1)

ACME SHOE RUBBER & PLASTIC CORPORATION and CHUA PAC vs. HON. COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES AND REGIONAL SHERIFF OF CALOOCAN CITY
GR NO. 103576 AUGUST 22, 1996

Facts:

Chua Pac (petitioner) executed, for and in behalf of ACME Shoe Rubber & Plastic Corporation, a
chattel mortgage in favor of Producers Bank of the Philippines (private respondent). The
mortgage stood by way of security for Chua Pac’s corporate loan of PHP 3M. A provision in the
chattel mortgage agreement stated that such mortgage shall also stand as a security for said
obligation and any all other obligations of the mortgagor to the mortgagee whether such
obligations have been contracted before, during or after the constitution of this mortgage. In due
time, the loan was paid by the company. Subsequently, the company obtained from respondent
bank additional financial accommodations. Another loan was again extended covered by
promissory notes but went unsettled. The respondent bank applied for an extrajudicial
foreclosure of the chattel mortgage prompting petitioner to file a case in court. The trial court
dismissed the case and ordered the foreclosure. In their appeal, the Court of Appeals affirmed
the decision of the court a quo.

Issue:

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise
extend to its coverage to obligations yet to be contracted or incurred?

Ruling:

No, it is not valid. While a pledge, real estate mortgage, or antichresis may exceptionally secure
after-incurred obligations so long as these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is constituted.
Although a promise expressed in a chattel mortgage to include debts that are yet to be
contracted can be a binding commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a chattel mortgage agreement covering
the newly contracted debt is executed either by concluding a fresh chattel mortgage or by
amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.
Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of the borrower of the financing agreement

1
whereon the promise is written but, of course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during the life of the chattel mortgage sought to be
foreclosed.

2)
TOPIC: Introduction to Credit Transactions

People Vs Concepcion

Credit was extended by PNB to a partnership, the only security required consisted of demand
notes which were paid, together with interest, on maturity.

Facts:

By telegrams and a letter of confi rmation to the manager of the branch of PNB (Philippine
National Bank), C, President and member of the board of directors of PNB, authorized an
extension of credit in favor of partnership X, of which the wife of C is a partner, in the amount of
P300,000.00. The special authorization given was essential in view of prior memorandum order
of C limiting the discretional power of the local manager to grant loans and discount negotiable
documents to P5,000.00.

Pursuant to the authorization by C, credit aggregating P300,000.00 was granted the fi rm, the
only security required consisting of six (6) demand notes. The notes, together with the interest,
were taken up and paid about two (2) months later. Under the law (Sec. 35, Act No. 2747.), the
PNB “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.”

Issues:

Was the granting of a credit of P300,000.00 to partnership X a loan within the meaning of Section
35 or only a concession of credit?

(2) Were the demand notes signed by the fi rm a loan or a discount?

Held:

The concession of a credit necessarily involves the granting of “loans” up to the limit of the
amount fi xed in the “credit.”

2
(2) The demand notes signed by the fi rm were not discount papers but were mere evidences of
indebtedness, because (a) interest was not deducted from the face of the notes, but was paid
when the notes fell due; and (b) they were single-name and not double-name paper. C violated
the prohibition.

3) -
4)

Carolyn M. Garcia -vs- Rica Marie S. Thio

GR No. 154878, 16 March 2007

FACTS

Respondent Thio received from petitioner Garcia two crossed checks which amount to
US$100,000 and US$500,000, respectively, payable to the order of Marilou Santiago. According
to petitioner, respondent failed to pay the principal amounts of the loans when they fell due and
so she filed a complaint for sum of money and damages with the RTC. Respondent denied that
she contracted the two loans and countered that it was Marilou Satiago to whom petitioner lent
the money. She claimed she was merely asked y petitioner to give the checks to Santiago. She
issued the checks for P76,000 and P20,000 not as payment of interest but to accommodate
petitioner’s request that respondent use her own checks instead of Santiago’s. RTC ruled in favor
of petitioner. CA reversed RTC and ruled that there was no contract of loan between the parties.

ISSUE

(1) Whether or not there was a contract of loan between petitioner and respondent.

(2) Who borrowed money from petitioner, the respondent or Marilou Santiago?

HELD

(1) The Court held in the affirmative. A loan is a real contract, not consensual, and as such I
perfected only upon the delivery of the object of the contract. Upon delivery of the contract of
loan (in this case the money received by the debtor when the checks were encashed) the debtor
acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal
amount. It is undisputed that the checks were delivered to respondent.

(2) However, the checks were crossed and payable not to the order of the respondent but
to the order of a certain Marilou Santiago. Delivery is the act by which the res or substance is
thereof placed within the actual or constructive possession or control of another. Although
respondent did not physically receive the proceeds of the checks, these instruments were placed

3
in her control and possession under an arrangement whereby she actually re-lent the amount to
Santiago

5)
6)

Credit Transactions Case Digest: BPI Investment Corp V. CA (2002)

G.R. No. 133632 February 15, 2002

Lessons Applicable: Simple Loan

Facts:

 Frank Roa obtained a loan with interest rate of 16 1/4%/annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of BPI Investment Corp. (BPIIC), for the
construction of a house on his lot in New Alabang Village, Muntinlupa.
 He mortgaged the house and lot to AIDC as security for the loan.
 1980: Roa sold the house and lot to ALS Management & Development Corp. and Antonio
Litonjua for P850K who paid P350K in cash and assumed the P500K indebtness of ROA with
AIDC.
 AIDC proposed to grant ALS and Litonjua a new loan for P500K with interested rate of
20%/annum and service fee of 1%/annum on the outstanding balance payable within 10 years
through equal monthly amortization of P9,996.58 and penalty interest of 21%/annum/day
from the date the amortization becomes due and payable.
 March 1981: ALS and Litonjua executed a mortgage deed containing the new stipulation with
the provision that the monthly amortization will commence on May 1, 1981
 August 13, 1982: ALS and Litonjua paid BPIIC P190,601.35 reducing the P500K principal loan
to P457,204.90.
 September 13, 1982: BPIIC released to ALS and Litonjua P7,146.87, purporting to be what was
left of their loan after full payment of Roa’s loan
 June 1984: BPIIC instituted foreclosure proceedings against ALS and Litonjua on the ground
that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984
amounting to P475,585.31
 August 13, 1984: Notice of sheriff's sale was published
 February 28, 1985: ALS and Litonjua filed Civil Case No. 52093 against BPIIC alleging that they
are not in arrears and instead they made an overpayment as of June 30, 1984 since the P500K
loan was only released September 13, 1982 which marked the start of the amortization and
since only P464,351.77 was released applying legal compensation the balance of P35,648.23
should be applied to the monthly amortizations

4
 RTC: in favor of ALS and Litonjua and against BPIIC that the loan granted by BPI to ALS and
Litonjua was only in the principal sum of P464,351.77 and awarding moral damages,
exemplary damages and attorneys fees for the publication
 CA: Affirmed reasoning that a simple loan is perfected upon delivery of the object of the
contract which is on September 13, 1982
ISSUE: W/N the contract of loan was perfected only on September 13, 1982 or the second release
of the loan?

HELD: YES. 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
attorney’s 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.
 obligation to pay commenced only on October 13, 1982, a month after the perfection of the
contract
 contract of loan involves a reciprocal obligation, wherein the obligation or promise of each
party is the consideration for that of the other. 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. 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.
 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 and the
date when it was released. Such negligence resulted in damage for which an award of
nominal damages should be given
 SSS where we awarded attorney’s fees because private respondents were compelled to
litigate, we sustain the award of P50,000 in favor of private respondents as attorney’s fees

7) -
8) -
9)
Pajuyo vs CA
G.R. No. 146364 June 3, 2004
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.

FACTS:
Petitioner Pajuyo paid P400 to a certain Pedro Perez for the rights over a lot, where Pajuyo
subsequently built a house. In 1985, Pajuyo and private respondent Guevarra executed a
Kasunduan wherein Pajuyo allowed Guevarra to live in the house for free, on the condition that

5
Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that
he would vacate the premises upon Pajuyo’s demand.

In 1994, Pajuyo informed Guevarra of his need of the house and demanded that the latter vacate
the house. Guevarra refused. Pajuyo filed an ejectment case against Guevarra before the MTC.
Guevarra claimed that Pajuyo had no valid title over the lot since it is within the area set aside
for socialized housing. MTC rendered its decision in favor of Pajuyo, which was affirmed by RTC.
(MTC and RTC basically ruled that the Kasunduan created a legal tie akin to that of a landlord and
tenant relationship).

CA reversed the RTC decision, stating that the ejectment case is without legal basis since both
Pajuyo and Guevarra illegally occupied the said lot. CA further stated that both parties are in pari
delicto; thus, the court will leave them where they are. CA ruled that the Kasunduan is not a lease
contract, but a commodatum because the agreement is not for a price certain.

ISSUE: W/N the contractual relationship between Pajuyo and Guevarra was that of a
commodatum.

NO

HELD:
In a contract of commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time and return it. An essential
feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use
of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the
return of the thing loaned until after expiration of the period stipulated, or after accomplishment
of the use for which the commodatum is constituted. If the bailor should have urgent need of the
thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by
the bailor, he can demand the return of the thing at will, in which case the contractual relation is
called a precarium. Under the Civil Code, precarium is a kind of commodatum.

The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated
him to maintain the property in good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also
different from that of a commodatum. Case law on ejectment has treated relationship based on
tolerance as one that is akin to a landlord-tenant relationship where the withdrawal of

6
permission would result in the termination of the lease. The tenant’s withholding of the property
would then be unlawful.

Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum.70 These contracts
certainly involve the obligation to deliver or return the thing received.

Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Guevarra should know that there must be honor even between squatters. Guevarra
freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.

The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a
right to physical possession of the contested property. The Kasunduan is the undeniable evidence
of Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a
possessor in bad faith. The absence of a contract would not yield a different result, as there would
still be an implied promise to vacate.

10)

Republic vs. Bagtas

GR No. L-17474
October 25, 1962

Facts

Jose Bagtas borrowed from the Bureau of Animal Industry three bulls for a period of one year.
Each bull has a book value and are subject to a government charge of 10% as breeding fee. Upon
the expiration of the contract, Bagtas asked for renewal for another year. However, the Director
of the bureau only approved the renewal for one bull and requested the return of the two. Bagtas
offered to buy the bulls at a lower price, but the Director declined and advised him that he either
return the bulls or pay their full book values. Bagtas did not comply.

The Republic filed an action against Bagtas, praying that he returns or pays the value of the three
bulls loaned to him and pay the unpaid breeding fees with interest. Bagtas’ son returned two of
the bulls and his wife contended that the last bull was killed during a raid by the Huks. According

7
to her, because the loss was due to force majeure, she is relieved from the duty of returning or
paying the value of the bull.

Issues

1. Is the contract one of commodatum or one of lease?

2. Is the appellant still liable for the loss of the bull?

Ruling

1. It is one of lease. A contract of commodatum is essentially gratuitous. If the breeding fee

is considered a compensation, then the contract would be a lease of the bull.

2. Yes, appellee is still liable. Under the Article 1671 of the Civil Code, the lessee would be
subject to the responsibilities of a possessor in bad faith because she had continued
possession of the bull after the expiry of the contract.

And even if the contract be a commodatum, still the appellant is liable, because Article
1942 of the Civil Code provides that a bailee in a contract of commodatum is liable for
loss of the thing, even if it should be through fortuitous event:

(2) if he keeps it longer than the period stipulated…

(3) if the thing loaned has been delivered with appraisal of its value, unless there
is stipulation exempting the bailee from responsibility in case of a fortuitous
event.

Bagtas kept and used the bulls after the expiry of the contract. Each bull had an appraised
book value and there was no stipulation for the exception of liability due to fortuitous
event.

11) –
12) –

8
 13)

PEOPLE V. PUIG & PORRAS

TOPIC: Simple Loan/Mutuum

FACTS:

This is a petition for review under Rule 45 praying for the reversal of the orders of the RTC
dismissing the 112 cases of Qualified Theft against Puig & Porras.

The Provincial Prosecutor’s Office filled 112 cases of Qualified Theft against Puig & Porras
who were cashier & bookkeeper respectively, of the Rural Bank of Pototan Inc. It was alleged in
the information that “both accused conspiring, confederating and helping one another with
grave abuse of confidence, without knowledge and/or consent of the management of the bank
and with intent to gain, did there and then, willfully, unlawfully and feloniously take 15,000 pesos
to the damage and prejudice…” of said bank.

However, the Trial Court did not find the existence of probable cause based on the
following reasons:

1. The element of taking without consent was absent because it was the depositors who are the
owners of the money allegedly taken, not the Bank because the bank is a mere depositary.

2. The information lacked a showing of a high degree of confidence between the accused and the
bank which the accused could have abused.

ISSUE:

Whether or not the information for qualified theft filed against the accused sufficiently
allege taking without consent and grave abuse of confidence

CONTENTIONS:

Petitioner contends that under Art. 1980, deposits shall be governed by the provisions on
simple loans. Corollary thereto, Art. 1953 provides:

“Any person who receives a loan of money or any other fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of the same kinds
and quality.”

Hence, depositors who place their money in the bank are considered creditors of the bank and
the bank acquires ownership of the money.

9
RULING:

The Supreme Court found merit in the petition.

As to the first issue on ownership of the funds that were allegedly stolen:

It is a settled doctrine in jurisprudence that the relationship between a bank and a

depositor is that of a debtor-creditor. As correctly pointed out by the petitioner, Arts. 1980 and
1953 of the New Civil Code apply.

The bank acquires ownership of the money deposited by its clients; and the employees
of the bank who are entrusted with possession of the money of the Bank due to the confidence
reposed in them, occupy positions of confidence.

As to the issue of sufficiency of the allegations of the complaint:

The petition was dismissed because the Trial Court said that there was no allegation of
the degree of confidence that was reposed to the accused that they could have abused. The Trial
Court noted that there was a lack of the words “High degree of confidence” in the allegation.
However, Sec. 6 Rule 110 provides that the exact language of the law need not be used in alleging
the acts/omissions constituting the offense. It is sufficient that the acts/omissions complained of
be stated in a language that would allow a man of common understanding to know the charge
against him.

Therefore, the information sufficiently allege all the essential elements constituting the crime of
qualified theft.

14) –
15) .

Eastern Shipping Lines, Inc. v CA (Credit Transactions)

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND MERCANTILE
INSURANCE COMPANY, INC., respondents.

FACTS:

10
This is an action against defendants shipping company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee
who paid the consignee the value of such losses/damages.

the losses/damages were sustained while in the respective and/or successive custody and
possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all
the rights of action of said consignee against defendants.

DECISION OF LOWER COURTS: * trial court: ordered payment of damages, jointly and severally *
CA: affirmed trial court.

ISSUES AND RULING:

(a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or
joint and several, liability of the common carrier, the arrastre operator and the customs broker;

YES, it is solidary. Since it is the duty of the ARRASTRE to take good care of the goods that are in
its custody and to deliver them in good condition to the consignee, such responsibility also
devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the
obligation to deliver the goods in good condition to the consignee.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from
the time the articles are surrendered to or unconditionally placed in the possession of, and
received by, the carrier for transportation until delivered to, or until the lapse of a reasonable
time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code;
Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When
the goods shipped either are lost or arrive in damaged condition, a presumption arises against
the carrier of its failure to observe that diligence, and there need not be an express finding of
negligence to hold it liable.

(b) whether the payment of legal interest on an award for loss or damage is to be computed from
the time the complaint is filed or from the date the decision appealed from is rendered; and

11
FOLLOW THESE VERY IMPORTANT RULES (GUIDANCE BY THE SUPREME COURT)

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.

(c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%).

SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of
the court a quo (Court of Appeals) AND A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT

12
(6%), shall be imposed on such amount upon finality of the Supreme Court decision until the
payment thereof.

RATIO: when the judgment awarding a sum of money becomes final and executory, the monetary
award shall earn interest at 12% per annum from the date of such finality until its satisfaction,
regardless of whether the case involves a loan or forbearance of money. The reason is that this
interim period is deemed to be by then equivalent to a forbearance of credit.

NOTES: the Central Bank Circular imposing the 12% interest per annum applies only to loans or
forbearance of money, goods or credits, as well as to judgments involving such loan or
forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs
when the transaction involves the payment of indemnities in the concept of damage arising from
the breach or a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been applied,
i.e., from the time the complaint is filed until the adjudged amount is fully paid.

16)

CASE # 16 PCI LEASING & FINANCE V TROJAN METAL

TOPIC: CONVENTIONAL INTEREST

FACTS:

Sometime in 1997, Trojian Metal Industries, Inc. (TMI) came to PCLI Leasing and Finance,
Inc. (PCIL) to seek a loan. Instead of extending a loan, PCILF offered to buy various equipment
TMI owned. Hard-pressured for money, TMI agreed. PCILF and TMI immediately executed deeds
of sale evidencing TMI’s sale to PCILF of the various equipment. PCILF and TMI then entered into
a lease agreement, whereby the latter leased from the former the various equipment it
previously owned. Pursuant to the lease agreement, TMI issued postdated checks representing
24 monthly instalments. The lease agreement required TMI to give PCILF a guaranty deposit
which would serve as security for the timely performance of TMI’s obligation under the lease
agreement, to be automatically forfeited should TMI return the leased equipment before the
expiration of the lease agreement.To obtain additional loan from another financing company,
TMI used the leased equipment as temporary collateral. PCILF considered the second mortgage
a violation of the lease agreement. PCILF sent TMI a demand letter for the payment of the latters
outstanding obligation. PCILF filed with the RTC a complaint against TMI, spouses DIzon for

13
recovery of sum of money and personal property . The RTC issued the writ of replivin PCILF prayed
for, directing the sherif to take custody of the leased equipment. not long after, PCLIF sold the
leased equipment to a third party and collected the proceeds. The RTC ruled in favour of PCILF.
On Appeal, the court if appeals ruled that the sale with lease agreement was in fact a loan secured
by chattel mortgage.

ISSUE:

WON the sale with lease agreement the parties entered into was a financial lease or a loan
secured by chattel mortgage.

HELD:

In the present case, since the transaction between PCILF and TMI involved equipment already
owned by TMI, it cannot be considered as one financial leasing, as defined by law, but simply a
loan secured by the various equipment owned by TMI. Hence, the true transaction between the
parties expressed in a proper instrument, it would have been simple loan secured by a chattel
mortgage, instead of a simulated financial leasing. Thus, upon TMI’s default, PCILF was entitled
to seize the mortgage equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILF’s sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in the exercised of its rights to foreclose the
chattel mortgage as creditor-mortgagee.

Further, spouses Dizon as TMI’s President and vice-president, executed in favor of PCILF a
continuing guaranty of lease obligations. Under the continuing guaranty, the Dizon spouses
agreed to immediately pay whatever obligations would be due PCILF in case TMI failed to meet
its obligations under the lease agreement.

14
 17)

Case Digest: G.R. No. 173227. January 20, 2009

Sebastian Siga-an vs. Alicia Villanueva

Facts:

Respondent filed a complaint for sum of money against petitioner. Respondent claimed that
petitioner approached her inside the PNO and offered to loan her the amount of P540,000.00 of
which the loan agreement was not reduced in writing and there was no stipulation as to the
payment of interest for the loan. Respondent issued a check worth P500,000.00 to petitioner as
partial payment of the loan. She then issued another check in the amount of P200,000.00 to
petitioner as payment of the remaining balance of the loan of which the excess amount
of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied
as interest, petitioner pestered her to pay additional interest and threatened to block or
disapprove her transactions with the PNO if she would not comply with his demand. Thus, she
paid additional amounts in cash and checks as interests for the loan. She asked petitioner for
receipt for the payments but was told that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to petitioner
for the loan and interest accumulated to P1,200,000.00.

The RTC rendered a Decision holding that respondent made an overpayment of her loan
obligation to petitioner and that the latter should refund the excess amount to the former. It
ratiocinated that respondent’s obligation was only to pay the loaned amount of P540,000.00,
and that the alleged interests due should not be included in the computation of respondent’s
total monetary debt because there was no agreement between them regarding payment of
interest. It concluded that since respondent made an excess payment to petitioner in the
amount of P660,000.00 through mistake, petitioner should return the said amount to respondent
pursuant to the principle of solutio indebiti. Also, petitioner should pay moral damages for the
sleepless nights and wounded feelings experienced by respondent. Further, petitioner should
pay exemplary damages by way of example or correction for the public good, plus attorney’s fees
and costs of suit.

15
Issue:

(1) Whether or not interest was due to petitioner; and

(2) whether the principle of solutio indebiti applies to the case at bar.

Ruling:

(1) No. Compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan and no interest was due on the loan because
there was no written agreement as regards payment of interest. Article 1956 of the Civil Code,
which refers to monetary interest, specifically mandates that no interest shall be due unless it
has been expressly stipulated in writing. As can be gleaned from the foregoing provision,
payment of monetary interest is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of monetary
interest. Thus, we have held that collection of interest without any stipulation therefor in writing
is prohibited by law.

(2)Yes, if the borrower of loan pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil
Code explains the principle of solutio indebiti. Said provision provides that if something is
received when there is no right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises. In such a case, a creditor-debtor relationship is created under a
quasi-contract whereby the payor becomes the creditor who then has the right to demand the
return of payment made by mistake, and the person who has no right to receive such payment
becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the
ancient principle that no one shall enrich himself unjustly at the expense of another. The
principle of solutio indebiti applies where (1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who received the payment;
and (2) the payment is made through mistake, and not through liberality or some other
cause. We have held that the principle of solutio indebiti applies in case of erroneous payment
of undue interest.

16
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary
damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and threatened to block her
transactions with the PNO if she would not pay interest. This forced respondent to pay interest
despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate so as
to deter petitioner and other lenders from committing similar and other serious wrongdoings.

18) -
19) .

Pan Pacific Service Contractors v. Equitable PCI Bank

G.R. No. 169975

Facts:

Herein plaintiff and respndent entered into a contract regarding mechanical works
involving air condition systems. There was a P23,311,410.030 consideration for the said project
which also gave plaintiffs a price adjustment privilege with regards to labor and costruction
material costs, such contract further stipulated that an interest at a Bank Lending Rate of 18%
shall be paid upon delay.

A few months after the execution of the said project there was a ris on labor costs which
prompted plaintiffs to demand for price adjustment, instead of granting such, respondent
compelled plaintiff to execute a loan. Subsequent thereof the plaintiff again demanded for price
adjustment which was subsequently denied by the respondents instead they offered to offset
said price adjustment to the loan the acquired. Aggrieved, plaintiffs raised this issue to the RTC
wherein the RTC decided in favor of the plaintiffs but only gave them only a 12% annual interest
which was subsequently affirmed by the CA. Hence, this petition.

Issue:

WoN the stipulated interest rate be used?

Held:

The high court answered on the affirmative stating that It is settled that the agreement
or the contract between the parties is the formal expression of the parties rights, duties, and
obligations. It is the best evidence of the intention of the parties. Thus, when the terms of an
agreement have been reduced to writing, it is considered as containing all the terms agreed upon

17
and there can be, between the parties and their successors in interest, no evidence of such terms
other than the contents of the written agreement.

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

Under Article 2209 of the Civil Code, the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum of money is the payment
of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a
stipulation of a particular rate of penalty interest, payment of additional interest at a rate equal
to the regular monetary interest becomes due and payable. Finally, if no regular interest had
been agreed upon by the contracting parties, then the damages payable will consist of payment
of legal interest which is 6%, or in the case of loans or forbearances of money, 12% per annum.
It is only when the parties to a contract have failed to fix the rate of interest or when such amount
is unwarranted that the Court will apply the 12% interest per annum on a loan or forbearance of
money. The written agreement entered into between petitioners and respondent provides for
an interest at the current bank lending rate in case of delay in payment and the promissory note
charged an interest of 18%.

20)

CASE # 20

TOPIC: CONVENTIONAL INTEREST

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON v

ARTHUR F. MENCHAVEZ

GR 160545 March 9, 2010

FACTS:

On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained
a P 1,000,000 loan from respondent, with a monthly interest of P40,000 payable for six (6)

18
months, or a total obligation of P1,240,000 to be paid within 6 months from January 8, 1994 until
June 8, 1994.

Pantaleon then issued a promissory note. However, the petitioners failed to completely pay the
loan within the stipulated 6-month period.

Subsequently, respondent filed a complaint from sum of money with the RTC to enforce the
unpaid balance, plus 4% monthly interest, P30,000 in atty’s fees, P1,000 per court appearance
and costs of suit.

The petitioners admitted the loan of P1,240,000 but denied the stipulation on the 4% monthly
interest, arguing that the interest was not provided in the promissory note.

RTC: rendered a decision finding that the respondent issued a check of P1,000,000 in favour of
the petitioners that would earn an interest of 4% or P40,0000 per month.

CA: found that the parties agreed to a 4% monthly interest

Noted that the interest of 4% per month, or 48% per annum, was unreasonable and
should be reduced to 12% per annum.

ISSUE: whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of
interest (ROI) apply the 6-month payment period only or until full payment of the loan.

RULING:

Interest due should be stipulated in writing; otherwise, 12% per annum

—> The agreed sum can be computed at 4% interest per month, but not such ROI was stipulated
in the promissory note, rather a fixed sum equivalent to this rate was agreed upon.

19
—> Article 1956, NCC and Eastern Shipping Lines, Inc v. CA

“ In the absence of stipulation, the rate of interest shall be 12% per annum to be computed per
annum to be computed from default.”

RTC and CA appreciated the facts of the case; they erred in finding that the parties agreed to a
4% interest… The facts show that the parties agreed to the payment of a specific sum of money
of P40,000 per month for six months, not to a 4% ROI payable within a 6-month period.

21) –
22)

TRIPLE-V FOOD SERVICES INC. vs. FILIPINO MERCHANTS INSURANCE

COMPANY, GR. No. 160554, February 21, 2005

FACTS: Mary Jo-Anne De Asis dined at petitioner's Kamayan Restaurant. De Asis was using a
Mitsubishi Galant Super Saloon Model 1995 issued by her employer Crispa Textile Inc. On said
date, De Asis availed of the valet parking service of petitioner and entrusted her car key to
petitioner's valet counter. Afterwards, a certain Madridano, valet attendant, noticed that the car
was not in its parking slot and its key no longer in the box where valet attendants usually keep
the keys of cars entrusted to them. The car was never recovered. Thereafter, Crispa filed a claim
against its insurer, herein respondent Filipino Merchants Insurance Company, Inc. Having
indemnified Crispa for the loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed
with the RTC at Makati City an action for damages against petitioner Triple-V Food Services, Inc.
Petitioner claimed that the complaint failed to adduce facts to support the allegations of
recklessness and negligence committed in the safekeeping and custody of the subject vehicle.
Besides, when De Asis availed the free parking stab which contained a waiver of petitioner’s
liability in case of loss, she had thereby waived her rights.

ISSUE: Whether or not petitioner Triple-V Food Services, Inc. is liable for the loss.

HELD: The Supreme Court ruled in the affirmative. In a contract of deposit, a person receives an
object belonging to another with the obligation of safely keeping it and returning the same. A
deposit may be constituted even without any consideration. It is not necessary that the
depositary receives a fee before it becomes obligated to keep the item entrusted for safekeeping
and to return it later to the depositor. Petitioner cannot evade liability by arguing that neither a

20
contract of deposit nor that of insurance, guaranty or surety for the loss of the car was
constituted when De Asis availed of its free valet parking service.

23)

TOPIC: DEPOSIT

BPI vs. IAC

[The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust
Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the
Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger,
and was substituted as party to the case.]

FACTS:
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City
Branch, a dollar savings account and a peso current account. The complaint filed with the trial
court alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US
$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the agreement was
embodied in a document, a copy of which was attached to and made part of the complaint. The
document reads:

Makati Cable Address:

Philippines "COMTRUST"

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines
Quezon City Branch

December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:
We acknowledged (sic) having received from you today the sum of US
DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.

21
 Received by:
(Sgd.) VIRGILIO V. GARCIA

It was also alleged in the complaint that despite demands, the bank refused to return the
money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso
current account at prevailing conversion rates. It must be emphasized that COMTRUST did not
deny specifically under oath the authenticity and due execution of the above instrument. During
trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US
$3,000 for safekeeping. When he requested the return of the money on May 10, 1976,
COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on
December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to
Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00
was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to
his current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current
account at prevailing conversion rates, BPI now posits another ground to defeat private
respondent's claim. It now argues that the contract embodied in the document is the contract of
depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank
alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is
claimed, the bank cannot be liable under the contract, and the obligation is purely personal to
Garcia.

ISSUE:
Whether or not the contract in question is a contract of depositum.

SC RULING:
It was a contract of depositum.

In this case, no sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into
the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's
authority, but also the bank's power, to enter into the contract in question.

The document which embodies the contract states that the US$3,000.00 was received by
the bank for safekeeping. The subsequent acts of the parties also show that the intent of the
parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later

22
time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months
later.
That arrangement is that contract defined under Article 1962, New Civil Code, which
reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging
to another, with the obligation of safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the contract, there is no deposit but some
other contract.

It bears to take note that the object of the contract between Zshornack and COMTRUST
was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949,
which was in force at the time the parties entered into the transaction involved in this case. The
circular provides:

As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged
in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars
to the Central Bank within one business day from receipt. Otherwise, the contract of depositum
would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a transaction which is not authorized by CB Circular No.
20, it must be considered as one which falls under the general class of prohibited transactions.
Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a
cause of action against the other. The only remedy is one on behalf of the State to prosecute the
parties for violating the law. We thus rule that Zshornack cannot recover.

24)

CA Agro-Industrial Development Corporation vs CA

GR No. 90027. March 3, 1993

Facts:
CA Agro (through its President, Aguirre) and spouses Pugao entered into an agreement
whereby the former purchased two parcels of land for P350, 525 with a P75, 725 down payment

23
while the balance was covered by three (3) postdated checks. Among the terms embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that titles to the lots shall be
transferred to the petitioner upon full payment of the purchase price and that the owner’s copies
of the certificates of titles thereto shall be deposited in a safety deposit box of any bank. The
same could be withdrawn only upon the joint signatures of a representative of the petitioner
upon full payment of the purchase price. They then rented Safety Deposit box of private
respondent Security Bank and Trust Company (SBTC). For this purpose, both signed a contract of
lease which contains the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and
it assumes absolutely no liability in connection therewith.

After the execution of the contract, two (2) renter’s key were given to Aguirre, and Pugaos. A key
guard remained with the bank. The safety deposit box has two key holes and can be opened with
the use of both keys. Petitioner claims that the CTC were placed inside the said box.

Thereafter, a certain Mrs. Ramos offered to buy from the petitioner the two (2) lots at a price of
P225 per sqm. Mrs. Ramose demanded the execution of a deed of sale which necessarily entailed
the production of the CTC. Aguirre and Pugaos then proceeded to the bank to open the safety
deposit box. However, when opened in the presence of bank’s representative, the box yielded
no certificates. Because of the delay in reconstitution of title, Mrs. Ramos withdrew her earlier
offer and as a consequence petitioner failed to realize the expected profit of P280, 500. Hence,
the latter filed a complaint for damages.

RTC: Dismissed the complaint

CA: Affirmed

Issue:
Whether or not the contractual relation between a commercial bank and another party in
the contract of rent of a safety deposit box is one of bailor and bailee.

Ruling:
Yes.
The contract in the case at bar is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and absolute possession and
control of the safety deposit box was not given to the joint renters – the petitioner and Pugaos.

24
 American Jurisprudence:
The prevailing rule is that the relation between a bank renting out safe-deposit boxes and
its customer with respect to the contents of the box is that of a bail or bailee, the bailment being
for hire and mutual benefit.

Our provisions on safety deposit boxes are governed by Section 72 (a) of the General
Banking Act, and this primary function is still found within the parameters of a contract of deposit
like the receiving in custody of funds, documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from, but related to or in conjunction
with, this principal function. Thus, depositary’s liability is governed by our civil code rules on
obligation and contracts, and thus the SBTC would be liable if, in performing its obligation, it is
found guilty of fraud, negligence, delay or contravention of the tenor of the agreement.

25)

TOPIC: DEPOSIT

ASSOCIATED BANK (Now WESTMONT BANK), petitioner, vs. VICENTE HENRY TAN, respondent

FACTS: Sometime in September 1990, Tan, a regular depositor-creditor of the Associated Bank,
deposited a postdated UCPB check with the said BANK P101,000.00 issued to him by Willy Cheng.
The check was duly entered in his bank record making his balance to P297,000.00 as of October
1, 1990, from his original deposit of P196,000.00. Allegedly, upon advice and instruction of
the BANK that the P101,000.00 check was already cleared and backed up by sufficient
funds, TAN, on the same date, withdrew the sum of P240,000.00, leaving a balance of
P57,793.45. A day after, TAN deposited the amount of P50,000.00 making his existing balance in
the amount of P107,793.45, because he has issued several checks to his business partners.

However, his suppliers and business partners went back to him alleging that the checks
he issued bounced for insufficiency of funds. Thereafter, TAN, thru his lawyer, informed
the BANK to take positive steps regarding the matter for he has adequate and sufficient funds to
pay the amount of the subject checks. Nonetheless, the BANK did not bother nor offer any
apology regarding the incident. Consequently, TAN, as plaintiff, filed a Complaint for Damages on
December 19, 1990, with the Regional Trial Court against the BANK.

The BANK, in its answer, alleged that no banking institution would give an assurance to any of its
client/depositor that the check deposited by him had already been cleared and backed up by
sufficient funds but it could only presume that the same has been honored by the drawee bank in
view of the lapse of time that ordinarily takes for a check to be cleared. It also alleged that on
October 2, 1990, it gave notice to the respondent as to the return of his UCPB check deposit in

25
the amount of P101,000, hence, on even date, respondent deposited the amount of P50,000.00
to cover the returned check.

ISSUE: Whether or not the petitioner has the right to debit the account of its client for a check
deposit which was dishonored by the drawee bank.

RULING: Yes. Nonetheless, the real issue here is not so much the right of petitioner to debit
respondent's account but, rather, the manner in which it exercised such right.

The Court has held that even while the right of setoff is conceded, separate is the question
of whether that remedy has properly been exercised.

Section 2 of the General Banking Law of 2000 specifically says that the State recognizes
the "fiduciary nature of banking that requires high standards of integrity and performance."

It is undisputed that purportedly as an act of accommodation to a valued client, petitioner

allowed the withdrawal of the face value of the deposited check prior to its clearing. That act
certainly disregarded the clearance requirement of the banking system. Such a practice is
unusual, because a check is not legal tender or money; and its value can properly be transferred
to a depositor's account only after the check has been cleared by the drawee bank.

Under ordinary banking practice, after receiving a check deposit, a bank either immediately
credit the amount to a depositor's account; or infuse value to that account only after the
drawee bank shall have paid such amount. Before the check shall have been cleared for deposit,
the collecting bank can only "assume" at its own risk — as herein petitioner did — that the check
would be cleared and paid out.

The Petition has no merit.

26)

YHT REALTY CORP. VS. CA

FACTS:

On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented
a safety deposit box as it was his practice to rent a safety deposit box every time he registered at
Tropicana in previous trips.

26
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US
Dollars (US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten
Thousand Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2)
other envelopes containing letters and credit cards; two (2) bankbooks; and a checkbook,
arranged side by side inside the safety deposit box.

After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for
Australia. When he arrived in Australia, he discovered that the envelope with Ten Thousand US
Dollars (US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed that
the jewelry which he bought in Hongkong and stored in the safety deposit box upon his return to
Tropicana was likewise missing, except for a diamond bracelet.

Meetings were held between McLoughlin and his lawyer which resulted to the filing of a
complaint for damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez,
Payam and Tan (defendants) for the loss of McLoughlin's money which was discovered on 16
April 1988.

ISSUE:

Whether or not Petitioners are liable for the loss of McLoughlin's money

RULING:

Petitioners are liable.

Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are
guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages,
Article 2180, paragraph (4) of the same Code provides that the owners and managers of an
establishment or enterprise are likewise responsible for damages caused by their employees in
the service of the branches in which the latter are employed or on the occasion of their functions.
Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer
was negligent in selecting and/or supervising him for it is hard for the victim to prove the
negligence of such employer Thus, given the fact that the loss of McLoughlin's money was
consummated through the negligence of Tropicana's employees in allowing Tan to open the
safety deposit box without the guest's consent, both the assisting employees and YHT Realty
Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant
to Article 2193.

27
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed by
McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this
petition. Notably, both the trial court and the appellate court found the same to be null and void.
We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:

Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to
the effect that he is not liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the responsibility of the former as set
forth in Articles 1998 to 2001 is suppressed or diminished shall be void.

Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the New Civil
Code for they allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever. Evidently, the undertaking was
intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box
whether or not negligence was incurred by Tropicana or its employees.

The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of,
or injury to, the personal property of the guests even if caused by servants or employees of the
keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure.
It is the loss through force majeure that may spare the hotel-keeper from liability. In the case at
bar, there is no showing that the act of the thief or robber was done with the use of arms or
through an irresistible force to qualify the same as force majeure.

27)

SERRANO V. CENTRAL BANK OF THE PHILIPPINES

G.R. NO. L-30511. FEBRUARY 14, 1980

FACTS:
Manuel Serrano made a time deposit, for one year with 6% interest of One Hundred Fifty
Thousand Pesos with the Respondent Overseas Bank of Manila. Concepcion Maneja also made a
time deposit, for one year with 6-1/2 % interest, of Two Hundred Thousand Pesos on the same
respondent Overseas Bank of Manila.
Concepcion MAneja, then married, assigned and conveyed to petitioner Manuel Serrano, her
time deposit of Php200,000.00. Notwithstanding series of demands for encashment of the
aforementioned time deposit from the respondent Overseas Bank of Manila, not a single one of
the time deposit certificates was honored by respondent Overseas Bank of Manila.

28
Respondent Central Bank dissolve and liquidated the Overseas Bank of Manila. The former
denied that it is a guarantor of the permanent solvency of any banking institution as claimed by
the petitioner. Respondent Central Bank avers no knowledge of petitioners claim that the
properties given by the respondent Overseas Bank of Manila as additional collaterals to the
respondent Central Bank of the Philippines for the former’s overdrafts and emergency loans were
acquired from the depositor’s money including the time deposits of the petitioner.
Hence, this petition.

ISSUE: Whether or not the respondents are jointly and solidary liable for damages due to breach
of trust.

RULING:
The Court held that both respondent banks was not given preliminary injunction with respect to
the acts of the respondent Central Bank.
Both parties overlooked the fundamental principle in the nature of bank deposits when the
petitioner claimed that there should be created a constructive trust in his favor when the
respondent Overseas Bank of Manila increased the collaterals in favor of the respondent Central
Bank of the Philippines for the former’s overdrafts and emergency loans, since these collaterals
were acquired by the use of depositor’s money.
Bank deposits are in nature of irregular deposits. They are really loans because they earn interest.
All kinds of bank deposits, whether fixed, savings or current are to be treated as loans and are to
be covered by the loans. Current and savings deposits are loans to a bank because it can use the
same. The petitioner here in the making time deposits that earn interests with respondent
Overseas Bank of Manila was in reality a creditor of the respondent bank and not a depositor.
The respondent bank was in turn a debtor of petitioner. Failure of the respondent bank to honor
the time deposit is failure to pay obligation as a debtor and not a breach of trust arising from
depository’s failure to return the subject matter of the deposit.
The petition is dismissed for lack of merit, with costs against the petitioner.

28) –
29) –
30) –

29
 31)

TOPIC: Secured Transactions – Continuing Surety; Future Obligations

FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L. RODRIGUEZA vs. THE HONORABLE
COURT OF APPEALS and FILINVEST CREDIT CORPORATION
G.R. No. 112191. February 7, 1997

Facts:
In 1981, Petitioners Joseph Chua and Edgar Rodrigueza each executed an undated “Surety
Undertaking” where they “absolutely, unconditionally and solidarily guarantee the “full, faithful
and prompt performance, payment and discharge of any and all obligations and agreements” of
Fortune Motor (Phils) Corporation with Filinvest, and to cover obligations incurred by Fortune
Motors whether they be enforced or thereafter made (from the time of said surety contracts).

In 1982, Fortune, Filinvest and Canlubang Automotive Resources Corporation (“CARCO”) entered
into an “Automotive Wholesale Financing Agreement” wherein CARCO will deliver motor
vehicles to Fortune for the purpose of resale in the latter’s ordinary course of business.

Several vehicles were delivered by CARCO to Fortune and trust receipts covered by demand
drafts and deeds of assignment were executed in favor of Filinvest. When the obligation matured,
Filinvest demanded payment from Fortune Motor as well as from Chua and Rodrigueza.
However, not all the proceeds of the vehicles which petitioner had sold were remitted and
likewise failed to turn over several unsold vehicles covered by the trust receipts.

Hence, respondent filed in the RTC of Manila a complaint for a sum of money with preliminary
attachment against the petitioners. Rodrigueza averred that the surety agreement was void
because when it was signed in 1981, the principal obligation which was incurred in 1982 did not
exist yet.

Issues:
1) Whether or not the surety agreement is void.
2) Whether or not novation was effected.

Ruling: NO.
No. Surety May Secure Future Obligations.

30
The facts of this case bring us to no other conclusion than that the surety undertakings executed
by Chua and Rodrigueza were continuing guaranties or suretyships covering all future obligations
of Fortune Motors (Phils.) Corporation with Filinvest Credit Corporation. This is evident from the
written contract itself which contained the words absolutely, unconditionally and solidarily
guarantee(d) to Filinvest and its affiliated and subsidiary companies the full, faithful and prompt
performance, payment and discharge of any and all obligations and agreements of Fortune under
or with respect to any and all such contracts and any and all other agreements (whether by way
of guaranty or otherwise) now in force or hereafter made. Comprehensive or continuing surety
agreements are in fact quite commonplace in present day financial and commercial practice. A
bank or financing company which anticipates entering into a series of credit transactions with a
particular company, commonly requires the projected principal debtor to execute a continuing
surety agreement along with its sureties. By executing such an agreement, the principal places
itself in a position to enter into the projected series of transactions with its creditor; with such
suretyship agreement, there would be no need to execute a separate surety contract or bond for
each financing or credit accommodation extended to the principal debtor.

With regard to novation, this has already been ruled upon when this Court denied defendants’
Motion to dismiss because what happened was really an assignment of credit, and not a
novation of contract, which does not require the consent of the debtors. The plaintiff also
explained that the mother or the principal contract was the Financing Agreement, whereas the
trust receipts, the sight drafts, as well as the Deeds of assignment were only collaterals or
accidental modifications which do not extinguish the original contract by way of novation. When
the changes refer to secondary agreements and not to the object or principal conditions of the
contract, there is no novation; such changes will produce modifications of incidental facts, but
will not extinguish the original obligation.

Art 1292 New Civil Code. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligations be on every point incompatible with each other.

32) –

31
 33)

THE TEXAS COMPANY INC., petitioner vs. TOMAS ALONSO, respondent.

G.R. No. L-47495 August 14, 1941

TOPIC: Security Transactions-Guaranty

FACTS:

On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the Texas Company
(P.I.), Inc. in the Court of First Instance of Cebu for the recovery of the sum of P629, an unpaid
balance of the account of Leonora S. Bantug in connection with the agency contract with the
Texas Company for the faithful performance of which Tomas Alonso signed an offer to put up a
bond or a guaranty which according to him he was made to believe that he will be acting as mere
co-security with Vicente Palanca and that he was never notified of the acceptance of his bond by
the Texas Company. The Court of First Instance of Cebu rendered judgment on July 10, 1973,
which was amended on February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay
jointly and severally to the Texas Company the sum of P629, with interest at the rate of six per
cent (6%) from the date of filing of the complaint, and with proportional costs. Upon appeal by
Tomas Alonso, the Court of Appeals modified the judgment of the Court of First Instance of Cebu
in the sense that Leonor S. Bantug was held solely liable for the payment of the aforesaid sum of
P629 to the Texas Company, with the consequent absolution of Tomas Alonso. This case is now
before us on petition for review by certiorari of the decision of the Court of Appeals.

ISSUE:

Whether or not the Court of Appeals erred in holding that there was merely an offer of guaranty
on the part of the respondent, Tomas Alonso, and that the latter cannot be held liable there
under because he was never notified by the Texas Company of its acceptance.

RULING:

No. The Supreme Court is likewise bound by the finding of the Court of Appeals that there is no
evidence in this case tending to show that the respondent, Tomas Alonso, ever had knowledge
of any act on the part of petitioner amounting to an implied acceptance, so as to justify the
application of our decision in National Bank vs. Escueta (50 Phil., 991).

32
Where there is merely an offer of, or proposition for, a guaranty, or merely a conditional guaranty
in the sense that it requires action by the creditor before the obligation becomes fixed, it does
not become a binding obligation until it is accepted and, unless there is a waiver of notice of such
acceptance is given to, or acquired by, the guarantor, or until he has notice or knowledge that
the creditor has performed the conditions and intends to act upon the guaranty. (National
Bank vs. Garcia, 47 Phil., 662; C. J., sec. 21, p. 901; 24 Am. Jur., sec. 37, p. 899.)

34)

Case # 34: Bank of Commerce vs. Spouses Flores

G.R. No. 174006. Dec. 8, 2010

Topic: Week 4 under Guaranty

Facts:

Respondent filed a case for specific performance against petitioners. Respondents are
the registered owner of a condominium unit. On Oct. 22, 1993, respondents borrowed money
from petitioner bank in the amount of (900,000) they executed a real estate mortgage over
the unit as collateral. On Oct. 3, 1995, respondents again borrowed (1,100,000) from
petitioner bank, which was also secured by a mortgage over the same property.

On Jan. 2, 1996, respondents paid (1,011,555.54) as evidenced by OR, issued by the

petitioner bank, as payment in full of the loan and interest. Respondents then asked petitioner
to cancel the mortgage annotations since the loans secured by the real estate were already paid
in full. However, the bank refused to cancel the same and applied later on for extra-judicial
foreclosure of the mortgages over the condominium unit.

It is petitioner bank’s contention that the said undertaking, stipulated in the Deed of Real
Estate Mortgage dated Oct. 2, 1993 and Oct. 3, 1995, is a continuing guaranty meant to secure
future debts or credit granted by the petitioner bank. On the other hand, respondents posit that,
the mortgage should not be foreclosed because it does not include future debts not annotated.

33
Issue:

WON the real estate mortgage over the subject property is a continuing guaranty.

Ruling:

YES. It is a continuing guaranty.

Under Art. 2053 of the Civil Code, a guaranty may be given to secure even future debts,
the amount of which may not be known at the time the guaranty is executed. In other words, a
continuing guaranty is one that covers all transactions, including those arising in the future,
which are within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof. A continuing guaranty is an exception to the rule that an action
to foreclose a mortgage must be limited to the amount mentioned in the mortgage contract. A
guaranty is to be construed as continuing when, by the terms thereof, it is evident that the object
is to give standing credit to the principal debtor to be used from time to time either indefinitely
or until a certain period, especially if the right to recall the guaranty is expressly reserved.

In the instant case, the language of the real estate mortgage unambiguously reveals
that the security provided in the real estate mortgage is continuing in nature. Thus, it was
intended as security for the payment of loans annotated at the back of CCT No. 2130, and as
security for all amounts that respondents may owe petitioner.

Therefore, respondents’ full payment of the loans annotated on the title of the property
shall not effect release of the mortgage because, by the express terms of the mortgage, it was
meant to secure all future debts of the spouses and such debts had been obtained and remain
unpaid. Unless full payment is made by the spouses of all the amounts that they have incurred
from petitioner bank, the property is burdened by the mortgage.

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 35)

Pacionaria Baylon vs Court of Appeals and Leonila Tomacruz

August 17, 1999

Facts:

Pacionara Baylon introduced Rosita Luanzon to Leonila Tomacruz which is the co-manager of her
husband in PLDT. Baylon invited Leonila to lend Rosita money for her business as contractor and
in return pay the amount and a monthly interest rate of 5%.

Persuaded by Baylon’s assurances that the business was stable and the high interest rate Leonila
lent Rosita P 150,000. Rosita on the other hand issued and signed a promissory note
acknowledging the receipt of P 150,000 payable on August 22, 1987. Baylon signed the
promissory note as “guarantor”.

Later on, Rosita failed to pay the said amount forcing Leonila to file a case for collection of sum
of money against Rosita and Baylon. However summons were never served to Rosita.

Baylon denied having guaranteed the payment of the promissory note and claims that the money
given to Rosita was not a loan but an investment and that assuming that the loan was guaranteed
Leonila has not exhausted the property of Rosita nor resorted to all legal remedies against Rosita
as required by law.

Trial court ruled in favor of Leonila making Baylon liable for the said amount. This decision was
affirmed by the C.A.

Issue:

(a) WON there was a contract of loan between Tomacruz and Luanzon

(b) WON Baylon should be held liable for the amount of the promissory note.

Ruling:

(a) YES. If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulation shall control.[16] Resort to
extrinsic aids and other extraneous sources are not necessary in order to ascertain the

35
 parties' intent when there is no ambiguity in the terms of the agreement.[17] Both
petitioner and private respondent do not deny the due execution and authenticity of the
June 22, 1987 promissory note. The clear terms of the promissory note establish a
creditor-debtor relationship between Luanzon and private respondent. The transaction
at bench is therefore a loan, not an investment.

(b) NO. Petitioner is invoking the benefit of excussion pursuant to article 2058 of the Civil
Code, which provides that —
The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor, and has resorted to all the legal remedies against the debtor.

It is axiomatic that the liability of the guarantor is only subsidiary. All the properties of the
principal debtor must first be exhausted before his own is levied upon. Thus, the creditor may
hold the guarantor liable only after judgment has been obtained against the principal debtor and
the latter is unable to pay, "for obviously the 'exhaustion of the principal's property' — the
benefit of which the guarantor claims — cannot even begin to take place before judgment has
been obtained." This rule is embodied in article 2062 of the Civil Code which provides that the
action brought by the creditor must be filed against the principal debtor alone, except in some
instances when the action may be brought against both the debtor and the principal debtor.

Under the circumstances availing in the present case, the court held that it is premature to even
determine whether or not petitioner is liable as a guarantor and whether she is entitled to the
concomitant rights as such, like the benefit of excussion, since the most basic prerequisite is
wanting — that is, no judgment was first obtained against the principal debtor Rosita B. Luanzon.
It is useless to speak of a guarantor when no debtor has been held liable for the obligation which
is allegedly secured by such guarantee. Although the principal debtor Luanzon was impleaded as
defendant, there is nothing in the records to show that summons was served upon her. Thus, the
trial court never even acquired jurisdiction over the principal debtor. The court held that private
respondent must first obtain a judgment against the principal debtor before assuming to run
after the alleged guarantor.

36) –

36
 37)

Willex Plastic Industries Corporation vs Court of Appeals and International Corporate Bank
G.R. No. 103066 April 25, 1996

Inter-Resin Industrial Corporation (IRIC) took out a loan from Manila Bank and as additional
security executed a Continuing Surety Agreement with Investment Underwriting Corporation of
the Philippines (IUCP) stating that they are liable to Manila Bank solidarily for the loan taken out
by IRIC in 1978. In 1979, IRIC and Willex Plastic executed a Continuing Guarantee for the loan
which IRIC obtained from IUCP to the extent of P5,000,000. IUCP paid Manila Bank P4million to
satisfy IRIC’s obligation. They then demanded the payment of said amount from both IRIC and
Willex. IRIC paid IUCP P600,000 from the proceeds of its fire insurance, however, Willex denied
obligation alleging that it is only a guarantor of the principal hence its liability was only secondary
to the principal and that it did not receive consideration nor benefit from the contract between
the bank and IRIC. Willlex insisted that IUCP should pursue IRIC and apply to the loan the assets
of the latter first before going after them. They further allege that they are the guarantor of a
loan to Manila Bank and not to Interbank hence the Continuing Guaranty cannot retroactively
be applied as contracts of suretyship contemplates future dealings

Issue: Whether or not Willex is liable as guarantor for the loan obtained by IRIC from IUCP.

Yes. It is clear from the evidence that the Continuing Guaranty executed by Willex with IRIC would
cover sums obtained in the past (retroact) and/or to be obtained by IRIC from Interbank.
Although a contract of suretyship is ordinarily not to be construed as retrospective, in the end
the intention of the parties as revealed is controlling, thus can be applied to the 1978 loan. A
guarantor or surety is bound by the same consideration that makes the contract effective
between the principal parties thereto. It is never necessary that a guarantor or surety should
receive any part or benefit if such there be accruing to his principal.

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 38)

G.R. No. 72275

Pacific Building Corp v IAC and Roberto Regala, Jr.

Facts:

This is a petition for certiorari of the decision set by the IAC which modified the decision of the
trial court against private defendant in the case for sum of money filed by Pacific Banking
Corporation.

Defendant Celia Regala obtained from the plaintiff bank a Pacificard credit card and as a
condition, her spouse, the defendant-appellant herein, Roberto Regala Jr., executed a
Guarantor’s Undertaking on the same day whereby the latter agreed “jointly and severally of
Celia Aurora Syjuco Regala, to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia Aurora Syjuco
Regala with the use of the Pacificard, or renewals thereof, issued in her favor by the Pacific
Banking Corporation”.

Celia Regala’s purchased goods and services thru the use of her Pacificard amounted to P92,
803.98. She also used Pacificard beyond its one-year due date. Celia Regala, however, failed to
settle her account. Despite the written demand sent to the Celia Regala and also to her spouse
under his “Guarantor’s Undertaking”, they still were not able to settle their account, and the
bank, thereafter, filed a complaint with the trial court.

In his answer, Roberto Regala admitted his execution of the “Guarantor’s Undertaking”, but
asserted that his liability was limited to P2,000.00 a month, the agreed credit limit.

The RTC decided in favor of the bank, declaring Roberto to be jointly and severally liable to pay
the total charges with his wife, Celia. However, upon appeal, appellant court modified the
judgment and decided Roberto to be liable from Celia Regala’s use of the Pacificard from Oct. 29,
1975 up to October 29, 1976 up to the amount of P2,000.00 per month only.

Issue:

Is Roberto’s liability only up to P2,000.00 a month?

Held:

38
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's Undertaking,"
was in substance a contract of surety. As distinguished from a contract of guaranty where the
guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in case
the latter should fail to do so, in a contract of suretyship, the surety binds himself solidarily with
the principal debtor. As a surety he bound himself jointly and severally with the debtor Celia
Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation."

It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but
not for more than the principal debtor, both as regards the amount and the onerous nature of
the conditions. It is likewise not disputed by the parties that the credit limit granted to Celia
Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the
original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s
liability should be limited to that extent.

A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this
sense that a surety, although solidarily liable with the principal debtor, is different from the
debtor. It does not mean, however, that the surety cannot be held liable to the same extent as
the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of suretyship.

39
 39)

SECURITY BANK AND TRUST CO. v. CUENCA

TOPIC: SURETY

FACTS: In 1980, petitioner Security Bank granted Sta. Ines a credit line, which was effective until
November 30, 1981, in the amount of eight million pesos to assist the latter in meeting the
additional capitalization requirements of its logging operations. As additional security for the
payment of the loan, Respondent Cuenca, as President and Chairman of the Board of Directors
of Sta. Ines, executed an Indemnity Agreement in favor of Security Bank whereby he solidarily
bound himself with Sta. Ines.

Sta. Ines later encountered difficulties in making the amortization payments on its loans. As such,
upon request, the past due obligations of Sta. Ines was restructured, without notice to or prior
consent of Cuenca who already resigned, as signified by the Loan Agreement executed by
Security Bank and Sta. Ines in the year 1989.

Later on, Sta. Ines defaulted in the payment of its restructured loan obligations despite demands
made upon them and Cuenca. Thus, Security Bank filed a complaint for collection of sum of
money. The lower court ruled in favor of Security Bank and against Sta. Ines and Cuenca.
However, on appeal to the Court of Appeals, the latter released Cuenca from liability, ruling that
the 1989 Loan Agreement had novated the 1980 credit accommodation.

ISSUE: Whether or not the 1989 Loan Agreement novated the original credit accommodation and
Cuenca's liability under the Indemnity Agreement.

RULING: Yes, the 1989 Loan Agreement novated the original credit accommodation and Cuenca's
liability under the Indemnity Agreement.

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code. In the
absence of an express agreement, novation takes place only when the old and the new
obligations are incompatible on every point. Moreover, the following requisites must be
established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new
contract; (3) the old contract is extinguished; and (4) there is a valid new contract.

In this case, the requisites of novation are present. The 1989 Loan Agreement extinguished the
obligation obtained under the 1980 credit accommodation. This is evident from its explicit
provision to "liquidate" the principal and the interest of the earlier indebtedness. Furthermore,
several incompatibilities between the 1989 Agreement and the 1980 original obligation
demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated
that the amount of loan was not to exceed P8 million, the 1989 Agreement provided that the
loan was P12.2 million. Since the 1989 Loan Agreement had extinguished the original credit

40
accommodation, the Indemnity Agreement, an accessory obligation, was necessarily
extinguished also, pursuant to Article 1296 of the Civil Code.

The Court further stressed that an essential alteration in the terms of the Loan Agreement
without the consent of the surety extinguishes the latter's obligation. As the Court held
in National Bank v. Veraguth, "[i]t is fundamental in the law of suretyship that any agreement
between the creditor and the principal debtor which essentially varies the terms of the principal
contract, without the consent of the surety, will release the surety from liability." A surety
agreement, being an onerous undertaking, is strictly construed against the creditor, and every
doubt is resolved in favor of the solidary debtor.

On a further note, even though the Indemnity Agreement is a continuing surety does not
authorize the bank to extend the scope of the principal obligation inordinately. In Dino v. CA, the
Court held that "a continuing guaranty is one which covers all transactions, including those arising
in the future, which are within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof."

In this case, the Indemnity Agreement was subject to the two limitations of the credit
accommodation: (1) that the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981. Hence, it was a continuing
surety only in regard to loans obtained on or before the aforementioned expiry date and not
exceeding the total of P8 million.

In sum, the Court held that the 1989 Loan Agreement extinguished by novation the obligation
under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had
been an accessory to the 1980 credit accommodation, was also extinguished.

41
FACTS: In 1980, petitioner Security Bank granted Sta. Ines a credit line, which was effective until
November 30, 1981, in the amount of eight million pesos to assist the latter in meeting the
additional capitalization requirements of its logging operations. As additional security for the
payment of the loan, Respondent Cuenca, as President and Chairman of the Board of Directors
of Sta. Ines, executed an Indemnity Agreement in favor of Security Bank whereby he solidarily
bound himself with Sta. Ines.

Sta. Ines later encountered difficulties in making the amortization payments on its loans. As such,
upon request, the past due obligations of Sta. Ines was restructured, without notice to or prior
consent of Cuenca who already resigned, as signified by the Loan Agreement executed by
Security Bank and Sta. Ines in the year 1989.

Later on, Sta. Ines defaulted in the payment of its restructured loan obligations despite demands
made upon them and Cuenca. Thus, Security Bank filed a complaint for collection of sum of
money. The lower court ruled in favor of Security Bank and against Sta. Ines and Cuenca.
However, on appeal to the Court of Appeals, the latter released Cuenca from liability, ruling that
the 1989 Loan Agreement had novated the 1980 credit accommodation.

ISSUE: Whether or not the 1989 Loan Agreement novated the original credit accommodation and
Cuenca's liability under the Indemnity Agreement.

RULING: Yes, the 1989 Loan Agreement novated the original credit accommodation and Cuenca's
liability under the Indemnity Agreement.

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code. In the
absence of an express agreement, novation takes place only when the old and the new
obligations are incompatible on every point. Moreover, the following requisites must be
established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new
contract; (3) the old contract is extinguished; and (4) there is a valid new contract.

In this case, the requisites of novation are present. The 1989 Loan Agreement extinguished the
obligation obtained under the 1980 credit accommodation. This is evident from its explicit
provision to "liquidate" the principal and the interest of the earlier indebtedness. Furthermore,
several incompatibilities between the 1989 Agreement and the 1980 original obligation
demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated
that the amount of loan was not to exceed P8 million, the 1989 Agreement provided that the
loan was P12.2 million. Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was necessarily
extinguished also, pursuant to Article 1296 of the Civil Code.

42