendor was a tenant of the purchaser. During the period of redemption the relation
which existed between the vendor and the vendee was that of landlord and tenant. That relation can
only be terminated by a repurchase of the property by the vendor in accordance with the terms of the
said contract. The contract was one of rent. The contract was not a loan, as that word is used in Act
No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make
contracts for parties. They made their own contract in the present case. There is not a word, a
phrase, a sentence or paragraph, which in the slightest way indicates that the parties to the contract
in question did not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is explicit,
clear, unambiguous and beyond question. It expresses the exact intention of the parties at the time it
was made. There is not a word, a phrase, a sentence or paragraph found in said contract which
needs explanation. The parties thereto entered into said contract with the full understanding of its
terms and should not now be permitted to change or modify it by parol evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of the
contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action
the right guaranteed to them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with
the law applicable thereto, that the judgment appealed from should be and is hereby affirmed, with
costs. So ordered.

Avancea, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

THE CONSOLIDATED BANK AND TRUST CORPORATION

(SOLIDBANK), petitioner, vs. THE COURT OF APPEALS,
 CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and
SPOUSE, respondents.

DECISION
YNARES-SANTIAGO, J.:

The instant petition for review seeks to partially set aside the July 26, 1993
Decision[1] of respondent Court of Appeals in CA-G.R. CV No. 29950, insofar as it
orders petitioner to reimburse respondent Continental Cement Corporation the amount
of P490,228.90 with interest thereon at the legal rate from July 26, 1988 until fully
paid. The petition also seeks to set aside the March 8, 1994 Resolution [2] of respondent
Court of Appeals denying its Motion for Reconsideration.
The facts are as follows:
On July 13, 1982, respondents Continental Cement Corporation (hereinafter,
respondent Corporation) and Gregory T. Lim (hereinafter, respondent Lim) obtained
from petitioner Consolidated Bank and Trust Corporation Letter of Credit No. DOM-
23277 in the amount of P1,068,150.00 On the same date, respondent Corporation paid
a marginal deposit of P320,445.00 to petitioner. The letter of credit was used to
purchase around five hundred thousand liters of bunker fuel oil from Petrophil
Corporation, which the latter delivered directly to respondent Corporation in its
Bulacan plant. In relation to the same transaction, a trust receipt for the amount of
P1,001,520.93 was executed by respondent Corporation, with respondent Lim as
signatory.
Claiming that respondents failed to turn over the goods covered by the trust
receipt or the proceeds thereof, petitioner filed a complaint for sum of money with
application for preliminary attachment [3]before the Regional Trial Court of Manila. In
answer to the complaint, respondents averred that the transaction between them was a
simple loan and not a trust receipt transaction, and that the amount claimed by
petitioner did not take into account payments already made by them. Respondent Lim
also denied any personal liability in the subject transactions. In a Supplemental
Answer, respondents prayed for reimbursement of alleged overpayment to petitioner
of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the following issues:

1) Whether or not the transaction involved is a loan transaction or a trust receipt

transaction;
2) Whether or not the interest rates charged against the defendants by the plaintiff are
proper under the letter of credit, trust receipt and under existing rules or regulations of
the Central Bank;

3) Whether or not the plaintiff properly applied the previous payment of P300,456.27
by the defendant corporation on July 13, 1982 as payment for the latters account; and

4) Whether or not the defendants are personally liable under the transaction sued for
in this case.[4]

On September 17, 1990, the trial court rendered its Decision, [5] dismissing the
Complaint and ordering petitioner to pay respondents the following amounts under
their counterclaim: P490,228.90 representing overpayment of respondent Corporation,
with interest thereon at the legal rate from July 26, 1988 until fully paid; P10,000.00
as attorneys fees; and costs.
Both parties appealed to the Court of Appeals, which partially modified the
Decision by deleting the award of attorneys fees in favor of respondents and, instead,
ordering respondent Corporation to pay petitioner P37,469.22 as and for attorneys
fees and litigation expenses.
Hence, the instant petition raising the following issues:

1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT ACTED

INCORRECTLY OR COMMITTED REVERSIBLE ERROR IN HOLDING THAT
THERE WAS OVERPAYMENT BY PRIVATE RESPONDENTS TO THE
PETITIONER IN THE AMOUNT OF P490,228.90 DESPITE THE ABSENCE OF
ANY COMPUTATION MADE IN THE DECISION AND THE ERRONEOUS
APPLICATION OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.

2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE

MARGINAL DEPOSIT BY THE RESPONDENT APPELLATE COURT IS IN
ACCORDANCE WITH BANKING PRACTICE.

3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS TO THE

FLOATING OF INTEREST RATE IS VALID UNDER APPLICABLE
JURISPRUDENCE AND THE RULES AND REGULATIONS OF THE CENTRAL
BANK.

4. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY

ERRED IN NOT CONSIDERING THE TRANSACTION AT BAR AS A TRUST
RECEIPT TRANSACTION ON THE BASIS OF THE JUDICIAL ADMISSIONS OF
THE PRIVATE RESPONDENTS AND FOR WHICH RESPONDENTS ARE
LIABLE THEREFOR.

5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY

ERRED IN NOT HOLDING PRIVATE RESPONDENT SPOUSES LIABLE
UNDER THE TRUST RECEIPT TRANSACTION.[6]

The petition must be denied.

On the first issue respecting the fact of overpayment found by both the lower
court and respondent Court of Appeals, we stress the time-honored rule that findings
of fact by the Court of Appeals especially if they affirm factual findings of the trial
court will not be disturbed by this Court, unless these findings are not supported by
evidence.[7]
Petitioner decries the lack of computation by the lower court as basis for its ruling
that there was an overpayment made. While such a computation may not have
appeared in the Decision itself, we note that the trial courts finding of overpayment is
supported by evidence presented before it. At any rate, we painstakingly reviewed and
computed the payments together with the interest and penalty charges due thereon and
found that the amount of overpayment made by respondent Bank to
petitioner, i.e., P563,070.13, was more than what was ordered reimbursed by the
lower court. However, since respondents did not file an appeal in this case, the amount
ordered reimbursed by the lower court should stand.
Moreover, petitioners contention that the marginal deposit made by respondent
Corporation should not be deducted outright from the amount of the letter of credit is
untenable. Petitioner argues that the marginal deposit should be considered only after
computing the principal plus accrued interests and other charges. However, to sustain
petitioner on this score would be to countenance a clear case of unjust enrichment, for
while a marginal deposit earns no interest in favor of the debtor-depositor, the bank is
not only able to use the same for its own purposes, interest-free, but is also able to
earn interest on the money loaned to respondent Corporation. Indeed, it would be
onerous to compute interest and other charges on the face value of the letter of credit
which the petitioner issued, without first crediting or setting off the marginal deposit
which the respondent Corporation paid to it. Compensation is proper and should take
effect by operation of law because the requisites in Article 1279 of the Civil Code are
present and should extinguish both debts to the concurrent amount. [8]
Hence, the interests and other charges on the subject letter of credit should be
computed only on the balance of P681,075.93, which was the portion actually loaned
by the bank to respondent Corporation.
 Neither do we find error when the lower court and the Court of Appeals set aside
as invalid the floating rate of interest exhorted by petitioner to be applicable. The
pertinent provision in the trust receipt agreement of the parties fixing the interest rate
states:

I, WE jointly and severally agree to any increase or decrease in the interest rate which
may occur after July 1, 1981, when the Central Bank floated the interest rate, and to
pay additionally the penalty of 1% per month until the amount/s or installment/s due
and unpaid under the trust receipt on the reverse side hereof is/are fully paid. [9]

We agree with respondent Court of Appeals that the foregoing stipulation is

invalid, there being no reference rate set either by it or by the Central Bank, leaving
the determination thereof at the sole will and control of petitioner.
While it may be acceptable, for practical reasons given the fluctuating economic
conditions, for banks to stipulate that interest rates on a loan not be fixed and instead
be made dependent upon prevailing market conditions, there should always be a
reference rate upon which to peg such variable interest rates. An example of such a
valid variable interest rate was found in Polotan, Sr. v. Court of Appeals. [10] In that
case, the contractual provision stating that if there occurs any change in the prevailing
market rates, the new interest rate shall be the guiding rate in computing the
interest due on the outstanding obligation without need of serving notice to the
Cardholder other than the required posting on the monthly statement served to the
Cardholder[11] was considered valid. The aforequoted provision was upheld
notwithstanding that it may partake of the nature of an escalation clause, because at
the same time it provides for the decrease in the interest rate in case the prevailing
market rates dictate its reduction. In other words, unlike the stipulation subject of the
instant case, the interest rate involved in the Polotan case is designed to be based on
the prevailing market rate. On the other hand, a stipulation ostensibly signifying an
agreement to any increase or decrease in the interest rate, without more, cannot be
accepted by this Court as valid for it leaves solely to the creditor the determination of
what interest rate to charge against an outstanding loan.
Petitioner has also failed to convince us that its transaction with respondent
Corporation is really a trust receipt transaction instead of merely a simple loan, as
found by the lower court and the Court of Appeals.
The recent case of Colinares v. Court of Appeals[12] appears to be foursquare with
the facts obtaining in the case at bar. There, we found that inasmuch as the debtor
received the goods subject of the trust receipt before the trust receipt itself was entered
into, the transaction in question was a simple loan and not a trust receipt
agreement. Prior to the date of execution of the trust receipt, ownership over the goods
was already transferred to the debtor. This situation is inconsistent with what normally
obtains in a pure trust receipt transaction, wherein the goods belong in ownership to
the bank and are only released to the importer in trust after the loan is granted.
In the case at bar, as in Colinares, the delivery to respondent Corporation of the
goods subject of the trust receipt occurred long before the trust receipt itself was
executed. More specifically, delivery of the bunker fuel oil to respondent Corporations
Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982.
[13]
Further, the oil was used up by respondent Corporation in its normal operations by
August, 1982.[14] On the other hand, the subject trust receipt was only executed nearly
two months after full delivery of the oil was made to respondent Corporation, or on
September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction was
explained in Colinares, to wit:

The Trust Receipts Law does not seek to enforce payment of the loan, rather it
punishes the dishonesty and abuse of confidence in the handling of money or goods to
the prejudice of another regardless of whether the latter is the owner. Here, it is crystal
clear that on the part of Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of PBC. Petitioners continually
endeavored to meet their obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the
money for their personal use. The mala prohibita nature of the alleged offense
notwithstanding, intent as a state of mind was not proved to be present in Petitioners
situation. Petitioners employed no artifice in dealing with PBC and never did they
evade payment of their obligation nor attempt to abscond. Instead, Petitioners sought
favorable terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for
re-sale, contrary to the express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their construction project. At no time
did title over the construction materials pass to the bank, but directly to the Petitioners
from CM Builders Centre. This impresses upon the trust receipt in question vagueness
and ambiguity, which should not be the basis for criminal prosecution in the event of
violation of its provisions.

The practice of banks of making borrowers sign trust receipts to facilitate collection of
loans and place them under the threats of criminal prosecution should they be unable
to pay it may be unjust and inequitable, if not reprehensible. Such agreements are
contracts of adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy
of banks, and is prone to misinterpretation, as had happened in this case. Eventually,
PBC showed its true colors and admitted that it was only after collection of the
money, as manifested by its Affidavit of Desistance.

Similarly, respondent Corporation cannot be said to have been dishonest in its

dealings with petitioner. Neither has it been shown that it has evaded payment of its
obligations. Indeed, it continually endeavored to meet the same, as shown by the
various receipts issued by petitioner acknowledging payment on the loan. Certainly,
the payment of the sum of P1,832,158.38 on a loan with a principal amount of only
P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of
funds on the part of respondent Corporation, which are the gravamen of a trust receipt
violation. Furthermore, respondent Corporation is not an importer which acquired the
bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly,
at no time did title over the oil pass to petitioner, but directly to respondent
Corporation to which the oil was directly delivered long before the trust receipt was
executed. The fact that ownership of the oil belonged to respondent Corporation,
through its President, Gregory Lim, was acknowledged by petitioners own account
officer on the witness stand, to wit:
Q - After the bank opened a letter of credit in favor of Petrophil Corp. for the account of the
defendants thereby paying the value of the bunker fuel oil what transpired next after that?
A - Upon purchase of the bunker fuel oil and upon the requests of the defendant possession of the
bunker fuel oil were transferred to them.
Q - You mentioned them to whom are you referring to?
A - To the Continental Cement Corp. upon the execution of the trust receipt acknowledging the
ownership of the bunker fuel oil this should be acceptable for whatever disposition he may make.
Q - You mentioned about acknowledging ownership of the bunker fuel oil to whom by whom?
A - By the Continental Cement Corp.
Q - So by your statement who really owns the bunker fuel oil?
ATTY. RACHON:
Objection already answered.
COURT:
Give time to the other counsel to object.
ATTY. RACHON:
He has testified that ownership was acknowledged in favor of Continental Cement Corp. so that
question has already been answered.
ATTY. BAAGA:
That is why I made a follow up question asking ownership of the bunker fuel oil.
COURT:
 Proceed.
ATTY. BAAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp.?
A - Gregory Lim.[15]

By all indications, then, it is apparent that there was really no trust receipt
transaction that took place. Evidently, respondent Corporation was required to sign the
trust receipt simply to facilitate collection by petitioner of the loan it had extended to
the former.
Finally, we are not convinced that respondent Gregory T. Lim and his spouse
should be personally liable under the subject trust receipt. Petitioners argument that
respondent Corporation and respondent Lim and his spouse are one and the same
cannot be sustained. The transactions sued upon were clearly entered into by
respondent Lim in his capacity as Executive Vice President of respondent
Corporation.We stress the hornbook law that corporate personality is a shield against
personal liability of its officers. Thus, we agree that respondents Gregory T. Lim and
his spouse cannot be made personally liable since respondent Lim entered into and
signed the contract clearly in his official capacity as Executive Vice President. The
personality of the corporation is separate and distinct from the persons composing it. [16]
WHEREFORE, in view of all the foregoing, the instant Petition for Review is
DENIED. The Decision of the Court of Appeals dated July 26, 1993 in CA-G.R. CV
No. 29950 is AFFIRMED.
SO ORDERED.
G.R. No. 96494 May 28, 1992

CASA FILIPINA DEVELOPMENT CORPORATION, petitioner,

vs.
THE DEPUTY EXECUTIVE SECRETARY, OFFICE OF THE PRESIDENT, MALACAANG,
MANILA, AND JOSE VALENZUELA, JR., respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari (treated as a petition for certiorari) seeking reversal of the
decision of the Office of the President dated April 11, 1989, in O.P. Case No. 3722, entitled "Casa
Filipina Development Corporation, Respondent-Appellant, v. Jose Valenzuela, Jr., Complainant-
Appellee," which affirmed the decision of the Housing and Land Use Regulatory Board dated
October 6, 1987; and its resolution dated September 26, 1989, which denied the motion for
reconsideration for Lack of merit.

The antecedent facts are, as follows:

On June 30, 1986, private respondent Jose Valenzuela, Jr. filed a complaint against petitioner Casa
Filipina Development Corporation before the Office of Appeals, Adjudication and Legal Affairs
(OAALA) of the then Human Settlements Regulatory Commission (now Housing and Land Use
Regulatory Board) for its failure to execute and deliver the deed of sale and transfer certificate of
title. He alleged therein that on May 2, 1984, he entered into a contract to sell with petitioner for the
purchase of a 120 sq. m. lot denominated as Lot 8, Block 9, Phase II of Casa Filipina, Sucat II, Bo.
San Dionisio, Paraaque, Metro Manila, for a total purchase price of P68,400.00 with P16,416.00 as
downpayment and the balance of P51,984.00 to be paid in 12 equal monthly installments of
P4,915.16 with 24% interest per annum starting September 3, 1984; that on October 7, 1985, he
made his full and final payment under O.R. No. 6266; that despite full payment of the lot, petitioner
refused to execute the necessary deed of absolute sale and deliver the corresponding transfer
certificate of title to him; that since October 1985, he had offered to pay for or reimburse petitioner
the expenses for the transfer of the title but the latter refuses to accept the same; and that he was
constrained to hire a lawyer for a fee to protect his interests.

For petitioner's defense, it contended that private respondent's action is premature because of his
failure to comply with the other conditional requirements of their contract such as payment of transfer
expenses, and that had the latter paid said fees, it would have been very much willing to effect the
transfer of the title.

On January 21, 1987, the OAALA rendered judgment in favor of private respondent, relying on
Section 25 of Presidential Decree No. 957 (Regulating the Sale of Subdivision Lots and
Condominiums, Providing Penalties for Violations thereof), which provides:

Sec. 25. Issuance of Title The owner or developer shall deliver the title of the lot
or unit to the buyer upon full payment of the lot or unit. No fee except those required
for the registration of the deed of sale in the Registry of deeds shall be collected for
the issuance of such title. In the event a mortgage over the lot or unit is outstanding
at the time of the issuance of the title to the buyer, the owner of or developer shall
redeem the mortgage or the corresponding portion thereof within six months from
such issuance in order that the title over any fully paid lot or unit may be secured and
delivered to the buyer in accordance herewith.
The dispositive portion of its decision reads (p. 19, Rollo):

WHEREFORE, PREMISES CONSIDERED, judgment is rendered ordering

respondent, within 15 days from finality of this decision, to execute the deed of
absolute sale for Lot 8, Block 9, Phase II, Casa Filipina, Sucat II, Bo. San Dionisio,
Paraaque, Metro Manila in favor of the complainant and thereafter to bill
complainant the total amount due for the registration and transfer expenses of the
title. Respondent is further ordered, within 15 days from receipt of complainant's
payment for registration and transfer expenses, to deliver to the latter the transfer
certificate of title of subject lot free from all liens and encumbrances. In the event
respondent is unable to deliver the title to the said lot, respondent is hereby ordered
to refund (to) complainant his total payments amounting to SEVENTY SIX
THOUSAND ONE HUNDRED EIGHTY PESOS and 82/100 (P76,180.82) plus 24%
interest per annum from June 30, 1986, the date of the filing of the complaint, until
fully paid. Respondent is likewise ordered to pay complainant TWO THOUSAND
PESOS (P2,000.00) by way of attorney's fees, for compelling the latter to litigate and
incur expenses in the protection of his rights.

It is SO ORDERED.

Petitioner then filed an appeal before the Housing and Land Use Regulatory Board. In petitioner's
memorandum, it narrated the events that transpired which led to its failure to deliver the title, namely:
its original mortgagee bank was Royal Savings Bank which was absorbed by Comsavings Bank
apparently due to bankrun; Comsavings Bank is not amenable to petitioner's earlier arrangement
with Royal Savings Bank on individual redemption of title, thus, it demanded that petitioner's
obligations should be paid prior to the release of any individual title; petitioner cannot seasonably
meet such demand due to the inability of the past administration to put up a viable and progressive
economic program that brought it into a fix situation wherein it has no participation either intentionally
or by negligence.

On October 6, 1987, the HLURB dismissed petitioner's appeal for lack of merit and affirmed in
toto the questioned decision of the OAALA (p. 23, Rollo). It opined that (ibid):

. . . Suffice it to state that the payment in full by the complainant-appellee of the

purchased (sic) price of the lot should warrant the immediate delivery of the title to
the lot so purchased. Section 25 of P.D. 957 clearly provides that the redemption by
the mortgagor or (sic) any mortgage (sic) property shall be within a period of six (6)
months from (the) date of issuance of the title in favor of the buyer. Obviously from
the moment full payment is made by the buyer to (sic) his purchased lot, the
maximum period contemplated by law for delivery of title is only six (6) months.
Within this period it becomes mandatory upon the owner or developer of a
subdivision to deliver (the) title to the lot buyer. In the case at bar, full payment was
made on October 7, 1985 and despite the lapse of one (1) year more or less from
(the) date of full payment, delivery of (the) title is still uncertain.

The defense of the respondent-appellant that its failure to deliver the title allegedly
due to the inability of the past administration to put up a viable and progressive
economic program which led to the closure of the Royal Savings Bank as its original
mortgagee bank in not well-taken since there is no proof submitted to this Board to
sunbstantiate appellant's claim. On the contrary it was only the OAALA decision that
made the respondent-appellant change its line of justification which happened to be
just an allegation which need not be passed upon by this Board.
Petitioner appealed further to the Office of the President. Again, on April 11, 1989, its appeal was
dismissed for lack of merit and the questioned decision of the HLURB was affirmed (p. 32, Rollo). On
September 26, 1989, the motion for reconsideration was denied for lack of merit (p. 36, Rollo).
Hence, the present petition, wherein petitioner raises the following issues (pp. 9-10 Rollo):

1. THE RESPONDENT DEPUTY EXECUTIVE SECRETARY, WITH DUE RESPECT

ERRED IN NOT APPLYING SETTLED JURISPRUDENCE AND THE PROVISION
OF LAW APPLICABLE IN THIS CASE.

2. THE RESPONDENT DEPUTY EXECUTIVE SECRETARY, WITH DUE RESPECT,

ERRED IN ARRIVING AT A CONCLUSION CONTRADICTORY OF (sic) THE FACTS
AND EVIDENCE, AMOUNTING TO GRAVE ABUSE OF DISCRETION.

Mainly, petitioner asseverates that in granting both remedies of specific performance and rescission,
public respondent ignored a well-pronounced rule that these remedies cannot be availed of at the
same time. There is no evidence showing that private respondent had offered to pay the expenses
for the transfer of the title. Furthermore the amount of 24% interest imposed by the OAALA in case
of refund is high and without basis: firstly, HLURB Resolution No. R-421, series of 1988, strictly
enjoins the maximum interest to be awarded in case of refund to 12%; secondly, although condition
no. 1 of their contract to sell provides for said rate of interest, it merely applies to interest on
installment payments but not with respect to refunds; thirdly, since the contract between them is not
a forbearance of money or loan, the doctrine laid down in the case of Reformina v. Tomol, Jr., G.R.
No. 59096, 139 SCRA 260 applies, that is, except where the action involves forbearance of money
or loan, interest which courts may award is only up to 12% (should be 6%). Finally, inasmuch as
issuance of the title has not yet been effected because of the take over by Comsavings Bank of
Royal Savings Bank, the period specified under Section 25 of P.D. No. 957 has not begun to run for
the purpose of redemption.

The arguments advanced by petitioner utterly lack merit.

It is plain enough in the OAALA decision that rescission is being ordered only in the event specific
performance is not feasible. Moreover, petitioner is already estopped from raising this issue because
in its appeal memorandum submitted before the HLURB, it leaded that (p. 28, Rollo):

5. Appellant prays that it be given a period/time to redeem the title or the demand for
issuance of title be suspended from the Comsavings Bank before any deed of
absolute sale be executed so that the Transfer Certificate of Title be issued and/or
refund be ordered.

The OAALA found as a fact that "the complaint-appellee was ready, willing and able to pay for the
expenses for the transfer of title as stipulated in the Contract to Sell . . . " (p. 22, Rollo). We accord
respect and finality to this finding (Filipinas Manufacturers Bank v. NLRC, et al., G.R. No. 72805,
February 28, 1990, 182 SCRA 848; Vda. de Pineda, et al. v. Pea, etc., et al., G.R. No. 57665, July
2, 1990, 187 SCRA 22).

We adopt the disposition of the Office of the Solicitor General on the correct rate of interest as Our
own (pp. 124-125, Rollo):

The ruling in Reformina v. Tomol, it must be underscored, deals exclusively with

cases where damages in the form of interest is due but no specific rate has been
previously set by the parties. In such cases, the legal interest of 12% per
annum must be applied. In the present case, however, the interest rate of 24% per
 annum was mutually agreed upon by petitioner and private respondent in their
contract to sell this was the interest rate imposed on private respondent for the
payment of the installments on the contract price and there is no reason why this
same interest rate should not be equally applied to petitioner which is guilty of
violating the reciprocal obligation.

In Solid Homes Inc. v. Court of Appeals (170 SCRA 63 [1989]), a subdivision owner,
in violation of their Offsetting Agreement, incurred delay in the delivery of a house
and lot to the supplier of the construction materials. On review, the issue of which
rate of interest the 6% per annum which was then the legal interest or the
stipulated interest rate of 12% was raised. This Honorable Court ruled:

On the matter of interest, we agree with the trial court and the Court
of Appeals that the proper rate of interest is twelve (12%) per centum
per annum, which is the rate of interest expressly agreed upon in
writing by the parties, as appearing in the invoices (Exhibits "C" and
"D"), and sanctioned by Art. 2209 of the Civil Code, . . .(Emphasis
supplied)

It is, thus, evident that if a particular rate of interest has been expressly stipulated by
the parties, that interest, not the legal rate of interest, shall be applied.

Section 25 of P.D. No. 957 imposes an obligation on the part of the owner or developer, in the event
the mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, to
redeem the mortgage or the corresponding portion thereof within six months from such issuance. We
focus Our attention on the period of "six months" to be reckoned "from the issuance of the title."
Supposing there is no such issuance of the title, as in this case, from what event is the six month
period to be counted? Or, will this period not begin to run at all unless the title has been issued? The
argument of petitioner that the issuance of the title is a prerequisite to the running of the six month
period of redemption, fails to convince Us. Otherwise, the owner or developer can readily concoct a
thousand and one reasons as justifications for its failure to issue the title and in the process, prolong
the period within which to deliver the title to the buyer free from any liens or encumbrances.
Additionally, by not issuing/delivering the title of the lot to private respondent upon full payment
thereof, petitioner has already violated the explicit mandate of the first sentence of Section 25 of P.D.
No. 957. If We were to count the six month period of redemption from the belated issuance of the
title, petitioner will have a lot to gain from its own non-observance of said provision. We shall not
countenance such absurdity. Of equal importance as the preceding ratiocination are the reasons
behind the enactment of P.D. No. 957, as expressed succinctly in its "whereas" clauses, to wit:

WHEREAS, reports of alarming magnitude also show cases of swindling and

fraudulent manipulations perpetrated by unscrupulous subdivision and condominium
sellers and operators, such as failure to deliver titles to the buyers or titles free from
liens and encumbrances, and to pay real estate taxes, and fraudulent sales of the
same subdivision lots to different innocent purchasers for value;

WHEREAS, these acts not only undermine the land and housing program of the
government but also defeat the objectives of the New Society, particularly the
promotion of peace and order and the enhancement of the economic, social and
moral condition of the Filipino people;

WHEREAS, this state of affairs has rendered it imperative that the real estate
subdivision and condominium businesses be closely supervised and regulated, and
 that penalties be imposed on fraudulent practices and manipulations committed in
connection therewith.

ACCORDINGLY, the petition is hereby DISMISSED. The decision of the Office of the President
dated April 11, 1989 and its resolution dated September 26, 1989 are AFFIRMED.

SO ORDERED.
 PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and AMBROSIO
PADILLA, Respondents.

The Chief Legal Counsel for Petitioner.

Ambrosio Padilla, Mempin & Reyes Law Offices for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; BANKING LAWS; RATE OF INTEREST; INCREASE OF INTEREST RATE; NOT TO BE
MADE OFTENER THAN ONCE A YEAR. PNB, over the objection of the private respondent, and without
authority from the Monetary Board, within a period of only four (4) months, increased the 18% interest rate
on the private respondents loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October
1984; and (c) to 48% in November 1984. Those increases were null and void. Although Section 2, P.D. No.
116 of January 29, 1973, authorizes the Monetary Board to prescribe the maximum rate or rates of interest
for loans or renewal thereof and to change such rate or rates whenever warranted by prevailing economic
and social conditions, it expressly provides that "such changes shall not be made oftener than once every
twelve months. "If the Monetary Board itself was not authorized to make such changes oftener than once a
year, even less so may a bank which is subordinate to the Board.

2. ID.; ID.; ID.; ID.; MAY BE INCREASED WITHIN LIMITS OF LAW; PNB CIRCULARS AND RESOLUTION ARE
NEITHER LAWS NOR RESOLUTIONS OF MONETARY BOARD. While the private respondent-debtor did
agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of
the contract "to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE
may prescribe" (Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Exhs. 2, 3, and 4), no
laws was ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to
32%, 41% and 48% (per annum), and no documents were executed and delivered by the debtor to
effectuate the increases. The PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No.
40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are
neither laws nor resolutions of the Monetary Board.

3. ID.; ID.; ID.; REMOVAL OF USURY LAW CEILING ON INTEREST RATES DOES NOT AUTHORIZE BANKS TO
UNILATERALLY AND SUCCESSIVELY INCREASE INTEREST RATES. CB Circular No. 905, Series of 1982
(Exh. 11) removed the Usury law ceiling on interest rates but it did not authorize the PNB, or any bank
for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a
span of four (4) months, in violation of P.D. 116 which limits such changes to "once every twelve months."
library
cralaw virtua1aw

4. ID.; ID.; ID.; UNILATERAL ACTION TO INCREASE INTEREST RATES, A VIOLATION OF ARTICLE 1308 OF
CIVIL CODE. Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on
the private respondents loan, violated the mutuality of contracts ordained in Article 1308 of the civil Code:
"ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them." cralaw virtua1aw library

5. ID.; ID.; ID.; SUCCESSIVE INCREASE OF INTEREST RATES, A VIOLATION OF ARTICLE 1956 OF CIVIL
CODE. PNBs successive increases of the interest rate on the private respondents loan, over the latters
protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01
that its terms "may be amended only by an instrument in writing signed by the party to be bound as
burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code
which provides that "no interest shall be due unless it has been expressly stipulated in writing."

DECISION

GRIO-AQUINO, J.:
The Philippine National Bank (PNB) has appealed by certiorari from the decision promulgated on June 27,
1989 by the Court of Appeals in CA-G.R. CV No. 09791 entitled, "AMBROSIO PADILLA, plaintiff-appellant
versus PHILIPPINE NATIONAL BANK, defendant-appellee," reversing the decision of the trial court which had
dismissed the private respondents complaint "to annul interest increases." (p. 32, Rollo.) The Court of
Appeals rendered judgment: jgc:chanrobles.com.ph

". . . declaring the questioned increases of interest as unreasonable, excessive and arbitrary and ordering
the defendant-appellee [PNB] to refund to the plaintiff-appellant the amount of interest collected from July,
1984 in excess of twenty-four percent (24%) per annum. Costs against the defendant-appellee." (pp 14-15,
Rollo.)

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

The Credit Agreement provided that

"9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central
Bank and the current and general policies of the Bank and those which the Bank may adopt in the future,
which may have relation to or in any way affect the Line, which rules, regulations and policies are
incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written request
from the Bank, the Borrowers shall execute and deliver such documents and instruments, in form and
substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules, regulations
and policies." (p. 85, Rollo.)

The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated 18% interest per
annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the
future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the
applicable maximum interest rate is reduced by law or by the Monetary Board." (pp. 85-86, Rollo; Emphasis
ours.)

The Real Estate Mortgage Contract likewise provided that: jgc:chanrobles.com.ph

"(k) INCREASE OF INTEREST RATE

"The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall
be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of
Directors of the MORTGAGEE may prescribe for its debtors." (p. 86, Rollo; Emphasis supplied.)

Four (4) months advance interest and incidental expenses/charges were deducted from the loan, the net
proceeds of which were released to the private respondent by crediting or transferring the amount to his
current account with the bank. chanrobles.com : virtual law library

On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8 million "will expire on
July 4, 1984," (2)" [i]f renewal of the line for another year is intended, please submit soonest possible your
request," and (3) the "present policy of the Bank requires at least 30% reduction of principal before your
line can be renewed." (pp. 86-87, Rollo.) Complying, private respondent on June 25, 1984, paid PNB
P540,000 00 (30% of P1.8 million) and requested that "the balance of P1,260,000.00 be renewed for
another period of two (2) years under the same arrangement" and that "the increase of the interest rate of
my mortgage loan be from 18% to 21%" (p. 87, Rollo.).

On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that "the increase in the rate of
interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)

On July 26, 1984, private respondent made an additional payment of P100,000.

On August 10, 1984, PNB informed private respondent that "we can not give due course to your request for
preferential interest rate in view of the following reasons: Existing Loan Policies of the bank requires 32%
for loan of more than one year; our present cost of funds has substantially increased." (pp. 8788, Rollo.)

On August 17, 1984, private respondent further paid PNB P150,000.00.

In a letter dated August 24, 1984 to PNB, private respondent announced that he would "continue making
further payments, and instead of a loan of more than one year, I shall pay the said loan before the lapse of
one year or before July 4, 1985. . . . I reiterate my request that the increase of my rate of interest from
18% be fixed at 21% or 24%." (p. 88, Rollo.)

On September 12, 1984, private respondent paid PNB P160,000.00.

In letters dated September 12, 1984 and September 13, 1984, PNB informed private respondent that "the
interest rate on your outstanding line/loan is hereby adjusted from 32% p.a. to 41% p.a. (35% prime rate +
6%) effective September 6, 1984;" and further explained "why we can not grant your request for a lower
rate of 21% or 24%." (pp. 88-89, Rollo.)

In a letter dated September 24, 1984 to PNB, private respondent registered his protest against the increase
of interest rate from 18% to 32% on July 4, 1984 and from 32% to 41% on September 6, 1984.

On October 15, 1984, private respondent reiterated his request that the interest rate should not be
increased from 18% to 32% and from 32% to 41%. He also attached (as payment) a check for
P140,000.00. chanrobles.com.ph : virtual law library

Like rubbing salt on the private respondents wound, the petitioner informed private respondent on October
29, 1984, that "the interest rate on your outstanding line/loan is hereby adjusted from 41% p.a. to 48%
p.a. (42% prime rate plus 6% spread) effective 25 October 1984." (p. 89, Rollo.)

In November 1984, private respondent paid PNB P50,000.00 thus reducing his principal loan obligation to
P300,000.00.

On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a complaint against
PNB entitled, "AMBROSIO PADILLA v. PHILIPPINE NATIONAL BANK" (Civil Case No. 84-28391), praying that
judgment be rendered: jgc:chanrobles.com.ph

"a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to 41% and again to 48%
are illegal, not valid nor binding on plaintiff, and that an adjustment of his interest rate from 18% to 24% is
reasonable, fair and just;

"b. The interest rate on the P900,000.00 released on September 27, 1982 be counted from said date and
not from July 4, 1984;

"c. The excess of interest payment collected by defendant bank by debiting plaintiffs current account be
refunded to plaintiff or credited to his current account;

"d. Pending the determination of the merits of this case, a restraining order and or a writ of preliminary
injunction be issued (1) to restrain and or enjoin defendant bank for [sic] collecting from plaintiff and/or
debiting his current account with illegal and excessive increases of interest rates; and (2) to prevent
defendant bank from declaring plaintiff in default for non-payment and from instituting any foreclosure
proceeding, extrajudicial or judicial, of the valuable commercial property of plaintiff." (pp. 89-90, Rollo.)

In its answer to the complaint, PNB denied that the increases in interest rates were illegal, unilateral
excessive and arbitrary and recited the reasons justifying said increases.

On March 31, 1985, the private respondent paid the P300,000 balance of his obligation to PNBN (Exh. 5).

The trial court rendered judgment on April 14, 1986, dismissing the complaint because the increases of
interest were properly made.

The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of Appeals reversed
the trial court, hence, NBs recourse to this Court by a petition for review under Rule 45 of the Rules of
Court.
The assignments of error raised in PNBs petition for review can be resolved into a single legal issue of
whether the bank, within the term of the loan which it granted to the private respondent, may unilaterally
change or increase the interest rate stipulated therein at will and as often as it pleased.

The answer to that question is no.

In the first place, although Section 2, PD. No. 116 of January 29, 1973, authorizes the Monetary Board to
prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such rate or
rates whenever warranted by prevailing economic and social conditions, it expressly provides that "such
changes shall not be made oftener than once every twelve months." cralaw virtua1aw library

In this case, PNB, over the objection of the private respondent, and without authority from the Monetary
Board, within a period of only four (4) months, increased the 18% interest rate on the private respondents
loan obligation three (3) times: (a) to 32% in July 1984; (b) to 41% in October 1984; and (c) to 48% in
November 1984. Those increases were null and void, for if the Monetary Board itself was not authorized to
make such changes oftener than once a year, even less so may a bank which is subordinate to the Board.
red
chanrobles law library :

Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor did agree in the Deed
of Real Estate Mortgage (Exh. 5) that the interest rate may be increased during the life of the contract "to
such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe"
(Exh. 5-e-1) or "within the limits allowed by law" (Promissory Notes, Exs. 2, 3, and 4), no law was ever
passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41%
and 48% (per annum), and no documents were executed and delivered by the debtor to effectuate the
increases. The Court of Appeals observed.

". . . We focus Our attention first of all on the agreement between the parties as embodied in the following
instruments, to wit: (1) Exhibit 1 Credit Agreement dated July 1, 1982; (2) Exhibit 2 Promissory
Note dated July 5, 1982; (3) Exhibit (3) Promissory Note dated January 3, 1983; (4) Exhibit 4
Promissory Note, dated December 13, 1983; and (5) Exhibit 5 Real Estate Mortgage contract dated July
1, 1982.

"Exhibit 1 states in its portion marked Exhibit 1-g-1: chanrob1es virtual 1aw library

9 .06 Other Conditions. The Borrowers hereby agree to be bound by the rules and regulations of the Central
Bank and the current and general policies of the Bank and those which the Bank may adopt in the future,
which may have relation to or in any way affect the Line, which rules, regulations and policies are
incorporated herein by reference as if set forth herein in full. Promptly upon receipt of a written request
from the Bank, the Borrowers shall execute and deliver such documents and instruments, in form and
substance satisfactory to the Bank, in order to effectuate or otherwise comply with such rules, regulations
and policies.

"Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, 3-B, and 4-B uniformly
authorize the defendant bank to increase the stipulated interest rate of 18% per annum within the limits
allowed by law at any time depending on whatever policy it may adopt in the future: Provided, that, the
interest rate on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board.

"Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates: chanrob1es virtual 1aw library

(k) INCREASE OF INTEREST RATE

The rate of interest charged on the obligation secured by this mortgage as well as the interest on the
amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall
be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of
Directors of the MORTGAGEE may prescribe for its debtors.

"Clearly, then, the agreement between the parties authorized the defendant bank to increase the interest
rate beyond the original rate of 18% per annum but within the limits allowed by law or within the rate
allowed by law, it being declared the obligation of the plaintiff as borrower to execute and deliver the
corresponding documents and instruments to effectuate the increase." (pp. 11-12, Rollo.)

In Banco Filipino Savings and Mortgage Bank v. Navarro, 15 SCRA 346 (1987), this Court disauthorized the
bank from raising the interest rate on the borrowers loan from 12% to 17% despite an escalation clause in
the loan agreement signed by the debtors authorizing Banco Filipino "to correspondingly increase the
interest rate stipulated in this contract without advance notice to me/us in the event a law should be
enacted increasing the lawful rates of interest that may be charged on this particular kind of loan."
(Emphasis supplied.) chanrobles virtual lawlibrary

In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated July 1, 1976 (72 O.G.
No. 3, p. 676-J) which provided that "the maximum rate of interest, including commissions premiums, fees
and other charges on loans with a maturity of more than 730 days by banking institution . . . shall be
19%." cralaw virtua1aw library

This Court disallowed the increase for the simple reason that said "Circular No. 494, although it has the
effect of law is not a law." Speaking through Mme. Justice Ameurfina M. Herrera, this Court held: jgc:chanrobles.com.ph

"It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that
there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the stipulated interest in the event that
the applicable maximum rate of interest is reduced by law or by the Monetary Board." p. 111, Rollo.).

In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB Circular No. 40-79-
84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those resolution and circulars are neither laws
nor resolutions of the Monetary Board.

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates

". . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law." cralaw virtua1aw library

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the
agreed interest rates from 18% to 48% within a span of four (4) months, in violation of PD. 116 which limits
such changes to "once every twelve months." cralaw virtua1aw library

Besides violating PD. 116, the unilateral action of the PNB in increasing the interest rate on the private
respondents loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code: jgc:chanrobles.com.ph

"ART. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them." cralaw virtua1aw library

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 v. 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 partys (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua v.
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.

PNBS successive increases of the interest rate on the private respondents loan, over the latters protest,
were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its
terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by
such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which
provides that "no interest shall be due unless it has been expressly stipulated in writing." cralaw virtua1aw library

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per
annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as
found by the Court of Appeals, is indisputable.

WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-G.R. CV No. 09791,
the Court resolved to deny the petition for review for lack of merit, with costs against the petitioner.

SO ORDERED.
G.R. No. 76518 July 13, 1990

IRENE P. RELUCIO, petitioner,

vs.
ZEIDA B. BRILLANTE-GARFIN and COURT OF APPEALS, respondents.

Orlando A. Martizano for petitioner.

Sivestre V. Garfin for private respondent.

RESOLUTION

FELICIANO, J.:

On 22 October 1979, private respondent Zeida B. Brillante-Garfin filed a complaint in the lower court for specific performance with damages
against petitioner Irene P. Relucio, to compel the latter to: (a) execute, in compliance with the Contract to Buy and Sell in question, a final
deed of sale in favor of the former over two (2) residential subdivision lots in the Mariano Village Subdivision, Naga City; and (b) construct
paved roads on the northern and southern sides of the lots, as "necessary facilities, improvements, infrastructures and other forms of
development of the subdivision area." Private respondent alleged that the lots, which have a total contract price of P10,800.00, have already
been paid for, as she had already paid P200.00 as down payment, and had subsequently completed payment of 128 equal monthly
installments of P89.45 each amounting to P11,450.00; that as the law allows the charging of interest only as monetary interest or as
compensatory interest, none of which have obtained in her case, as she had never incurred in delay in the payment of installments due, the
stipulated interest of six percent (6%) per annum on the outstanding balance is null and void; and that the amount of 650.00 representing
overpayment be returned to her.

Petitioner resisted the complaint, maintaining that private respondent, contrary to the latter's
allegations, is obliged to pay interest on the installment payments of the unpaid outstanding balance
even if paid on their "due dates" per schedule of payments; that private respondent had actually
been in arrears in the amount of P4,269.40, representing such interest as of June 1979, which
therefore entitled petitioner to cancel the contract in question. Petitioner then prayed for judicial
affirmance of her Notarial Notice of Cancellation over the said contract in question.

The lower court ordered petitioner:

1. To execute a deed of absolute sale of the two lots described in the complaint in
favor of the plaintiff to enable the latter to secure the corresponding certificate of title
in her name within thirty (30) days from the finality of this Decision;

2. To construct or cause the construction of roads on the Northern and Southern

sides of the said two lots in accordance with the contract if any, and in conformity
with the City of Naga planning ordinance relative to this case;

3. The return to the plaintiff the excess payment of P650.00, plus 6% interest per
annum from the date of the filing of the complaint; and

To pay to the plaintiff attorney's fees in the sum of P l,000.00 and the costs of suit. 1

The Court of Appeals affirmed in A.C.-GR CV No. 03194 by a

Decision dated 17 July 1986.
2

Petitioner now comes to this Court, arguing that she has the right to rescind the contract for private
respondent's continued refusal to pay the monthly installments on the contract price.
Two issues are presented for resolution in this petition: (1) whether or not private respondent has
fully paid the stipulated price in the contract so as to be entitled lawfully to demand the execution of
a deed of absolute sale in her favor. This issue in turn will depend on the question of whether or not
petitioner may validly charge interest on installment payments, notwithstanding that private
respondent had been prompt in her monthly payments; and (2) whether or not petitioner's notice of
cancellation was valid and effective.

Examination of the record shows that the questioned Contract to Buy and Sell the subdivision lots
provided for payment by private respondent of the sum of P200.00 as downpayment, and that "the
balance [of P10,600.00] shall be paid in 180 monthly installments at P89.45 per month, including
interest rate at six percent (6%) per annum, until the purchase price is fully paid." This stipulation
3

clearly specified that an interest charge of six percent (6%) per annum was included in the monthly
installment price: private respondent could not have helped noticing that P89.45 multiplied by 180
monthly installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00 may
thus be seen to be the cash price of the subdivision lots, that is, the amount payable if the price of
the lots were to be paid in cash and in full at the execution of the contract; it is not the amount that
the vendor will have received in the aggregate after fifteen (15) years if the vendee shall have
religiously paid the monthly installments. The installment price, upon the other hand, of the
subdivision lots-the sum total of the monthly installments (i.e., P16,101.00) typically, as in the instant
case, has an interest component which compensates the vendor for waiting fifteen (15) years before
receiving the total principal amount of P10,600.00. Economically or financially, P10,600.00 delivered
in full today is simply worth much more than a long series of small payments totalling, after fifteen
(15) years, P10,600.00. For the vendor, upon receiving the full cash price, could have deposited that
amount in a bank, for instance, and earned interest income which at six percent (6%) per year and
for fifteen (15) years, would precisely total P5,501.00 (the difference between the installment price of
P16,101.00 and the cash price of P10,600.00) To suppose, as private respondent argues, that
mere prompt payment of the monthly installments as they fell due would obviate application of the
interest charge of six percent (6%) per annum, is to ignore that simple economic fact. That economic
fact is, of course, recognized by law, which authorizes the payment of interest when contractually
stipulated for by the parties or when implied in recognized commercial custom or usage.
4

Vendor and vendee are legally free to stipulate for the payment of either the cash price of a
subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the
installment payment system, he is in effect paying interest on the cash price, whether the fact and
rate of such interest payment is disclosed in the contract or not. The contract for the purchase and
sale of a piece of land on the installment payment system in the case at bar is not only quite lawful; it
also reflects a very wide spread usage or custom in our present day commercial life.

Applying the foregoing analysis to the case at bar: when private respondent started paying monthly
installments in September 1968, the initial P89.45 was apportioned between the principal and the
interest, with P53.00 being allocated to service the interest charge and P36.45 being credited to
5 6

the principal. During the succeeding monthly payments, however, as the outstanding balance on the
principal gradually declined, the interest component (in absolute terms) correspondingly fell while the
component credited to the principal increased proportionately, thus amortizing the balance of the
principal purchase prize as that balance gradually declined. This explains petitioner's theory of
7

declining balance, which unfortunately was not appreciated by both the trial and appellate courts.

Despite private respondent's failure to fully pay the stipulated price of the two lots in question,
petitioner, however, could not validly rescind the contract not being lawfully entitled to do so.
Petitioner failed to rebut private respondents' allegations that the former had failed to introduce
required improvements in the subdivision; the former's bare allegation that the improvements have
already been donated to the city government was not accepted by the trial court. Section 23 of
Presidential Decree No. 957, otherwise known as The Subdivision and Condominium Buyers'
Protective Decree, provides:

Section 23. Non-forfeiture of Payments. No installment payment made by the

buyer in a subdivision or condominium project for the lot or unit he contracted to buy
shall be forfeited in favor of the owner or developer when the buyer, after due notice
to the owner or developer desists front further payment due to the failure of the
owner or developer to develop the subdivision or condominium project according to
the approved plans and within the time limit for complying with the same. Such buyer
may, at his option, be reimbursed the total amount paid. . . (Emphasis supplied)

In this respect, the trial court was correct in holding that petitioner could not rescind the
contract. As the law vests upon the buyer the option to demand reimbursement of the total
amount paid, or to wait for further development of the subdivision, private respondent who
opted for the latter alternative by waiting for the proper development of the site, may not be
ousted from the subdivision. 8

ACCORDINGLY, the Court Resolved to GRANT the Petition due course and to SET ASIDE and
NULLIFY the Decision of the Court of Appeals. In lieu thereof, a new Decision is hereby RENDERED
requiring

1. the petitioner to complete the necessary improvements and developments in the

subdivision area in accordance with the approved subdivision plans and applicable
provisions of P.D. No. 957 as well as applicable implementing administrative
regulations and City of Naga zoning ordinances, if any;

2. private respondent immediately to resume paying installment payments under her

Contract to Buy and Sell with petitioner, subject to her right to proceed against
petitioner should petitioner fail again to comply with her obligations under P.D. No.
957; and

3. petitioner to execute the Deed of Absolute Sale when private respondent shall
have fully paid the purchase price in accordance with the mentioned Contract to Buy
and Sell.

No pronouncement as to costs.

SO ORDERED.