SIMPLE LOAN ALS and Litonjua was only in the principal sum of P464,351.
and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1%
G.R. No. 133632               February 15, 2002
BPI INVESTMENT CORPORATION, petitioner,  The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
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, 1 consolidated with (b) Civil Case No. 52093, for damages
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 ₱300,000 for moral damages, ₱50,000 for exemplary damages,
and ₱50,000 for attorney’s 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 ₱850,000. They paid
₱350,000 in cash and assumed the ₱500,000 balance of Roa’s 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
₱500,000 to be applied to Roa’s 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 ₱9,996.58 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 Roa’s arrearages by paying BPIIC the sum of ₱190,601.35.
This reduced Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated when BPIIC applied
thereto the proceeds of private respondents’ loan of ₱500,000.
On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what was left of
their loan after full payment of Roa’s 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 (₱475,585.31). A notice of
sheriff’s 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 ₱500,000
loan in August and September 1982. Further, out of the ₱500,000 loan, only the total amount of ₱464,351.77
was released to private respondents. Hence, applying the effects of legal compensation, the balance of
₱35,648.23 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
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.
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 attorney’s 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 ₱500,000 loan after
deducting therefrom the value of Roa’s 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 ₱194,960.43. Evidence showed that private
respondents had an overpayment, because as of June 1984, they already paid a total amount of ₱201,791.96.
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 ATTORNEY’S 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 Roa’s
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 ₱500,000 loan, private respondents were required to reduce
Frank Roa’s 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,4 a simple loan is On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages for it
perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though the did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right under the
loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the full loan mortgage contract because private respondents were irregular in their monthly amortization.1âwphi1 It
was released to private respondents. They submit that petitioner misread Bonnevie. To give meaning to invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Article 1934, according to private respondents, Bonnevie must be construed to mean that the contract to Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals "the
extend the loan was perfected on March 31, 1981 but the contract of loan itself was only perfected upon the negligence of the appellant is not so gross as to warrant moral and temperate damages," except that, said
delivery of the full loan to private respondents on September 13, 1982. Court reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with the
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected on findings of both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith. The
March 31, 1981, and their payment did not start a month thereafter, still no default took place. According to SSS was of the belief that it was acting in the legitimate exercise of its right under the mortgage contract in the
private respondents, a perfected loan agreement imposes reciprocal obligations, where the obligation or face of irregular payments made by private respondents and placed reliance on the automatic acceleration
promise of each party is the consideration of the other party. In this case, the consideration for BPIIC in clause in the contract. The filing alone of the foreclosure application should not be a ground for an award of
entering into the loan contract is the promise of private respondents to pay the monthly amortization. For the moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral
latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if damages.
the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages because
Therefore, private respondents conclude, they did not incur in delay when they did not commence paying the it insisted on the payment of amortization on the loan even before it was released. Further, it did not make the
monthly amortization on May 1, 1981, as it was only on September 13, 1982 when petitioner fully complied corresponding deduction in the monthly amortization to conform to the actual amount of loan released, and it
with its obligation under the loan contract. immediately initiated foreclosure proceedings when private respondents failed to make timely payment.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is But as admitted by private respondents themselves, they were irregular in their payment of monthly
perfected only upon the delivery of the object of the contract. 5 Petitioner misapplied Bonnevie. The contract amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article Consequently, we should rule out the award of moral and exemplary damages.11 
1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage,
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner without checking and correspondingly adjusting its records on the amount actually released to private
applied for a loan of ₱500,000 with respondent bank. The latter approved the application through a board respondents and the date when it was released. Such negligence resulted in damage to private respondents,
resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts for which an award of nominal damages should be given in recognition of their rights which were violated by
attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We BPIIC.12 For this purpose, the amount of ₱25,000 is sufficient.
recognized in this case, a perfected consensual contract which under normal circumstances could have made Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled to litigate,
the bank liable for not releasing the loan. However, since the fault was attributable to petitioner therein, the we sustain the award of ₱50,000 in favor of private respondents as attorney’s fees.
court did not award it damages. WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April
A perfected consensual contract, as shown above, can give rise to an action for damages. However, said 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and
contract does not constitute the real contract of loan which requires the delivery of the object of the contract exemplary damages in favor of private respondents is DELETED, but the award to them of attorney’s fees in
for its perfection and which gives rise to obligations only on the part of the borrower.6  the amount of ₱50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents ₱25,000
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was as nominal damages. Costs against petitioner.SO ORDERED.
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. 8 As averred by private
respondents, the 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. 9 Only when a
party has performed his part of the contract can he 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, 10 factual matters need not tarry
us now. On these points we are bound by the findings of the appellate and trial courts.

2
G.R. No. 118375             October 3, 2003 admissibility of various representations and pronouncements of Ruebenfeldt, invoking the rule on the non-
CELESTINA T. NAGUIAT, petitioner,  binding effect of the admissions of third persons.11 
vs. The resolution of the issues presented before this Court by Naguiat involves the determination of facts, a
COURT OF APPEALS and AURORA QUEAÑO, respondents. function which this Court does not exercise in an appeal by certiorari. Under Rule 45 which governs appeal by
DECISION certiorari, only questions of law may be raised12 as the Supreme Court is not a trier of facts. 13 The resolution of
TINGA, J.: factual issues is the function of lower courts, whose findings on these matters are received with respect and
Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the Sixteenth Division are in fact generally binding on the Supreme Court. 14 A question of law which the Court may pass upon must
of the respondent Court of Appeals promulgated on 21 December 19941 , which affirmed in toto the decision not involve an examination of the probative value of the evidence presented by the litigants. 15 There is a
handed down by the Regional Trial Court (RTC) of Pasay City.2  question of law in a given case when the doubt or difference arises as to what the law is on a certain state of
The case arose when on 11 August 1981, private respondent Aurora Queaño (Queaño) filed a complaint facts; there is a question of fact when the doubt or difference arises as to the truth or the falsehood of alleged
before the Pasay City RTC for cancellation of a Real Estate Mortgage she had entered into with petitioner facts.16 
Celestina Naguiat (Naguiat). The RTC rendered a decision, declaring the questioned Real Estate Mortgage Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the lower
void, which Naguiat appealed to the Court of Appeals. After the Court of Appeals upheld the RTC decision, courts.17 But Naguiat’s case does not fall under any of the exceptions. In any event, both the decisions of the
Naguiat instituted the present petition.1ªvvphi1.nét appellate and trial courts are supported by the evidence on record and the applicable laws.
The operative facts follow: Against the common finding of the courts below, Naguiat vigorously insists that Queaño received the loan
Queaño applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos (₱200,000.00), which proceeds. Capitalizing on the status of the mortgage deed as a public document, she cites the rule that a
Naguiat granted. On 11 August 1980, Naguiat indorsed to Queaño Associated Bank Check No. 090990 (dated public document enjoys the presumption of validity and truthfulness of its contents. The Court of Appeals,
11 August 1980) for the amount of Ninety Five Thousand Pesos (₱95,000.00), which was earlier issued to however, is correct in ruling that the presumption of truthfulness of the recitals in a public document was
Naguiat by the Corporate Resources Financing Corporation. She also issued her own Filmanbank Check No. defeated by the clear and convincing evidence in this case that pointed to the absence of consideration. 18 This
065314, to the order of Queaño, also dated 11 August 1980 and for the amount of Ninety Five Thousand Court has held that the presumption of truthfulness engendered by notarized documents is rebuttable, yielding
Pesos (₱95,000.00). The proceeds of these checks were to constitute the loan granted by Naguiat to as it does to clear and convincing evidence to the contrary, as in this case.19 
Queaño.3  On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or endorsed
To secure the loan, Queaño executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor of were actually encashed or deposited. The mere issuance of the checks did not result in the perfection of the
Naguiat, and surrendered to the latter the owner’s duplicates of the titles covering the mortgaged contract of loan. For the Civil Code provides that the delivery of bills of exchange and mercantile documents
properties.4 On the same day, the mortgage deed was notarized, and Queaño issued to Naguiat a promissory such as checks shall produce the effect of payment only when they have been cashed. 20 It is only after the
note for the amount of TWO HUNDRED THOUSAND PESOS (₱200,000.00), with interest at 12% per annum, checks have produced the effect of payment that the contract of loan may be deemed perfected. Art. 1934 of
payable on 11 September 1980.5 Queaño also issued a Security Bank and Trust Company check, postdated the Civil Code provides:
11 September 1980, for the amount of TWO HUNDRED THOUSAND PESOS (₱200,000.00) and payable to "An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties,
the order of Naguiat. but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract."
Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of funds. On A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the
the following day, 12 September 1980, Queaño requested Security Bank to stop payment of her postdated object of the contract.21 In this case, the objects of the contract are the loan proceeds which Queaño would
check, but the bank rejected the request pursuant to its policy not to honor such requests if the check is drawn enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If indeed the checks were
against insufficient funds.6  encashed or deposited, Naguiat would have certainly presented the corresponding documentary evidence,
On 16 October 1980, Queaño received a letter from Naguiat’s lawyer, demanding settlement of the loan. such as the returned checks and the pertinent bank records. Since Naguiat presented no such proof, it follows
Shortly thereafter, Queaño and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the meeting, that the checks were not encashed or credited to Queaño’s account.1awphi1.nét
Queaño told Naguiat that she did not receive the proceeds of the loan, adding that the checks were retained Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the ground
by Ruebenfeldt, who purportedly was Naguiat’s agent.7  that they could not bind her following the res inter alia acta alteri nocere non debet rule. The Court of Appeals
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province, who then rejected the argument, holding that since Ruebenfeldt was an authorized representative or agent of Naguiat
scheduled the foreclosure sale on 14 August 1981. Three days before the scheduled sale, Queaño filed the the situation falls under a recognized exception to the rule.22 Still, Naguiat insists that Ruebenfeldt was not her
case before the Pasay City RTC,8 seeking the annulment of the mortgage deed. The trial court eventually agent.
stopped the auction sale.9  Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is
On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and void, supported by ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a
and ordering Naguiat to return to Queaño the owner’s duplicates of her titles to the mortgaged lots. 10 Naguiat stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queaño the checks she
appealed the decision before the Court of Appeals, making no less than eleven assignments of error. The issued or indorsed to Queaño, pending delivery by the latter of additional collateral. Ruebenfeldt served as
Court of Appeals promulgated the decision now assailed before us that affirmed in toto the RTC decision. agent of Naguiat on the loan application of Queaño’s friend, Marilou Farralese, and it was in connection with
Hence, the present petition. that transaction that Queaño came to know Naguiat. 23 It was also Ruebenfeldt who accompanied Queaño in
Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of whether her meeting with Naguiat and on that occasion, on her own and without Queaño asking for it, Reubenfeldt
Queaño had actually received the loan proceeds which were supposed to be covered by the two checks actually drew a check for the sum of ₱220,000.00 payable to Naguiat, to cover for Queaño’s alleged liability to
Naguiat had issued or indorsed. Naguiat claims that being a notarial instrument or public document, the Naguiat under the loan agreement.24 
mortgage deed enjoys the presumption that the recitals therein are true. Naguiat also questions the The Court of Appeals recognized the existence of an "agency by estoppel 25 citing Article 1873 of the Civil
Code.26 Apparently, it considered that at the very least, as a consequence of the interaction between Naguiat

3
and Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the agent of Naguiat, but Naguiat did
nothing to correct Queaño’s impression. In that situation, the rule is clear. One who clothes another with
apparent authority as his agent, and holds him out to the public as such, cannot be permitted to deny the
authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person
in good faith, and in the honest belief that he is what he appears to be.27 The Court of Appeals is correct in
invoking the said rule on agency by estoppel.1awphi1.nét
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant in the
face of the fact that the checks issued or indorsed to Queaño were never encashed or deposited to her
account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not remit and
the borrower did not receive the proceeds of the loan. That being the case, it follows that the mortgage which
is supposed to secure the loan is null and void. The consideration of the mortgage contract is the same as that
of the principal contract from which it receives life, and without which it cannot exist as an independent
contract.28 A mortgage contract being a mere accessory contract, its validity would depend on the validity of
the loan secured by it.29  complaint on the ground of pendency of another action with RTC-Makati, Branch 147. Acting on the motion,
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner. SO
ORDERED.
G.R. No. 123031 October 12, 1999
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,
vs.
COURT OF APPEALS, VICENTE ALEGRE, respondents.
QUISUMBING, J.:
This petition for review on certiorari assails respondent appellate court's Decision, 1 dated December 8, 1995,
in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial Court of Makati, Branch 132. The
dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to pay
plaintiff [herein private respondent]:
(1) the principal sum of P514,390.94 with legal interest thereon
computed from August 6, 1991 until fully paid; and
(2) the costs of suit.
SO ORDERED. 2
Based on the records, the following are the pertinent facts of the case:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in money market
operations.
On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand
(P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note for
five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos (P516,238.67)
covered private respondent's placement plus interest at twenty and a half (20.5%) percent for thirty-two (32)
days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred fourteen
thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of the private
respondent as proceeds of his matured investment plus interest. The CHECK was drawn from petitioner's
current account number 0011-0803-59, maintained with the Bank of the Philippine Islands (BPI), main branch
at Makati City.1âwphi1.nêt
On June 17, 1991, private respondent's wife deposited the CHECK with Rizal Commercial Banking Corp.
(RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the "Check (is)
Subject of an Investigation." BPI took custody of the CHECK pending an investigation of several counterfeit
checks drawn against CIFC's aforestated checking account. BPI used the check to trace the perpetrators of
the forgery.
Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several
occasions, that he be paid in cash. CIFC refused the request, and instead instructed private respondent to
wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent, through counsel, made a
4
formal demand for the payment of his money market placement. In turn, CIFC promised to replace the
CHECK but required an impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint 3 for recovery of a sum of money against
the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a separate civil
action 4 for collection of a sum of money with the RTC-Makati, Branch 147. The collection suit alleged that BPI
unlawfully deducted from CIFC's checking account, counterfeit checks amounting to one million, seven
hundred twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The
action included the prayer to collect the amount of the CHECK paid to Vicente Alegre but dishonored by BPI.
Meanwhile, in response to Alegre's complaint with RTC-Makati, Branch 132, CIFC filed a motion for leave of
court to file a third-party complaint against BPI. BPI was impleaded by CIFC to enforce a right, for contribution
and indemnity, with respect to Alegre's claim. CIFC asserted that the CHECK it issued in favor of Alegre was
genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFC's motion. However, BPI moved to dismiss the third-party
the trial court dismissed the third-party complaint on November 4, 1992, after finding that the third party
complaint filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with RTC-Makati
Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22, 1993, Vito Arieta,
Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK, retained the original copy and
forwarded only a certified true copy to RCBC. When Arieta was recalled on July 20, 1993, he testified that on
July 16, 1993, BPI encashed and deducted the said amount from the account of CIFC, but the proceeds, as
well as the CHECK remained in BPI's custody. The bank's move was in accordance with the Compromise
Agreement 5 it entered with CIFC to end the litigation in RTC-Makati, Branch 147. The compromise
agreement, which was submitted for the approval of the said court, provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of
P1,724,364.58 plus P20,000 litigation expenses as full and final
settlement of all of plaintiff's claims as contained in the Amended
Complaint dated September 10, 1992. The aforementioned amount
shall be credited to plaintiff's current account No. 0011-0803-59
maintained at defendant's Main Branch upon execution of this
Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P514,390.94 from the
aforesaid current account representing payment/discharge of BPI
Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No.
92-515 arising from the alleged dishonor of BPI Check No. 513397,
plaintiff cannot go after the defendant: otherwise stated, the defendant
shall not be liable to the plaintiff. Plaintiff [CIFC] may however set-up
the defense of payment/discharge stipulated in par. 2 above. 6
On July 27, 1993, BPI filed a separate collection suit 7 against Vicente Alegre with the RTC-Makati, Branch 62.
The complaint alleged that Vicente Alegre connived with certain Lina A. Pena and Lita A. Anda and forged
several checks of BPI's client, CIFC. The total amount of counterfeit checks was P1,724,364.58. BPI
prevented the encashment of some checks amounting to two hundred ninety five thousand, seven hundred
seventy-five pesos and seven centavos (P295,775.07). BPI admitted that the CHECK, payable to Vicente
Alegre for P514,390.94, was deducted from BPI's claim, hence, the balance of the loss incurred by BPI was
nine hundred fourteen thousand, one hundred ninety-eight pesos and fifty-seven centavos (P914,198.57),
plus costs of suit for twenty thousand (P20,000.00) pesos. The records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the decision of the
trial court.
Hence this appeal, 8 in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court holding that
petitioner was not discharged from the liability of paying the value of the subject check to private respondent
after BPI has debited the value thereof against petitioner's current account.
2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article 1249 of the Civil
Code in the instant case. The applicable law being the Negotiable Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable Trial Court's findings that the petitioner
was guilty of negligence and delay in the performance of its obligation to the private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable Trial Court's decision ordering petitioner
to pay legal interest and the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable Trial Court's dismissal of petitioner's third-
party complaint against BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE PRESENT CASE;
2. WHETHER OR NOT "BPI CHECK NO. 513397" WAS VALIDLY DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF PETITIONER AGAINST
BPI BY REASON OF LIS PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are the
pertinent laws to govern its money market transaction with private respondent, and not paragraph 2 of Article
1249 of the Civil Code. Petitioner stresses that it had already been discharged from the liability of paying the
value of the CHECK due to the following circumstances:
1) There was "ACCEPTANCE" of the subject check by BPI, the drawee
bank, as defined under the Negotiable Instruments Law, and therefore,
BPI, the drawee bank, became primarily liable for the payment of the
check, and consequently, the drawer, herein petitioner, was discharged
from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED the
subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value of
the check from petitioner's account amounted to and/or constituted a
discharge of the drawer's (petitioner's) liability under the
instrument/subject check. 9
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
Liability of drawee retaining or destroying bill — Where a drawee to whom a bill is
delivered for acceptance destroys the same, or refuses within twenty-four hours
after such delivery or such other period as the holder may allow, to return the bill
accepted or non-accepted to the Holder, he will be deemed to have accepted the
same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the payment of
the CHECK. Consequently, when BPI offset the value of CHECK against the losses from the forged checks
allegedly committed by the private respondent, the check was deemed paid.
Art. 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly provides for the
medium in the "payment of debts." It provides that:
The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency, which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.
Considering the nature of a money market transaction, the above-quoted provision should be applied in the
present controversy. As held in Perez vs. Court of Appeals, 10 a "money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal
5
directly with each other but through a middle man or dealer in open market. In a money market transaction,
the investor is a lender who loans his money to a borrower through a middleman or dealer. 11
In the case at bar, the money market transaction between the petitioner and the private respondent is in the
nature of a loan. The private respondent accepted the CHECK, instead of requiring payment in money. Yet,
when he presented it to RCBC for encashment, as early as June 17, 1991, the same was dishonored by non-
acceptance, with BPI's annotation: "Check (is) subject of an investigation." These facts were testified to by
BPI's manager. Under these circumstances, and after the notice of dishonor, 12 the holder has an immediate
right of recourse against the drawer, 13 and consequently could immediately file an action for the recovery of
the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal
tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of
payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals, 14 this Court held:
Since a negotiable instrument is only a substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as payment (citation omitted). A check,
whether a manager's check or ordinary check, is not legal tender, and an offer of a check
in payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized (Art. 1249, Civil Code, par. 3.) 15
Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFC's current
account, this did not ipso facto operate as a discharge or payment of the instrument. Although the value of the
CHECK was deducted from the funds of CIFC, it was not delivered to the payee, Vicente Alegre. Instead, BPI
offset the amount against the losses it incurred from forgeries of CIFC checks, allegedly committed by Alegre.
The confiscation of the value of the check was agreed upon by CIFC and BPI. The parties intended to
amicably settle the collection suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a
compromise agreement, which reads:
x x x           x x x          x x x
2. Thereupon, defendant shall debit the sum of P514,390.94 from the aforesaid current account representing
payment/discharge of BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged
dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant; otherwise stated, the defendant
shall not be liable to the plaintiff. Plaintiff however (sic) set-up the defense of payment/discharge stipulated in
par. 2
above. 16
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an
end to one already commenced. 17 It is an agreement between two or more persons who, for preventing or
putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and
which everyone of them prefers in the hope of gaining, balanced by the danger of losing. 18 The compromise
agreement could not bind a party who did not sign the compromise agreement nor avail of its
benefits. 19 Thus, the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a
party thereto. His money could not be the subject of an agreement between CIFC and BPI. Although Alegre's
money was in custody of the bank, the bank's possession of it was not in the concept of an owner. BPI cannot
validly appropriate the money as its own. The codal admonition on this issue is clear:
Art. 1317 —
No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.
A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before
it is revoked by the other contracting party. 20
BPI's confiscation of Alegre's money constitutes garnishment without the parties going through a valid
proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his
claim the property of the defendant in the hands of a third person or money owed to such third person or a
garnishee to the defendant. 21 The garnishment procedure must be upon proper order of RTC-Makati, Branch
62, the court who had jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC has not
yet tendered a valid payment of its obligation to the private respondent. Tender of payment involves a positive
and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the
former's obligation and demanding that the latter accept the same. 22 Tender of payment cannot be presumed
by a mere inference from surrounding circumstances.
With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the following
requisites must concur: (a) identity of parties or at least such as to represent the same interest in both actions;
(b) identity of rights asserted and relief prayed for, the relief being founded on the same acts; and (c) the
identity in the two cases should be such that the judgment which may be rendered in one would, regardless of
which party is successful, amount to res judicata in the other. 23
The trial court's ruling as adopted by the respondent court states, thus:
A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance
Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this
Court and the Third Party Complaint in the instant case would readily show that the parties
are not only identical but also the cause of action being asserted, which is the recovery of
the value of BPI Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third
Party Complaint the rights asserted and relief prayed for, the reliefs being founded on the
facts, are identical.
xxx xxx xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third Party
Complaint is hereby ordered dismissed on ground of lis pendens. 24
We agree with the observation of the respondent court that, as between the third party claim filed by the
petitioner against BPI in Civil Case No. 92-515 and petitioner's ancillary claim against the bank in Civil Case
No. 92-1940, there is identity of parties as well as identity of rights asserted, and that any judgment that may
be rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that "In case plaintiff is adjudged
liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI Check No. 513397,
plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated, the defendant shall not be liable to the
plaintiff." 25Clearly, this stipulation expressed that CIFC had already abandoned any further claim against BPI
with respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a party in the case at
bar, would amount to res judicata and would violate terms of the compromise agreement between CIFC and
BPI. The general rule is that a compromise has upon the parties the effect and authority of res judicata, with
respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have
been included therein. 26 This holds true even if the agreement has not been judicially approved. 27
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R. CV
No. 44085 is AFFIRMED. Costs against petitioner.1âwphi1.nêtSO ORDERED.
G.R. No. 123498               November 23, 2007
BPI FAMILY BANK, Petitioner,  "not on file."
vs.
AMADO FRANCO and COURT OF APPEALS, Respondents.
DECISION
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity. We
reiterate this exhortation in the case at bench.
Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA) Decision 1 in
CA-G.R. CV No. 43424 which affirmed with modification the judgment 2 of the Regional Trial Court, Branch 55,
Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals, 3 some of whom opened
and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a series of
transactions.
6
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current
account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment Corporation (FMIC) also
opened a time deposit account with the same branch of BPI-FB with a deposit of ₱100,000,000.00, to mature
one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current, 4 savings,5 and time
deposit,6with BPI-FB. The current and savings accounts were respectively funded with an initial deposit of
₱500,000.00 each, while the time deposit account had ₱1,000,000.00 with a maturity date of August 31, 1990.
The total amount of ₱2,000,000.00 used to open these accounts is traceable to a check issued by Tevesteco
allegedly in consideration of Franco’s introduction of Eladio Teves,7 who was looking for a conduit bank to
facilitate Tevesteco’s business transactions, to Jaime Sebastian, who was then BPI-FB SFDM’s Branch
Manager. In turn, the funding for the ₱2,000,000.00 check was part of the ₱80,000,000.00 debited by BPI-FB
from FMIC’s time deposit account and credited to Tevesteco’s current account pursuant to an Authority to
Debit purportedly signed by FMIC’s officers.
It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were forged. 8 On
September 4, 1989, Antonio Ong,9 upon being shown the Authority to Debit, personally declared his signature
therein to be a forgery. Unfortunately, Tevesteco had already effected several withdrawals from its current
account (to which had been credited the ₱80,000,000.00 covered by the forged Authority to Debit) amounting
to ₱37,455,410.54, including the ₱2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMIC’s forgery claim, BPI-FB,
thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin 10 to debit Franco’s savings
and current accounts for the amounts remaining therein.11 However, Franco’s time deposit account could not
be debited due to the capacity limitations of BPI-FB’s computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current account were dishonored upon
presentment for payment, and stamped with a notation "account under garnishment." Apparently, Franco’s
current account was garnished by virtue of an Order of Attachment issued by the Regional Trial Court of
Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed by BPI-FB against Franco
et al.,14 to recover the ₱37,455,410.54 representing Tevesteco’s total withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to Franco’s
receipt of notice that his accounts were under garnishment.15 In fact, at the time the Notice of Garnishment
dated September 27, 1989 was served on BPI-FB, Franco had yet to be impleaded in the Makati case where
the writ of attachment was issued.
It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil Case
No. 89-4996, that Franco was impleaded in the Makati case. 16 Immediately, upon receipt of such copy, Franco
filed a Motion to Discharge Attachment which the Makati RTC granted on May 16, 1990. The Order Lifting the
Order of Attachment was served on BPI-FB on even date, with Franco demanding the release to him of the
funds in his savings and current accounts. Jesus Arangorin, BPI-FB’s new manager, could not forthwith
comply with the demand as the funds, as previously stated, had already been debited because of FMIC’s
forgery claim. As such, BPI-FB’s computer at the SFDM Branch indicated that the current account record was
With respect to Franco’s savings account, it appears that Franco agreed to an arrangement, as a favor to
Sebastian, whereby ₱400,000.00 from his savings account was temporarily transferred to Domingo Quiaoit’s
savings account, subject to its immediate return upon issuance of a certificate of deposit which Quiaoit
needed in connection with his visa application at the Taiwan Embassy. As part of the arrangement, Sebastian
retained custody of Quiaoit’s savings account passbook to ensure that no withdrawal would be effected
therefrom, and to preserve Franco’s deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount of
₱63,189.00 from the remaining balance of the time deposit account representing advance interest paid to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of ₱80,000,000.00 debited from its
account.17The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First Metro
Investment Corporation,18 we upheld the finding of the courts below that BPI-FB failed to exercise the degree
of diligence required by the nature of its obligation to treat the accounts of its depositors with meticulous care.
Thus, BPI-FB was found liable to FMIC for the debited amount in its time deposit. It was ordered to pay
₱65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully restored. In turn, the 17%
shall itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et al.), 19 recipients
of a ₱500,000.00 check proceeding from the ₱80,000,000.00 mistakenly credited to Tevesteco, likewise filed
suit. Buenaventura et al., as in the case of Franco, were also prevented from effecting withdrawals 20 from their
current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City Branch. Likewise, when the case was
elevated to this Court docketed as BPI Family Bank v. Buenaventura, 21 we ruled that BPI-FB had no right to
freeze Buenaventura, et al.’s accounts and adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators of the
multi-million peso scam.22 In the criminal case, Franco, along with the other accused, except for Manuel
Bienvenida who was still at large, were acquitted of the crime of Estafa as defined and penalized under Article
351, par. 2(a) of the Revised Penal Code.23 However, the civil case24 remains under litigation and the
respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze his accounts and release his
deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit. In his complaint, Franco
prayed for the following reliefs: (1) the interest on the remaining balance 25 of his current account which was
eventually released to him on October 31, 1991; (2) the balance26 on his savings account, plus interest
thereon; (3) the advance interest27 paid to him which had been deducted when he pre-terminated his time
deposit account; and (4) the payment of actual, moral and exemplary damages, as well as attorney’s fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and refusing to
release his deposits, claiming that it had a better right to the amounts which consisted of part of the money
allegedly fraudulently withdrawn from it by Tevesteco and ending up in Franco’s accounts. BPI-FB
asseverated that the claimed consideration of ₱2,000,000.00 for the introduction facilitated by Franco between
George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the other, spoke volumes of
Franco’s participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and against [BPI-
FB], ordering the latter to pay to the former the following sums:
1. ₱76,500.00 representing the legal rate of interest on the amount of ₱450,000.00 from May 18,
1990 to October 31, 1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings account as of May 18, 1990,
together with the interest thereon in accordance with the bank’s guidelines on the payment therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined his
appeal to the Manila RTC’s denial of his claim for moral and exemplary damages, and the diminutive award of
attorney’s fees. In affirming with modification the lower court’s decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification ordering
[BPI-FB] to pay [Franco] ₱63,189.00 representing the interest deducted from the time deposit of plaintiff-
appellant. ₱200,000.00 as moral damages and ₱100,000.00 as exemplary damages, deleting the award of
nominal damages (in view of the award of moral and exemplary damages) and increasing the award of
attorney’s fees from ₱30,000.00 to ₱75,000.00.
Cost against [BPI-FB].
SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the
deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2) Franco is
entitled to interest on his current account; (3) Franco can recover the ₱400,000.00 deposit in Quiaoit’s savings
account; (4) the dishonor of Franco’s checks was not legally in order; (5) BPI-FB is liable for interest on
Franco’s time deposit, and for moral and exemplary damages; and (6) BPI-FB’s counter-claim has no factual
and legal anchor.
7
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze
Franco’s accounts and preclude him from withdrawing his deposits. However, contrary to the appellate court’s
ruling, we hold that Franco is not entitled to unearned interest on the time deposit as well as to moral and
exemplary damages.
First. On the issue of who has a better right to the deposits in Franco’s accounts, BPI-FB urges us that the
legal consequence of FMIC’s forgery claim is that the money transferred by BPI-FB to Tevesteco is its own,
and considering that it was able to recover possession of the same when the money was redeposited by
Franco, it had the right to set up its ownership thereon and freeze Franco’s accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains possession
after it is stolen, and to illustrate this point, BPI-FB gives the following example: where X’s television set is
stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of the TV set to X, the
latter would have the right to keep possession of the property and preclude Z from recovering possession
thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless,
one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in
possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good
faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor.
BPI-FB’s argument is unsound. To begin with, the movable property mentioned in Article 559 of the Civil Code
pertains to a specific or determinate thing.30 A determinate or specific thing is one that is individualized and
can be identified or distinguished from others of the same kind.31
In this case, the deposit in Franco’s accounts consists of money which, albeit characterized as a movable, is
generic and fungible.32 The quality of being fungible depends upon the possibility of the property, because of
its nature or the will of the parties, being substituted by others of the same kind, not having a distinct
individuality.33
Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a movable to
recover the exact same thing from the current possessor, BPI-FB simply claims ownership of the equivalent
amount of money, i.e., the value thereof, which it had mistakenly debited from FMIC’s account and credited to
Tevesteco’s, and subsequently traced to Franco’s account. In fact, this is what BPI-FB did in filing the Makati
Case against Franco, et al. It staked its claim on the money itself which passed from one account to another,
commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership,34 and this characteristic is all the
more manifest in the instant case which involves money in a banking transaction gone awry. Its primary
function is to pass from hand to hand as a medium of exchange, without other evidence of its title.35 Money,
which had passed through various transactions in the general course of banking business, even if of traceable
origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FB’s illustrative
example, ostensibly based on Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB conveniently
forgets that the deposit of money in banks is governed by the Civil Code provisions on simple loan or
mutuum.36 As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately
acquired ownership of Franco’s deposits, but such ownership is coupled with a corresponding obligation to
pay him an equal amount on demand.37Although BPI-FB owns the deposits in Franco’s accounts, it cannot
prevent him from demanding payment of BPI-FB’s obligation by drawing checks against his current account,
or asking for the release of the funds in his savings account. Thus, when Franco issued checks drawn against
his current account, he had every right as creditor to expect that those checks would be honored by BPI-FB as
debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on its mere
suspicion that the funds therein were proceeds of the multi-million peso scam Franco was allegedly involved
in. To grant BPI-FB, or any bank for that matter, the right to take whatever action it pleases on deposits which
it supposes are derived from shady transactions, would open the floodgates of public distrust in the banking
industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38 continues to resonate, thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the economic
life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as
active instruments of business and commerce, banks have become an ubiquitous presence among the
people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus,
even the humble wage-earner has not hesitated to entrust his life’s savings to the bank of his choice, knowing
that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal
faith, usually maintains a modest checking account for security and convenience in the settling of his monthly
bills and the payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single transaction
accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the
bank will deliver it as and to whomever directs. A blunder on the part of the bank, such as the dishonor of the
check without good reason, can cause the depositor not a little embarrassment if not also financial loss and
perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature of its functions, the
bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of its
customers. Having failed to detect the forgery in the Authority to Debit and in the process inadvertently
facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco and the other
payees of checks issued by Tevesteco, or prevent withdrawals from their respective accounts without the
appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature in the
Authority to Debit, effected the transfer of ₱80,000,000.00 from FMIC’s to Tevesteco’s account, when FMIC’s
account was a time deposit and it had already paid advance interest to FMIC. Considering that there is as yet
no indubitable evidence establishing Franco’s participation in the forgery, he remains an innocent party. As
between him and BPI-FB, the latter, which made possible the present predicament, must bear the resulting
loss or inconvenience.
Second. With respect to its liability for interest on Franco’s current account, BPI-FB argues that its non-
compliance with the Makati RTC’s Order Lifting the Order of Attachment and the legal consequences thereof,
is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in this respect. The Manila
RTC’s order to pay interests on Franco’s current account arose from BPI-FB’s unjustified refusal to comply
with its obligation to pay Franco pursuant to their contract of mutuum. In other words, from the time BPI-FB
refused Franco’s demand for the release of the deposits in his current account, specifically, from May 17,
1990, interest at the rate of 12% began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPI-FB’s
non-compliance with the Order Lifting the Order of Attachment. However, such authority does not preclude the
Manila RTC from ruling on BPI-FB’s liability to Franco for payment of interest based on its continued and
unjustified refusal to perform a contractual obligation upon demand. After all, this was the core issue raised by
Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s account, we find no reason to depart from the
factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually owned by
Franco who simply accommodated Jaime Sebastian’s request to temporarily transfer ₱400,000.00 from
Franco’s savings account to Quiaoit’s account.40 His testimony cannot be characterized as hearsay as the
records reveal that he had personal knowledge of the arrangement made between Franco, Sebastian and
himself.41
8
BPI-FB makes capital of Franco’s belated allegation relative to this particular arrangement. It insists that the
transaction with Quiaoit was not specifically alleged in Franco’s complaint before the Manila RTC. However, it
appears that BPI-FB had impliedly consented to the trial of this issue given its extensive cross-examination of
Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of evidence.— When issues not raised by the
pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if
they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them
to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even
after judgment; but failure to amend does not affect the result of the trial of these issues. If evidence is
objected to at the trial on the ground that it is now within the issues made by the pleadings, the court may
allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action
and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable the
amendment to be made. (Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for Franco to recover the ₱400,000.00 begs the
issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of the funds in his
account, and pointed to Franco as the actual owner thereof. Clearly, Franco’s action for the recovery of his
deposits appropriately covers the deposits in Quiaoit’s account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Franco’s checks
respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTC’s supplemental
writ of attachment issued on September 14, 1989. It posits that as the party that applied for the writ of
attachment before the Makati RTC, it need not be served with the Notice of Garnishment before it could place
Franco’s accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB’s clever but transparent ploy to circumvent
Section 4,42 Rule 13 of the Rules of Court. It should be noted that the strict requirement on service of court
papers upon the parties affected is designed to comply with the elementary requisites of due process. Franco
was entitled, as a matter of right, to notice, if the requirements of due process are to be observed. Yet, he
received a copy of the Notice of Garnishment only on September 27, 1989, several days after the two checks
he issued were dishonored by BPI-FB on September 20 and 21, 1989. Verily, it was premature for BPI-FB to
freeze Franco’s accounts without even awaiting service of the Makati RTC’s Notice of Garnishment on
Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made without
including in the main suit the owner of the property attached by virtue thereof. Section 5, Rule 13 of the Rules
of Court specifically provides that "no levy or attachment pursuant to the writ issued x x x shall be enforced
unless it is preceded, or contemporaneously accompanied, by service of summons, together with a copy of
the complaint, the application for attachment, on the defendant within the Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB garnished his accounts.43 Effectively, therefore, the Makati
RTC had no authority yet to bind the deposits of Franco through the writ of attachment, and consequently,
there was no legal basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Franco’s time deposit account, and for moral as well as exemplary damages, we find it proper
to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the amount of
₱10,000.00. However, we retain the CA’s award of ₱75,000.00 as attorney’s fees.
In granting Franco’s prayer for interest on his time deposit account and for moral and exemplary damages, the
CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to Franco; (2)
misleadingly claimed that Franco’s deposits were under garnishment; (3) misrepresented that Franco’s current
account was not on file; and (4) refused to return the ₱400,000.00 despite the fact that the ostensible owner,
Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is
liable shall be those that are the natural and probable consequences of the breach of the obligation, and
which the parties have foreseen or could have reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which
may be reasonably attributed to the non-performance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201 and should not
be held liable for all damages now being imputed to it for its breach of obligation. For the same reason, it is
not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it partakes of the nature of fraud. 44 We have held that it is a breach of
a known duty through some motive of interest or ill will. 45 In the instant case, we cannot attribute to BPI-FB
fraud or even a motive of self-enrichment. As the trial court found, there was no denial whatsoever by BPI-FB
of the existence of the accounts. The computer-generated document which indicated that the current account
was "not on file" resulted from the prior debit by BPI-FB of the deposits. The remedy of freezing the account,
or the garnishment, or even the outright refusal to honor any transaction thereon was resorted to solely for the
purpose of holding on to the funds as a security for its intended court action,46 and with no other goal but to
ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral damages cannot be awarded;
and that the adverse result of an action does not per se make the action wrongful, or the party liable for it. One
may err, but error alone is not a ground for granting such damages.48
An award of moral damages contemplates the existence of the following requisites: (1) there must be an injury
clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a culpable act
or omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause of
the injury sustained by the claimant; and (4) the award for damages is predicated on any of the cases stated
in Article 2219 of the Civil Code.49
Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil Code, 50 upon
which to base his claim for moral damages.1âwphi1
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220 of the
Civil Code for breach of contract.51
We also deny the claim for exemplary damages. Franco should show that he is entitled to moral, temperate,
or compensatory damages before the court may even consider the question of whether exemplary damages
should be awarded to him.52 As there is no basis for the award of moral damages, neither can exemplary
damages be granted.
While it is a sound policy not to set a premium on the right to litigate, 53 we, however, find that Franco is entitled
to reasonable attorney’s fees for having been compelled to go to court in order to assert his right. Thus, we
affirm the CA’s grant of ₱75,000.00 as attorney’s fees.
Attorney’s fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest,54 or when the court deems it just and equitable.55 In the case at bench, BPI-FB refused to unfreeze
the deposits of Franco despite the Makati RTC’s Order Lifting the Order of Attachment and Quiaoit’s
unwavering assertion that the ₱400,000.00 was part of Franco’s savings account. This refusal constrained
Franco to incur expenses and litigate for almost two (2) decades in order to protect his interests and recover
his deposits. Therefore, this Court deems it just and equitable to grant Franco ₱75,000.00 as attorney’s fees.
The award is reasonable in view of the complexity of the issues and the time it has taken for this case to be
resolved.56
Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila RTC’s ruling, as affirmed by the
CA, that BPI-FB is not entitled to recover ₱3,800,000.00 as actual damages. BPI-FB’s alleged loss of profit as
a result of Franco’s suit is, as already pointed out, of its own making. Accordingly, the denial of its counter-
claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November 29,
1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on the time deposit and of
moral and exemplary damages is DELETED.
No pronouncement as to costs.SO ORDERED.
G.R. Nos. 173654-765             August 28, 2008
9
PEOPLE OF THE PHILIPPINES, petitioner, 
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the
Philippines, represented by the Office of the Solicitor General, praying for the reversal of the Orders dated 30
January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6 th Judicial Region, Branch 68,
Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against respondents Teresita Puig and
Romeo Porras, and denying petitioner’s Motion for Reconsideration, in Criminal Cases No. 05-3054 to 05-
3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before Branch 68 of the RTC in
Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras
(Porras) who were the Cashier and Bookkeeper, respectively, of private complainant Rural Bank of Pototan,
Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except for the amounts,
date and time of commission, to wit:
INFORMATION
That on or about the 1 st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents],
conspiring, confederating, and helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and with intent of gain, did then and
there willfully, unlawfully and feloniously take, steal and carry away the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the said
bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence of probable cause that
would have necessitated the issuance of a warrant of arrest based on the following grounds: 
(1) the element of ‘taking without the consent of the owners’ was missing on the ground that it is
the depositors-clients, and not the Bank, which filed the complaint in these cases, who are the
owners of the money allegedly taken by respondents and hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance
between the respondents and the offended party that would have created a high degree of
confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through would be
violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution which states
that in all criminal prosecutions, the accused shall enjoy the right to be informed of the nature and cause of the
accusation against him. Following Section 6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC
dismissed the cases on 30 January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner. 
On 9 June 2006, an Order3 denying petitioner’s Motion for Reconsideration was issued by the RTC, finding as
follows:
Accordingly, the prosecution’s Motion for Reconsideration should be, as it hereby, DENIED. The
Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole legal
issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY ALLEGE
THE ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE QUALIFYING
CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January 2006 and
9 June 2006 issued by the trial court, and that it be directed to proceed with Criminal Cases No. 05-3054 to
05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple loans."
Corollary thereto, Article 1953 of the same Code provides that "a person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the
same kind and quality." Thus, it posits that the depositors who place their money with the bank are considered
creditors of the bank. The bank acquires ownership of the money deposited by its clients, making the money
taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified theft,
citing that a perusal of the Informations will show that they specifically allege that the respondents were the
Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took various amounts
of money with grave abuse of confidence, and without the knowledge and consent of the bank, to the damage
and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a Petition
for Review on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable cause for the
issuance of a warrant of arrest presupposes evaluation of facts and circumstances, which is not proper under
said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the
principal party to file a Petition for Review on Certiorari, considering that the incident was indorsed by the
DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the existence of probable cause which will justify the
issuance of the warrant of arrest. Petitioner assails the dismissal contending that the Informations for Qualified
Theft sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse of confidence; and
(b) the element of taking, with intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the
allegations in the Information inadequate. He ruled that the Information failed to state facts constituting the
qualifying circumstance of grave abuse of confidence and the element of taking without the consent of the
owner, since the owner of the money is not the Bank, but the depositors therein. He also cites People v. Koc
Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a high
degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable cause
simply on the insufficiency of the allegations in the Informations concerning the facts constitutive of the
elements of the offense charged. This, therefore, makes the issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as
follows, viz:
ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties next higher by two
degrees than those respectively specified in the next preceding article, if committed by a domestic
servant, or with grave abuse of confidence, or if the property stolen is motor vehicle, mail matter or
large cattle or consists of coconuts taken from the premises of a plantation, fish taken from a
fishpond or fishery or if property is taken on the occasion of fire, earthquake, typhoon, volcanic
eruption, or any other calamity, vehicular accident or civil disturbance. (Emphasis supplied.)  contributions from its member/contributors of said corporation, and having collected and received in
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of another’s property
without violence or intimidation against persons or force upon things. The elements of the crime under this
Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
10
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner’s consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of force
upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that the
information must state the acts or omissions complained of as constitutive of the offense. 
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is
enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the offense
and the qualifying and aggravating circumstances must be stated in ordinary and concise language
and not necessarily in the language used in the statute but in terms sufficient to enable a person of
common understanding to know what offense is being charged as well as its qualifying and
aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or
omissions complained of as constituting the offense. The test is whether it enables a person of common
understanding to know the charge against him, and the court to render judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper  of the Rural Bank
of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer. Banks,
on the other hand, where monies are deposited, are considered the owners thereof. This is very clear not only
from the express provisions of the law, but from established jurisprudence. The relationship between banks
and depositors has been held to be that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code,
as appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning loan. 
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of possession by
the Bank of the money deposits therein, and the duties being performed by its employees who have custody
of the money or have come into possession of it. The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of confidence, to the damage and prejudice of the
Bank, without particularly referring to it as owner of the money deposits, as sufficient to make out a case of
Qualified Theft. For a graphic illustration, we cite Roque v. People,6where the accused teller was convicted for
Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca, province of
Pampanga, Philippines and within the jurisdiction of his Honorable Court, the above-named accused
ASUNCION GALANG ROQUE, being then employed as teller of the Basa Air Base Savings and
Loan Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca, Pampanga,
and as such was authorized and reposed with the responsibility to receive and collect capital
her capacity as teller of the BABSLA the sum of TEN THOUSAND PESOS (P10,000.00), said
accused, with intent of gain, with grave abuse of confidence and without the knowledge and
consent of said corporation, did then and there willfully, unlawfully and feloniously take, steal and
carry away the amount of P10,000.00, Philippine currency, by making it appear that a certain
depositor by the name of Antonio Salazar withdrew from his Savings Account No. 1359, when in
truth and in fact said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the
damage and prejudice of BABSLA in the total amount of P10,000.00, Philippine currency. 
In convicting the therein appellant, the Court held that:
 [S]ince the teller occupies a position of confidence, and the bank places money in the teller’s
possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified Theft based
on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February 13,
1992, both dates inclusive, in the City of Manila, Philippines, the said accused did then and there
wilfully, unlawfully and feloniously, with intent of gain and without the knowledge and consent of the
owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the PHILIPPINE
COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch, Manila represented
by its Branch Manager, HELEN U. FARGAS, to the damage and prejudice of the said owner in the
aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of confidence
and unfaithfulness, he being the Branch Operation Officer of the said complainant and as such he
had free access to the place where the said amount of money was kept.  upon the judge to proceed with the case upon a showing that there is a prima facie case against the
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and Industrial
Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had he not been
holding the position of Luneta Branch Operation Officer which gave him not only sole access to the
bank vault xxx. The management of the PCIB reposed its trust and confidence in the appellant as its
Luneta Branch Operation Officer, and it was this trust and confidence which he exploited to enrich
himself to the damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of possession by
the Bank. The money in this case was in the possession of the defendant as receiving teller of the bank, and
the possession of the defendant was the possession of the Bank. The Court held therein that when the
defendant, with grave abuse of confidence, removed the money and appropriated it to his own use without the
consent of the Bank, there was taking as contemplated in the crime of Qualified Theft.11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the
respondents; that the crime was committed with grave abuse of confidence, with intent to gain and without the
knowledge and consent of the Bank, without necessarily stating the phrase being assiduously insisted upon
by respondents, "of a relation by reason of dependence, guardianship or vigilance, between the
respondents and the offended party that has created a high degree of confidence between them,
which respondents abused,"12 and without employing the word "owner" in lieu of the "Bank" were
considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case, there is
even no reason to quibble on the allegation in the Informations that they acted with grave abuse of
confidence. In fact, the Information which alleged grave abuse of confidence by accused herein is even more
precise, as this is exactly the requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of the
Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed in them,
occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential elements
constituting the crime of Qualified Theft.  Despite the restructuring, however, the Yus still had difficulties paying their loan. They asked BPI to release
On the theory of the defense that the DOJ is the principal party who may file the instant petition, the ruling
in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the private complainant or
the offended party is limited to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a reconsideration of the order of dismissal or
acquittal may be undertaken, whenever legally feasible, insofar as the criminal aspect thereof is
concerned and may be made only by the public prosecutor; or in the case of an appeal, by the State
only, through the OSG. x x x.  virtue of this agreement, the court dismissed the complaint against Magnacraft, 8 without prejudice to the Yus
11
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in
appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be raised, 14 and herein
petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at the
records of the preliminary investigation conducted will show that, indeed, probable cause exists for the
indictment of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge shall issue
a warrant of arrest only upon a finding of probable cause after personally evaluating the resolution of the
prosecutor and its supporting evidence. Soliven v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained
that probable cause for the issuance of a warrant of arrest is the existence of such facts and circumstances
that would lead a reasonably discreet and prudent person to believe that an offense has been committed by
the person sought to be arrested.17 The records reasonably indicate that the respondents may have, indeed,
committed the offense charged. 
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case may be,
to relieve the respondents from the pain of going through a trial once it is ascertained that no probable cause
exists to form a sufficient belief as to the guilt of the respondents, conversely, it is also equally imperative
respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The Orders
dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to 05-
3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue against herein
respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is
directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable
dispatch. No pronouncement as to costs.SO ORDERED.
G.R. No. 184122               January 20, 2010
BANK OF THE PHILIPPINE ISLANDS, INC., Petitioner, 
vs.
SPS. NORMAN AND ANGELINA YU and TUANSON BUILDERS CORPORATION represented by PRES.
NORMAN YU, Respondents.
This case is about the propriety of a summary judgment in resolving a documented claim of alleged excessive
penalty charges, interest, attorney’s fees, and foreclosure expenses imposed in an extrajudicial foreclosure of
mortgage. 
The Facts and the Case
Respondents Norman and Angelina Yu (the Yus), doing business as Tuanson Trading, and Tuanson Builders
Corporation (Tuanson Builders) borrowed various sums totaling ₱75 million from Far East Bank and Trust
Company. For collateral, they executed real estate mortgages over several of their properties, 1 including
certain lands in Legazpi City owned by Tuanson Trading.2 In 1999, unable to pay their loans, the Yus and
Tuanson Builders requested a loan restructuring, 3 which the bank, now merged with Bank of the Philippine
Islands (BPI), granted.4 By this time, the Yus’ loan balance stood at ₱33,400,000.00. The restructured loan
used the same collaterals, with the exception of Transfer Certificate of Title 40247 that secured a loan of
₱1,600,000.5
some of the mortgaged lands since their total appraised value far exceeded the amount of the remaining debt.
When BPI ignored their request, the Yus withheld payments on their amortizations. Thus, BPI extrajudicially
foreclosed6 the mortgaged properties in Legazpi City and in Pili, Camarines Sur. But the Yus sought by court
action against BPI and the winning bidder, Magnacraft Development Corporation (Magnacraft), the annulment
of the foreclosure sale. 
In the course of the proceedings, however, the Yus and Magnacraft entered into a compromise
agreement 7 that affirmed the latter’s ownership of three out of the 10 parcels of land that were auctioned. By
filing a new one against BPI. 
On October 24, 2003 the Yus filed their new complaint before the Regional Trial Court (RTC) of Legazpi City,
Branch 1, in Civil Case 10286 against BPI for recovery of alleged excessive penalty charges, attorney’s fees,
and foreclosure expenses that the bank caused to be incorporated in the price of the auctioned
properties.91avvphi1
In its answer,10 BPI essentially admitted the foreclosure of the mortgaged properties for ₱39,055,254.95,
broken down as follows: ₱33,283,758.73 as principal debt; ₱2,110,282.78 as interest; and ₱3,661,213.46 as
penalty charges.11 BPI qualified that the total of ₱39,055,254.95 corresponded only to the Yus’ debt as of date
of filing of the petition.12 The notice of the auction sale said that the total was "inclusive of interest, penalty
charges, attorney’s fee and expenses of this foreclosure."13
BPI further admitted that its bid of ₱45,090,566.41 for all the auctioned properties was broken down as
follows:14
Principal ₱ 32,188,723.07
Interest 2,763,088.93
Penalty Charges 5,568.649.09
Sub-total…………… ₱ 40,520,461.09
Add: 10% Attorney’s Fees 4,052,046.11
Litigation Expenses & Interest 446,726.74
Cost of Publication & Interest 71,332.47
TOTAL……………. ₱ 45,090,566.41
BPI also admitted that Magnacraft submitted the highest and winning bid of ₱45,500,000.00. 15 The sheriff
turned over this amount to BPI.16 According to BPI, it in turn remitted to the Clerk of Court the ₱409,433.59
difference between its bid price and that of Magnacraft’s.17 Although the proceeds of the sale exceeded the
₱39,055,254.95 stated in the notice of sale by ₱6,035,311.46, 18 the bid amount increased because it now
included litigation expenses and attorney’s fees as well as interests and penalties as recomputed.19
BPI admitted that it also pushed through with the second auction for the sale of a lot in Pili, Camarines Sur
that secured a remaining debt of ₱5,562,000.20 BPI made the lone bid21 of ₱1,701,934.09.22
The Yus had three causes of action against BPI.  judgment by the RTC; and
First. The bank imposed excessive penalty charges and interests: over ₱5 million in penalty charges
computed at 36% per annum compared to the 12% per annum that the Court fixed in the cases of
State Investment House, Inc. v. Court of Appeals 23 and Ruiz v. Court of Appeals.24 In addition, BPI
collected a 14% yearly interest on the principal, bringing the combined penalty charges and interest
to 50% of the principal per annum.  The Court’s Rulings
Second. BPI also imposed a charge of ₱4,052,046.11 in attorney’s fees, the equivalent of 10% of
the principal, interest, and penalty charges.  raise any genuine issue of fact.37 Here, to resolve the issue of the excessive charges allegedly incorporated
Third. BPI did not provide documents to support its claim for foreclosure expenses of ₱446,726.74
and cost of publication of ₱518,059.21.  agreements, the promissory note, and the real estate mortgages between them; c) the foreclosure and bidding
As an alternative to their three causes of action, the Yus claimed that BPI was in estoppel to claim more than
the amount stated in its published notices. Consequently, it must turn over the excess bid of ₱6,035,311.46. 
12
After pre-trial, the Yus moved for summary judgment, 25 pointing out that based on the answer, 26 the common
exhibits of the parties,27 and the answer to the written interrogatories to the sheriff,28 no genuine issues of fact
exist in the case. The Yus waived their claim for moral damages so the RTC can dispose of the case through
a summary judgment.29
Initially, the RTC granted only a partial summary judgment. It reduced the penalty charge of 36% per
annum30 to 12% per annum until the debt would have been fully paid but maintained the attorney’s fees as
reasonable considering that BPI already waived the ₱1,761,511.36 that formed part of the attorney’s fees and
reduced the rate of attorney’s fees it collected from 25% to 10% of the amount due. The RTC ruled that facts
necessary to resolve the issues on penalties and fees had been admitted by the parties thus dispensing with
the need to receive evidence.31
Still, the RTC held that it needed to receive evidence for the resolution of the issues of (1) whether or not the
foreclosure and publication expenses were justified; (2) whether or not the foreclosure of the lot in Pili,
Camarines Sur, was valid given that the proceeds of the foreclosure of the properties in Legazpi City
sufficiently covered the debt; and (3) whether or not BPI was entitled to its counterclaim for attorney’s fees,
moral damages, and exemplary damages.32
The Yus moved for partial reconsideration. 33 They argued that, since BPI did not mark in evidence any
document in support of the foreclosure expenses it claimed, it may be assumed that the bank had no evidence
to prove such expenses. As regards their right to the pro-rating of their debt among the mortgaged properties,
the Yus pointed out that BPI did not dispute the fact that the proceeds of the sale of the properties in Legazpi
City fully satisfied the debt. Thus, the court could already resolve without trial the issue of whether or not the
foreclosure of the Pili property was valid. 
Further, the Yus sought reconsideration of the reduction of penalty charges and the allowance of the
attorney’s fees. They claimed that the penalty charges should be deleted for violation of Republic Act (R.A.)
3765 or the Truth in Lending Act. BPI’s disclosure did not state the rate of penalties on late amortizations.
Also, the Yus asked the court to reduce the attorney’s fees from 10% to 1% of the amount due. On January 3,
2006 the RTC reconsidered its earlier decision and rendered a summary judgment:34
1. Deleting the penalty charges imposed by BPI for non-compliance with the Truth in Lending Act; 
2. Reducing the attorney’s fees to 1% of the principal and interest;
3. Upholding the reasonableness of the foreclosure expenses and cost of publication, both with
interests; 
4. Reiterating the turnover by the Clerk of Court to the Yus of the excess in the bid price;
5. Deleting the Yus’ claim for moral damages they having waived it; 
6. Denying the Yus’ claim for attorney’s fees for lack of basis; and
7. Dismissing BPI’s counterclaim for moral and exemplary damages and for attorney’s fees for lack
of merit considering that summary judgment has been rendered in favor of the Yus. 
BPI appealed the decision to the Court of Appeals (CA) in CA-G.R. CV 86577. But the CA rendered judgment
on January 23, 2008, affirming the RTC decision in all respects. And when BPI asked for
reconsideration,35 the CA denied it on July 14, 2008,36 hence, the bank’s recourse to this Court. 
The Issues Presented
BPI presents the following issues:
1. Whether or not the case presented no genuine issues of fact such as to warrant a summary
2. Where summary judgment is proper, whether or not the RTC and the CA a) correctly deleted the
penalty charges because of BPI’s alleged failure to comply with the Truth in Lending Act; b) correctly
reduced the attorney’s fees to 1% of the judgment debt; and c) properly dismissed BPI’s
counterclaims for moral and exemplary damages, attorney’s fees, and litigation expenses.
One. A summary judgment is apt when the essential facts of the case are uncontested or the parties do not
into the auction bid price, the RTC simply had to look at a) the pleadings of the parties; b) the loan
documents; and d) the admissions and other disclosures between the parties during pre-trial. Since the parties
admitted not only the existence, authenticity, and genuine execution of these documents but also what they contained data, including penalty charges, required by the Truth in Lending Act. They cannot avoid liability
stated, the trial court did not need to hold a trial for the reception of the evidence of the parties. based on a rigid interpretation of the Truth in Lending Act that contravenes its goal.
BPI contends that a summary judgment was not proper given the following issues that the parties raised: 1) Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable and
whether or not the loan agreements between them were valid and enforceable; 2) whether or not the Yus iniquitous.50Considering that BPI had already received over ₱2.7 million in interest and that it seeks to impose
have a cause of action against BPI; 3) whether or not the Yus are proper parties in interest; 4) whether or not the penalty charge of 3% per month or 36% per annum on the total amount due—principal plus interest, with
the Yus are estopped from questioning the foreclosure proceeding after entering into a compromise interest not paid when due added to and becoming part of the principal and also bearing interest at the same
agreement with Magnacraft; 5) whether or not the penalty charges and fees and expenses of litigation and rate—the Court finds the ruling of the RTC in its original decision51 reasonable and fair. Thus, the penalty
publication are excessive; and 6) whether or not BPI violated the Truth in Lending Act.38 charge of 12% per annum or 1% per month52 is imposed. 
But these are issues that could be readily resolved based on the facts established by the pleadings and the Three. As for the award of attorney’s fee, it being part of a party’s liquidated damages, the same may likewise
admissions of the parties.39 Indeed, BPI has failed to name any document or item of fact that it would have be equitably reduced.53 The CA correctly affirmed the RTC Order 54 to reduce it from 10% to 1% based on the
wanted to adduce at the trial of the case. A trial would have been such a great waste of time and resources.  following reasons: (1) attorney’s fee is not essential to the cost of borrowing, but a mere incident of
Two. Both the RTC and CA decisions cited BPI’s alleged violation of the Truth in Lending Act and the ruling of collection;55 (2) 1% is just and adequate because BPI had already charged foreclosure expenses; (3)
the Court in New Sampaguita Builders Construction, Inc. v. Philippine National Bank 40 to justify their deletion attorney’s fee of 10% of the total amount due is onerous considering the rote effort that goes into extrajudicial
of the penalty charges. Section 4 of the Truth in Lending Act states that: foreclosures. 
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Appeals Decision in CA-G.R. CV
transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and 86577 dated January 23, 2008 subject to the RESTORATION of the penalty charge of 12% per annum or 1%
regulations prescribed by the Board, the following information:  per month of the amount due computed from date of nonpayment or November 25, 2001. SO ORDERED.
(1) the cash price or delivered price of the property or service to be acquired; G.R. No. 174269               May 8, 2009
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with POLO S. PANTALEON, Petitioner, 
the transaction but which are not incident to the extension of credit; vs.
(5) the total amount to be financed; AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.
(6) the finance charge expressed in terms of pesos and centavos; and  The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina and son Adrian Roberto,
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple joined an escorted tour of Western Europe organized by Trafalgar Tours of Europe, Ltd., in October of 1991.
annual rate on the outstanding unpaid balance of the obligation.  The tour group arrived in Amsterdam in the afternoon of 25 October 1991, the second to the last day of the
Penalty charge, which is liquidated damages resulting from a breach, 41 falls under item (6) or finance charge. tour. As the group had arrived late in the city, they failed to engage in any sight-seeing. Instead, it was agreed
A finance charge "represents the amount to be paid by the debtor incident to the extension of credit." 42 The upon that they would start early the next day to see the entire city before ending the tour. 
lender may provide for a penalty clause so long as the amount or rate of the charge and the conditions under The following day, the last day of the tour, the group arrived at the Coster Diamond House in Amsterdam
which it is to be paid are disclosed to the borrower before he enters into the credit agreement.  around 10 minutes before 9:00 a.m. The group had agreed that the visit to Coster should end by 9:30 a.m. to
In this case, although BPI failed to state the penalty charges in the disclosure statement, the promissory note allow enough time to take in a guided city tour of Amsterdam. The group was ushered into Coster shortly
that the Yus signed, on the same date as the disclosure statement, contained a penalty clause that said: "I/We before 9:00 a.m., and listened to a lecture on the art of diamond polishing that lasted for around ten
jointly and severally, promise to further pay a late payment charge on any overdue amount herein at the rate minutes.1 Afterwards, the group was led to the store’s showroom to allow them to select items for purchase.
of 3% per month." The promissory note is an acknowledgment of a debt and commitment to repay it on the Mrs. Pantaleon had already planned to purchase even before the tour began a 2.5 karat diamond brilliant cut,
date and under the conditions that the parties agreed on.43 It is a valid contract absent proof of acts which and she found a diamond close enough in approximation that she decided to buy.2 Mrs. Pantaleon also
might have vitiated consent.44 selected for purchase a pendant and a chain,3 all of which totaled U.S. $13,826.00. 
The question is whether or not the reference to the penalty charges in the promissory note constitutes To pay for these purchases, Pantaleon presented his American Express credit card together with his passport
substantial compliance with the disclosure requirement of the Truth in Lending Act. 45 The RTC and CA relied to the Coster sales clerk. This occurred at around 9:15 a.m., or 15 minutes before the tour group was slated to
on the ruling in New Sampaguita as authority that the non-disclosure of the penalty charge renders its depart from the store. The sales clerk took the card’s imprint, and asked Pantaleon to sign the charge slip.
imposition illegal. But New Sampaguita is not attended by the same circumstances. What New Sampaguita The charge purchase was then referred electronically to respondent’s Amsterdam office at 9:20 a.m. 
disallowed, because it was not mentioned either in the disclosure statement or in the promissory note, was the Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not yet been approved. His son,
unilateral increase in the rates of penalty charges that the creditor imposed on the borrower. Here, however, it who had already boarded the tour bus, soon returned to Coster and informed the other members of the
is not shown that BPI increased the rate of penalty charge that it collected from the Yus. 46 Pantaleon family that the entire tour group was waiting for them. As it was already 9:40 a.m., and he was
The ruling that is more in point is that laid down in The Consolidated Bank and Trust Corporation v. Court of already worried about further inconveniencing the tour group, Pantaleon asked the store clerk to cancel the
Appeals,47 a case cited in New Sampaguita. The Consolidated Bank ruling declared valid the penalty charges sale. The store manager though asked plaintiff to wait a few more minutes. After 15 minutes, the store
that were stipulated in the promissory notes.48 What the Court disallowed in that case was the collection of a manager informed Pantaleon that respondent had demanded bank references. Pantaleon supplied the names
handling charge that the promissory notes did not contain.  of his depositary banks, then instructed his daughter to return to the bus and apologize to the tour group for
The Court has affirmed that financial charges are amply disclosed if stated in the promissory note in the case the delay. 
of Development Bank of the Philippines v. Arcilla, Jr. 49 The Court there said, "Under Circular 158 of the At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his AmexCard, and 30 minutes
Central Bank, the lender is required to include the information required by R.A. 3765 in the contract covering after the tour group was supposed to have left the store, Coster decided to release the items even without
the credit transaction or any other document to be acknowledged and signed by the borrower. In addition, the respondent’s approval of the purchase. The spouses Pantaleon returned to the bus. It is alleged that their
contract or document shall specify additional charges, if any, which will be collected in case certain offers of apology were met by their tourmates with stony silence. 4 The tour group’s visible irritation was
stipulations in the contract are not met by the debtor." In this case, the promissory notes signed by the Yus aggravated when the tour guide announced that the city tour of Amsterdam was to be canceled due to lack of

13
remaining time, as they had to catch a 3:00 p.m. ferry at Calais, Belgium to London. 5 Mrs. Pantaleon ended up extrajudicially requires the debtor’s performance. 18 Petitioner asserts that the Court of Appeals had wrongly
weeping, while her husband had to take a tranquilizer to calm his nerves.  applied the principle of mora accipiendi, which relates to delay on the part of the obligee in accepting the
It later emerged that Pantaleon’s purchase was first transmitted for approval to respondent’s Amsterdam office performance of the obligation by the obligor. The requisites of mora accipiendi are: an offer of performance by
at 9:20 a.m., Amsterdam time, then referred to respondent’s Manila office at 9:33 a.m, then finally approved at the debtor who has the required capacity; the offer must be to comply with the prestation as it should be
10:19 a.m., Amsterdam time.6 The Approval Code was transmitted to respondent’s Amsterdam office at 10:38 performed; and the creditor refuses the performance without just cause.19 The error of the appellate court,
a.m., several minutes after petitioner had already left Coster, and 78 minutes from the time the purchases argues petitioner, is in relying on the invocation by respondent of "just cause" for the delay, since while just
were electronically transmitted by the jewelry store to respondent’s Amsterdam office.  cause is determinative of mora accipiendi, it is not so with the case of mora solvendi. 
After the star-crossed tour had ended, the Pantaleon family proceeded to the United States before returning to We can see the possible source of confusion as to which type of mora to appreciate. Generally, the
Manila on 12 November 1992. While in the United States, Pantaleon continued to use his AmEx card, several relationship between a credit card provider and its card holders is that of creditor-debtor, 20 with the card
times without hassle or delay, but with two other incidents similar to the Amsterdam brouhaha. On 30 October company as the creditor extending loans and credit to the card holder, who as debtor is obliged to repay the
1991, Pantaleon purchased golf equipment amounting to US $1,475.00 using his AmEx card, but he cancelled creditor. This relationship already takes exception to the general rule that as between a bank and its
his credit card purchase and borrowed money instead from a friend, after more than 30 minutes had depositors, the bank is deemed as the debtor while the depositor is considered as the creditor. 21 Petitioner is
transpired without the purchase having been approved. On 3 November 1991, Pantaleon used the card to asking us, not baselessly, to again shift perspectives and again see the credit card company as the
purchase children’s shoes worth $87.00 at a store in Boston, and it took 20 minutes before this transaction debtor/obligor, insofar as it has the obligation to the customer as creditor/obligee to act promptly on its
was approved by respondent.  purchases on credit. 
On 4 March 1992, after coming back to Manila, Pantaleon sent a letter 7 through counsel to the respondent, Ultimately, petitioner’s perspective appears more sensible than if we were to still regard respondent as the
demanding an apology for the "inconvenience, humiliation and embarrassment he and his family thereby creditor in the context of this cause of action. If there was delay on the part of respondent in its normal role as
suffered" for respondent’s refusal to provide credit authorization for the aforementioned purchases. 8 In creditor to the cardholder, such delay would not have been in the acceptance of the performance of the
response, respondent sent a letter dated 24 March 1992, 9 stating among others that the delay in authorizing debtor’s obligation (i.e., the repayment of the debt), but it would be delay in the extension of the credit in the
the purchase from Coster was attributable to the circumstance that the charged purchase of US $13,826.00 first place. Such delay would not fall under mora accipiendi, which contemplates that the obligation of the
"was out of the usual charge purchase pattern established."10 Since respondent refused to accede to debtor, such as the actual purchases on credit, has already been constituted. Herein, the establishment of the
Pantaleon’s demand for an apology, the aggrieved cardholder instituted an action for damages with the debt itself (purchases on credit of the jewelry) had not yet been perfected, as it remained pending the approval
Regional Trial Court (RTC) of Makati City, Branch 145.11 Pantaleon prayed that he be awarded or consent of the respondent credit card company. 
₱2,000,000.00, as moral damages; ₱500,000.00, as exemplary damages; ₱100,000.00, as attorney’s fees; Still, in order for us to appreciate that respondent was in mora solvendi, we will have to first recognize that
and ₱50,000.00 as litigation expenses.12 there was indeed an obligation on the part of respondent to act on petitioner’s purchases with "timely
On 5 August 1996, the Makati City RTC rendered a decision 13 in favor of Pantaleon, awarding him dispatch," or for the purposes of this case, within a period significantly less than the one hour it apparently
₱500,000.00 as moral damages, ₱300,000.00 as exemplary damages, ₱100,000.00 as attorney’s fees, and took before the purchase at Coster was finally approved.
₱85,233.01 as expenses of litigation. Respondent filed a Notice of Appeal, while Pantaleon moved for partial The findings of the trial court, to our mind, amply established that the tardiness on the part of respondent in
reconsideration, praying that the trial court award the increased amount of moral and exemplary damages he acting on petitioner’s purchase at Coster did constitute culpable delay on its part in complying with its
had prayed for.14 The RTC denied Pantaleon’s motion for partial reconsideration, and thereafter gave due obligation to act promptly on its customer’s purchase request, whether such action be favorable or
course to respondent’s Notice of Appeal.15 unfavorable. We quote the trial court, thus: 
On 18 August 2006, the Court of Appeals rendered a decision16 reversing the award of damages in favor of As to the first issue, both parties have testified that normal approval time for purchases was a matter of
Pantaleon, holding that respondent had not breached its obligations to petitioner. Hence, this petition.  seconds.
The key question is whether respondent, in connection with the aforementioned transactions, had committed a Plaintiff testified that his personal experience with the use of the card was that except for the three charge
breach of its obligations to Pantaleon. In addition, Pantaleon submits that even assuming that respondent had purchases subject of this case, approvals of his charge purchases were always obtained in a matter of
not been in breach of its obligations, it still remained liable for damages under Article 21 of the Civil Code.  seconds.
The RTC had concluded, based on the testimonial representations of Pantaleon and respondent’s credit Defendant’s credit authorizer Edgardo Jaurique likewise testified:
authorizer, Edgardo Jaurigue, that the normal approval time for purchases was "a matter of seconds." Based Q. – You also testified that on normal occasions, the normal approval time for charges would be 3 to
on that standard, respondent had been in clear delay with respect to the three subject transactions. As it 4 seconds?
appears, the Court of Appeals conceded that there had been delay on the part of respondent in approving the A. – Yes, Ma’am.
purchases. However, it made two critical conclusions in favor of respondent. First, the appellate court ruled Both parties likewise presented evidence that the processing and approval of plaintiff’s charge purchase at the
that the delay was not attended by bad faith, malice, or gross negligence. Second, it ruled that respondent Coster Diamond House was way beyond the normal approval time of a "matter of seconds". 
"had exercised diligent efforts to effect the approval" of the purchases, which were "not in accordance with the Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at 9:15 a.m. and by the time he
charge pattern" petitioner had established for himself, as exemplified by the fact that at Coster, he was had to leave the store at 10:05 a.m., no approval had yet been received. In fact, the Credit Authorization
"making his very first single charge purchase of US$13,826," and "the record of [petitioner]’s past spending System (CAS) record of defendant at Phoenix Amex shows that defendant’s Amsterdam office received the
with [respondent] at the time does not favorably support his ability to pay for such purchase."17 request to approve plaintiff’s charge purchase at 9:20 a.m., Amsterdam time or 01:20, Phoenix time, and that
On the premise that there was an obligation on the part of respondent "to approve or disapprove with dispatch the defendant relayed its approval to Coster at 10:38 a.m., Amsterdam time, or 2:38, Phoenix time, or a total
the charge purchase," petitioner argues that the failure to timely approve or disapprove the purchase time lapse of one hour and [18] minutes. And even then, the approval was conditional as it directed in
constituted mora solvendi on the part of respondent in the performance of its obligation. For its part, computerese [sic] "Positive Identification of Card holder necessary further charges require bank information
respondent characterizes the depiction by petitioner of its obligation to him as "to approve purchases due to high exposure. By Jack Manila."
instantaneously or in a matter of seconds."  The delay in the processing is apparent to be undue as shown from the frantic successive queries of Amexco
Petitioner correctly cites that under mora solvendi, the three requisites for a finding of default are that the Amsterdam which reads: "US$13,826. Cardmember buying jewels. ID seen. Advise how long will this take?"
obligation is demandable and liquidated; the debtor delays performance; and the creditor judicially or They were sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08, all times Phoenix. Manila Amexco could be
14
unaware of the need for speed in resolving the charge purchase referred to it, yet it sat on its hand,
unconcerned.
xxx
To repeat, the Credit Authorization System (CAS) record on the Amsterdam transaction shows how Amexco
Netherlands viewed the delay as unusually frustrating. In sequence expressed in Phoenix time from 01:20
when the charge purchased was referred for authorization, defendants own record shows:
01:22 – the authorization is referred to Manila Amexco
01:32 – Netherlands gives information that the identification of the cardmember has been presented
and he is buying jewelries worth US $13,826.
01:33 – Netherlands asks "How long will this take?"
02:08 – Netherlands is still asking "How long will this take?"
The Court is convinced that defendants delay constitute[s] breach of its contractual obligation to act on his use
of the card abroad "with special handling."22 (Citations omitted)
xxx
Notwithstanding the popular notion that credit card purchases are approved "within seconds," there really is
no strict, legally determinative point of demarcation on how long must it take for a credit card company to
approve or disapprove a customer’s purchase, much less one specifically contracted upon by the parties. Yet
this is one of those instances when "you’d know it when you’d see it," and one hour appears to be an awfully
long, patently unreasonable length of time to approve or disapprove a credit card purchase. It is long enough
time for the customer to walk to a bank a kilometer away, withdraw money over the counter, and return to the
store.  determining what would be a fair and reasonable amount of moral damages, since each case must be
Notably, petitioner frames the obligation of respondent as "to approve or disapprove" the purchase "in timely
dispatch," and not "to approve the purchase instantaneously or within seconds." Certainly, had respondent
disapproved petitioner’s purchase "within seconds" or within a timely manner, this particular action would have
never seen the light of day. Petitioner and his family would have returned to the bus without delay – internally
humiliated perhaps over the rejection of his card – yet spared the shame of being held accountable by newly-
made friends for making them miss the chance to tour the city of Amsterdam.  appropriate. There is similarly no cause though to disturb the determined award of ₱100,000.00 as attorney’s
We do not wish do dispute that respondent has the right, if not the obligation, to verify whether the credit it is
extending upon on a particular purchase was indeed contracted by the cardholder, and that the cardholder is
within his means to make such transaction. The culpable failure of respondent herein is not the failure to
timely approve petitioner’s purchase, but the more elemental failure to timely act on the same, whether
favorably or unfavorably. Even assuming that respondent’s credit authorizers did not have sufficient basis on
hand to make a judgment, we see no reason why respondent could not have promptly informed petitioner the
reason for the delay, and duly advised him that resolving the same could take some time. In that way,
petitioner would have had informed basis on whether or not to pursue the transaction at Coster, given the
attending circumstances. Instead, petitioner was left uncomfortably dangling in the chilly autumn winds in a
foreign land and soon forced to confront the wrath of foreign folk.  G.R. No. 183360               September 8, 2014
Moral damages avail in cases of breach of contract where the defendant acted fraudulently or in bad faith, and
the court should find that under the circumstances, such damages are due. The findings of the trial court are
ample in establishing the bad faith and unjustified neglect of respondent, attributable in particular to the "dilly-
dallying" of respondent’s Manila credit authorizer, Edgardo Jaurique.23 Wrote the trial court:
While it is true that the Cardmembership Agreement, which defendant prepared, is silent as to the amount of
time it should take defendant to grant authorization for a charge purchase, defendant acknowledged that the
normal time for approval should only be three to four seconds. Specially so with cards used abroad which
requires "special handling", meaning with priority. Otherwise, the object of credit or charge cards would be
lost; it would be so inconvenient to use that buyers and consumers would be better off carrying bundles of
currency or traveller’s checks, which can be delivered and accepted quickly. Such right was not accorded to
plaintiff in the instances complained off for reasons known only to defendant at that time. This, to the Court’s
mind, amounts to a wanton and deliberate refusal to comply with its contractual obligations, or at least abuse
of its rights, under the contract.24
xxx
The delay committed by defendant was clearly attended by unjustified neglect and bad faith, since it alleges to
have consumed more than one hour to simply go over plaintiff’s past credit history with defendant, his
15
payment record and his credit and bank references, when all such data are already stored and readily
available from its computer. This Court also takes note of the fact that there is nothing in plaintiff’s billing
history that would warrant the imprudent suspension of action by defendant in processing the purchase.
Defendant’s witness Jaurique admits:
Q. – But did you discover that he did not have any outstanding account?
A. – Nothing in arrears at that time.
Q. – You were well aware of this fact on this very date?
A. – Yes, sir.
Mr. Jaurique further testified that there were no "delinquencies" in plaintiff’s account.25
It should be emphasized that the reason why petitioner is entitled to damages is not simply because
respondent incurred delay, but because the delay, for which culpability lies under Article 1170, led to the
particular injuries under Article 2217 of the Civil Code for which moral damages are remunerative. 26 Moral
damages do not avail to soothe the plaints of the simply impatient, so this decision should not be cause for
relief for those who time the length of their credit card transactions with a stopwatch. The somewhat unusual
attending circumstances to the purchase at Coster – that there was a deadline for the completion of that
purchase by petitioner before any delay would redound to the injury of his several traveling companions –
gave rise to the moral shock, mental anguish, serious anxiety, wounded feelings and social humiliation
sustained by the petitioner, as concluded by the RTC.27 Those circumstances are fairly unusual, and should
not give rise to a general entitlement for damages under a more mundane set of facts. 
We sustain the amount of moral damages awarded to petitioner by the RTC. There is no hard-and-fast rule in
governed by its own peculiar facts, however, it must be commensurate to the loss or injury
suffered.28 Petitioner’s original prayer for ₱5,000,000.00 for moral damages is excessive under the
circumstances, and the amount awarded by the trial court of ₱500,000.00 in moral damages more
seemly.1avvphi1
Likewise, we deem exemplary damages available under the circumstances, and the amount of ₱300,000.00
fees, and ₱85,233.01 as expenses of litigation.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is REVERSED and
SET ASIDE. The Decision of the Regional Trial Court of Makati, Branch 145 in Civil Case No. 92-1665 is
hereby REINSTATED. Costs against respondent.
SO ORDERED.
INTEREST AND USURY
ROLANDO C. DE LA PAZ,* Petitioner, 
vs.
L & J DEVELOPMENT COMPANY, Respondent.
"No interest shall be due unless it has been expressly stipulated in writing."1
This is a Petition for Review on Certiorari 2 assailing the February 27, 2008 Decision3 of the Court of Appeals
(CA) in CA-G.R. SP No. 100094, which reversed and set aside the Decision4 dated April 19, 2007 of the
Regional Trial Court (RTC), Branch 192, Marikina City in Civil Case No. 06-1145-MK. The said RTC Decision
affirmed in all respects the Decision5 dated June 30, 2006 of the Metropolitan Trial Court (MeTC), Branch 75,
Marikina City in Civil Case No. 05-7755, which ordered respondent L & J Development Company (L&J) to pay
petitioner Architect Rolando C. De La Paz (Rolando) its principal obligation of ₱350,000.00, plus 12% interest
per annumreckoned from the filing of the Complaint until full payment of the obligation.
Likewise assailed is the CA’s June 6, 2008 Resolution6 which denied Rolando’s Motion for Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent ₱350,000.00 without any security to L&J, a property developer with Atty.
Esteban Salonga (Atty. Salonga) as its President and General Manager. The loan, with no specified maturity
date, carried a 6% monthly interest, i.e., ₱21,000.00. From December 2000 to August 2003, L&J paid Rolando
a total of ₱576,000.007 representing interest charges.
As L&J failed to pay despite repeated demands, Rolando filed a Complaint8 for Collection of Sum of Money
with Damages against L&J and Atty. Salonga in his personal capacity before the MeTC, docketed as Civil
Case No. 05-7755. Rolando alleged, amongothers, that L&J’s debtas of January 2005, inclusive of the
monthly interest, stood at ₱772,000.00; that the 6% monthly interest was upon Atty. Salonga’s suggestion;
and, that the latter tricked him into parting with his money without the loan transaction being reduced into
writing.
In their Answer,9 L&J and Atty. Salonga denied Rolando’s allegations. While they acknowledged the loan as a
corporate debt, they claimed that the failure to pay the same was due to a fortuitous event, that is, the
financial difficulties brought about by the economic crisis. They further argued that Rolando cannot enforce the
6% monthly interest for being unconscionable and shocking to the morals. Hence, the payments already made
should be applied to the ₱350,000.00 principal loan.
During trial, Rolando testified that he had no communication with Atty. Salonga prior to the loan transaction
but knew him as a lawyer, a son of a former Senator, and the owner of L&J which developed Brentwood
Subdivision in Antipolo where his associate Nilo Velasco (Nilo) lives. When Nilo told him that Atty. Salonga
and L&J needed money to finish their projects, heagreed to lend them money. He personally met withAtty.
Salonga and their meeting was cordial.
He narrated that when L&J was in the process of borrowing the ₱350,000.00 from him, it was Arlene San
Juan (Arlene), the secretary/treasurer of L&J, who negotiated the terms and conditions thereof.She said that
the money was to finance L&J’s housing project. Rolando claimed that it was not he who demanded for the
6% monthly interest. It was L&J and Atty. Salonga, through Arlene, who insisted on paying the said interest as
they asserted that the loan was only a short-term one.
Ruling of the Metropolitan Trial Court
The MeTC, in its Decision10 of June 30, 2006, upheld the 6% monthly interest. In so ruling, it ratiocinated that
since L&J agreed thereto and voluntarily paid the interest at suchrate from 2000 to 2003, it isalready estopped
from impugning the same. Nonetheless, for reasons of equity, the saidcourt reduced the interest rate to 12%
per annumon the remaining principal obligation of ₱350,000.00. With regard to Rolando’s prayer for moral
damages, the MeTC denied the same as it found no malice or bad faith on the part ofL&J in not paying the
obligation. It likewise relieved Atty. Salonga of any liability as it found that he merely acted in his official
capacity in obtaining the loan. The MeTC disposed of the case as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff, Arch. Rolando C.
Dela Paz, and against the defendant, L & J Development Co., Inc., as follows:
a) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Three Hundred
Fifty Thousand Pesos (₱350,000.00) representing the principal obligation, plus interest at the legal
rate of 12% per annum to be computed from January 20, 2005, the date of the filing of the complaint,
until the whole obligation is fully paid;
b) ordering the defendant L & J Development Co., Inc. to pay plaintiff the amount of Five Thousand
Pesos (₱5,000.00) as and for attorney’s fees; and
c) to pay the costs of this suit.
SO ORDERED.11
Ruling of the Regional Trial Court
L&J appealed to the RTC. It asserted in its appeal memorandum 12 that from December 2000 to March 2003, it
paid monthly interest of ₱21,000.00 based on the agreed-upon interest rate of 6%monthly and from April 2003
to August 2003, interest paymentsin various amounts. 13 The total of interest payments made amounts to
₱576,000.00 – an amount which is even more than the principal obligation of ₱350,000.00
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. Hence, the 12% per
annumlegal interest should have been applied from the time of the constitution of the obligation. At 12% per
annum interest rate, it asserted that the amount of interestit ought to pay from December 2000 to March 2003
and from April 2003 to August 2003, only amounts to ₱105,000.00. If this amount is deducted from the total
interest paymentsalready made, which is ₱576,000.00, the amount of ₱471,000.00 appears to have beenpaid
over and above what is due. Applying the rule on compensation, the principal loan of ₱350,000.00 should be
set-off against the ₱471,000.00, resulting in the complete payment of the principal loan.
16
Unconvinced, the RTC, inits April 19, 2007 Decision, 14 affirmed the MeTC Decision, viz: WHEREFORE,
premises considered, the Decision appealed from is hereby AFFIRMED in all respects, with costs against the
appellant.
SO ORDERED.15
Ruling of the Court of Appeals
Undaunted, L&J went to the CA and echoed its arguments and proposed computation as proffered before the
RTC.
In a Decision16 dated February 27, 2008, the CAreversed and set aside the RTC Decision. The CA stressed
that the parties failedto stipulate in writing the imposition of interest on the loan. Hence, no interest shall be
due thereon pursuant to Article 1956 of the Civil Code.17 And even if payment of interest has been stipulated
in writing, the 6% monthly interest is still outrightly illegal and unconscionable because it is contrary to morals,
if not against the law. Being void, this cannot be ratified and may be set up by the debtor as defense. For
these reasons, Rolando cannot collect any interest even if L&J offered to pay interest. Consequently, he has
to return all the interest payments of ₱576,000.00 to L&J.
Considering further that Rolando and L&J thereby became creditor and debtor of each other, the CA applied
the principle of legal compensation under Article 1279 of the Civil Code. 18 Accordingly, it set off the principal
loan of ₱350,000.00 against the ₱576,000.00 total interest payments made, leaving an excess of
₱226,000.00, which the CA ordered Rolando to pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is REVERSED and SET ASIDE.
CONSEQUENT TO THE FOREGOING, respondent Rolando C. Dela Paz is ordered to pay to the petitioner
the amount of ₱226,000.00,plus interest of 12% per annumfrom the finality of this decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED.19
In his Motion for Reconsideration, 20 Rolando argued thatthe circumstances exempt both the application of
Article 1956 and of jurisprudence holding that a 6% monthly interest is unconscionable, unreasonable, and
exorbitant. He alleged that Atty. Salonga, a lawyer, should have taken it upon himself to have the loan and the
stipulated rate of interest documented but, by way of legal maneuver, Atty. Salonga, whom he fully trusted and
relied upon, tricked him into believing that the undocumented and uncollateralized loan was withinlegal
bounds. Had Atty. Salonga told him that the stipulated interest should be in writing, he would have readily
assented. Furthermore, Rolando insisted that the 6% monthly interest ratecould not be unconscionable as in
the first place, the interest was not imposed by the creditor but was in fact offered by the borrower, who also
dictated all the terms of the loan. He stressed that in cases where interest rates were declared
unconscionable, those meant to be protected by such declaration are helpless borrowers which is not the
case here.
Still, the CA denied Rolando’s motion in its Resolution21 of June 6, 2008.
Hence, this Petition.
The Parties’ Arguments
Rolando argues that the 6%monthly interest rateshould not have been invalidated because Atty. Salonga took
advantage of his legal knowledge to hoodwink him into believing that no document was necessaryto reflect
the interest rate. Moreover, the cases anent unconscionable interest rates that the CA relied upon involve
lenders who imposed the excessive rates,which are totally different from the case at bench where it is the
borrower who decided on the high interest rate. This case does not fall under a scenariothat ‘enslaves the
borrower or that leads to the hemorrhaging of his assets’ that the courts seek to prevent.
L&J, in controverting Rolando’s arguments, contends that the interest rate is subject of negotiation and is
agreedupon by both parties, not by the borrower alone. Furthermore, jurisprudence has nullified interestrates
on loans of 3% per month and higher as these rates are contrary to moralsand public interest. And while
Rolando raises bad faithon Atty. Salonga’s part, L&J avers thatsuch issue is a question of fact, a matter that
cannot be raised under Rule 45.
Issue
The Court’s determination of whether to uphold the judgment of the CA that the principal loan is deemed paid
isdependent on the validity of the monthly interest rate imposed. And in determining such validity, the Court
must necessarily delve into matters regarding a) the form of the agreement of interest under the law and b)
the alleged unconscionability of the interest rate. Our Ruling
The Petition is devoid of merit. interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to
The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from charging a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of
monetary interest. man."33 Indeed, "voluntariness does notmake the stipulation on [an unconscionable] interest valid."34
Under Article 1956 of the Civil Code, no interest shall bedue unless it has been expressly stipulated in writing. As exhaustibly discussed,no monetary interest isdue Rolando pursuant to Article 1956.1âwphi1 The CA thus
Jurisprudence on the matter also holds that for interest to be due and payable, two conditions must concur: a) correctly adjudged that the excess interest payments made by L&J should be applied to its principal loan. As
express stipulation for the payment of interest; and b) the agreement to pay interest is reduced in writing. computed by the CA, Rolando is bound to return the excess payment of ₱226,000.00 to L&J following the
Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is due. The principle of solutio indebiti.35
collection of interest without any stipulation in writing is prohibited by law.22 However, pursuant to Central Bank Circular No. 799 s. 2013 which took effect on July 1, 2013,36 the interest
But Rolando asserts that his situation deserves an exception to the application of Article 1956. He blames imposed by the CA must be accordingly modified. The ₱226,000.00 which Rolando is ordered to pay L&J
Atty. Salonga for the lack of a written document, claiming that said lawyer used his legal knowledge to dupe shall earn an interest of 6% per annumfrom the finality of this Decision.
him. Rolando thus imputes bad faith on the part of L&J and Atty. Salonga. The Court, however, finds no WHEREFORE, the Decision dated February 27, 2008 of the Court of Appeals in CA-G.R. SP No. 100094 is
deception on the partof L&J and Atty. Salonga. For one, despite the lack of a document stipulating the hereby AFFIRMED with modification that petitioner Rolando C. De La Paz is ordered to pay respondent L&J
payment of interest, L&J nevertheless devotedly paid interests on the loan. It only stopped when it suffered Development Company the amount of ,₱226,000.00, plus interest of 6o/o per annum from the finality of this
from financial difficulties that prevented it from continuously paying the 6% monthly rate. For Decision until fully paid.
another,regardless of Atty. Salonga’s profession, Rolando who is an architect and an educated man himself SO ORDERED.
could have been a more reasonably prudent person under the circumstances. To top it all, he admitted that he
had no prior communication with Atty. Salonga. Despite Atty. Salonga being a complete stranger, he
immediately trusted him and lent his company ₱350,000.00, a significant amount. Moreover, as the creditor,he
could have requested or required that all the terms and conditions of the loan agreement, which include the
payment of interest, be put down in writing to ensure that he and L&J are on the same page. Rolando had a
choice of not acceding and to insist that their contract be put in written form as this will favor and safeguard
him as a lender. Unfortunately, he did not. It must be stressed that "[c]ourts cannot follow one every step of
his life and extricate him from bad bargains, protect him from unwise investments, relieve him from one-sided
contracts,or annul the effects of foolish acts. Courts cannotconstitute themselves guardians of persons who
are not legally incompetent."23
It may be raised that L&J is estopped from questioning the interest rate considering that it has been paying
Rolando interest at such ratefor more than two and a half years. In fact, in its pleadings before the MeTCand
the RTC, L&J merely prayed for the reduction of interest from 6% monthly to 1% monthly or 12% per annum.
However, in Ching v. Nicdao,24 the daily payments of the debtor to the lender were considered as payment of
the principal amount of the loan because Article 1956 was not complied with. This was notwithstanding the
debtor’s admission that the payments made were for the interests due. The Court categorically stated therein
that "[e]stoppel cannot give validity to an act that is prohibited by law or one thatis against public policy."
Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is
unconscionable, regardless of who between the parties proposed the rate.
Indeed at present, usury has been legally non-existent in view of the suspension of the Usury Law 25 by Central
Bank Circular No. 905 s. 1982.26 Even so, not all interest rates levied upon loans are permitted by the courts
as they have the power to equitably reduce unreasonable interest rates. In Trade & Investment Development
Corporation of the Philippines v. Roblett Industrial Construction Corporation,27 we said:
While the Court recognizes the right of the parties to enter into contracts and who are expectedto comply with
their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if they are
unconscionable and the Court is allowed to temper interest rates when necessary. In exercising this vested
power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each
case. What may be iniquitous and unconscionable in onecase, may be just in another. x x x28
Time and again, it has been ruled in a plethora of cases that stipulated interest rates of 3% per month and
higher, are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary
to morals, if not against the law. 29 The Court, however, stresses that these rates shall be invalidated and shall
be reduced only in cases where the terms of the loans are open-ended, and where the interest rates are
applied for an indefinite period. Hence, the imposition of a specific sum of ₱40,000.00 a month for six months
on a ₱1,000,000.00 loan is not considered unconscionable.30
In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6% monthly or
72% interest per annumis "definitely outrageous and inordinate."31 The situation that it was the debtor who
insisted on the interest rate will not exempt Rolando from a ruling that the rate is void. As this Court cited in
Asian Cathay Finance and Leasing Corporation v. Gravador, 32 "[t]he imposition of an unconscionable rate of
17
G.R. No. L-47878             July 24, 1942
GIL JARDENIL, plaintiff-appellant,  per cent per annum should be paid up to the date of payment of the whole indebtedness is made. Payment of
vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.
Jose C. Robles for appellee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee
bound to pay the stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the
date payment is effected? This question is, in our opinion controlled by the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS
(P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en o
antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con los intereses de
dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia de su
vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por la
presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil,
sus herederos y causahabientes, la parcela de terreno descrita en el parrafo primero (1.º) de esta
escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until March
31, 1934. As the contract is silent as to whether after that date, in the event of non-payment, the debtor would
continue to pay interest, we cannot in law, indulge in any presumption as to such interest; otherwise, we would
be imposing upon the debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the
Civil Code provides that "interest shall be due only when it has been expressly stipulated." (Emphasis
supplied.)
A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190, now
section 58, Rule 123), and only when the wording of the written instrument appears to be contrary to the
evident intention of the parties that such intention must prevail. (Article 1281, Civil Code.) There is nothing in
the mortgage deed to show that the terms employed by the parties thereto are at war with their evident intent.
On the contrary the act of the mortgage of granting to the mortgagor on the same date of execution of the
deed of mortgage, an extension of one year from the date of maturity within which to make payment, without
making any mention of any interest which the mortgagor should pay during the additional period (see Exhibit B
attached to the complaint), indicates that the true intention of the parties was that no interest should be paid
during the period of grace. What reason the parties may have therefor, we need not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to express their
agreement, for if such mistake existed, plaintiff would have undoubtedly adduced evidence to establish it and
asked that the deed be reformed accordingly, under the parcel-evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed therein have not
been shown to belie or otherwise fail to express the true intention of the parties and that the deed has not
been assailed on the ground of mutual mistake which would require its reformation, same should be given its
full force and effect. When a party sues on a written contract and no attempt is made to show any vice therein,
he cannot be allowed to lay any claim more than what its clear stipulations accord. His omission, to which the
law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by what
their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from
November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been made which
we may assume to have been so made on the expiration of the year of grace, he shall be entitled to legal
interest upon the principal and the accrued interest from April 1, 1935, until full payment.
Thus modified judgment is affirmed, with costs against appellant.
Separate Opinions
PARAS, J., dissenting:
18
Under the facts stated in the decision of the majority, I come to the conclusion that interest at the rate of 12
such interest is expressly stipulated. True, it is stated in the mortgage contract that interest was to be paid up
to March 31, 1934, but this date was inserted merely because it was the date of maturity. The extension note
is silent as regards interest, but its payment is clearly implied from the nature of the transaction which is only a
renewal of the obligation. In my opinion, the ruling of the majority is anomalous and at war with common
practice and everyday business usage.
[G.R. No. 32644. October 4, 1930.]
CU UNJIENG E HIJOS, Plaintiff-Appellee, v. THE MABALACAT SUGAR CO., ET AL., Defendants. THE
MABALACAT SUGAR CO., Appellant. 
SYLLABUS
1. INTEREST; COMPOUND INTEREST; STIPULATION FOR PAYMENT OF INTEREST AT STATED
INTERVALS DURING YEAR. — A stipulation to the effect that interest shall be at the rate of 12 per centum
per annum payable at the end of each month upon the unpaid capital of the loan, does not authorize the
compounding of interest payments at intervals of one month. 
2. USURY; INTEREST IN EXCESS OF LEGAL RATE; VOLUNTARY PAYMENT NOT BINDING ON
DEBTOR. — Where interest is charged at an unlawful rate, in excess of the limit allowed by the Usury Law,
the mere voluntary payment of it to the creditor by the debtor is not binding. 
This action was instituted in the Court of First Instance of Pampanga by Cu Unjieng e Hijos, for the purpose of
recovering from the Mabalacat Sugar Company an indebtedness amounting to more than P163,000, with
interest, and to foreclose a mortgage given by the debtor to secure the same, as well as to recover stipulated
attorney’s fee and the sum of P1,206, paid by the plaintiff for insurance upon the mortgaged property, with
incidental relief. In the complaint Siuliong & Co., Inc., was joined as defendant, as a surety of the Mabalacat
Sugar Company, and as having a third mortgage on the mortgaged property. The Philippine National Bank
was also joined by reason of its interest as second mortgagee of the land covered by the mortgage to the
plaintiff. After the cause had been brought to issue by the answers of the several defendants, the cause was
heard and judgment rendered, the dispositive portion of the decision being as follows:jgc:chanrobles.com.ph
"Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar Company a pagar la
demandante la suma de P163,534.73, con sus intereses de 12 por ciento al año, compuestos mensualmente
desde el 1. ° de mayo de 1929. Tambien se le condena a pagar a dicha demandante la suma de P2,412 por
las primas de seguros abonadas por esta, con sus intereses de 12 por ciento al año, compuestos tambien
mensualmente desde el 15 de mayo de 1928, mas la de P7,500 por honorarios de abogados y las costas del
juicio. Y si esta deuda no se pagare dentro del plazo de tres meses, se ejecutaran los bienes hipotecados de
acuerdo con la ley. 
"Si del producto de la venta hubiese algun remanente, este, se destinara al pago del credito del Banco
Nacional, o sea de P32,704.69, con sus intereses de 9 por ciento al año desde el 7 de junio de 1929, sin
perjuicio de la orden de ejecucion que pudiera expedirse en el asunto No. 26435 del Juzgado de Primera
Instancia de Manila. 
"Se condena ademas a The Mabalacat Sugar Company al pago de la suma de P3,205.78 reclamada por
Siuliong & Co., con sus intereses de 9 por ciento al año desde el 29 de julio de 1926 hasta su completo pago,
ordenandola que rinda cuentas del azucar por ella producido y pague la comision correspondeniente bajo la
base de 5 por ciento de su valor, descontandose, desde luego, las cantidades ya pagadas. 
"Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc."cralaw virtua1aw library
 condition. But the chief thing is that interest cannot be thus accumulated on unpaid interest accruing upon the
From this judgment the defendant, the Mabalacat Sugar Company, appealed.  capital of the debt. 

The first point assigned as error has relation to the question whether the action was prematurely started. In The trial court was of the opinion that interest could be so charged, because of the Exhibit 1 of the Mabalacat
this connection we note that the mortgage executed by the Mabalacat Sugar Company contains, in paragraph Sugar Company, which the court considered as an interpretation by the parties to the contract and a
5, a provision to the effect that non-compliance on the part of the mortgage debtor with any of the obligations recognition by the debtor of the propriety of compounding the interest earned by the capital. But the exhibit
assumed in virtue of this contract will cause the entire debt to become due and give occasion for the referred to is merely a receipt showing that the sum of P256.28 was, on March 19, 1928, paid by the debtor to
foreclosure of the mortgage. The debtor party failed to comply with the obligation, imposed upon it in the the plaintiff as interest upon interest. But where interest is improperly charged, at an unlawful rate, the mere
mortgage, to pay the mortgage debt in the stipulated instalments at the time specified in the contract. It results voluntary payment of it to the creditor by the debtor is not binding. Such payment, in the case before us, was
that the creditor was justified in treating the entire mortgage debt as having been accelerated by such failure usurious, being in excess of 12 per cent which is allowed to be charged, under section 2 of the Usury Law,
of the debtor in paying the instalments.  when a debt is secured by mortgage upon real property. The Exhibit 1 therefore adds no support to the
contention of the plaintiff that interest upon interest can be accumulated in the manner adopted by the creditor
It appears, however, that on or about October 20, 1928, the mortgage creditor, Cu Unjieng e Hijos, agreed to in this case. The point here ruled is in exact conformity with the decision of this court in Bachrach Garage and
extend the time for payment of the mortgage indebtedness until June 30, 1929, with certain interim payments Taxicab Co. v. Golingco (39 Phil., 912), where this court held that interest cannot be allowed in the absence of
to be made upon specified dates prior to the contemplated final liquidation of the whole indebtedness. But the stipulation, or in default thereof, except when the debt is judicially claimed; and when the debt is judicially
debtor party failed to make the interim payments due on February 25, 1929, March 25, 1929, and April 25, claimed, the interest upon the interest can only be computed at the rate of 6 per cent per annum. 
1929, and failed altogether to pay the balance due, according to the terms of this extension, on June 30, 1929.
Notwithstanding the failure of the debtor to comply with the terms of this extension, it is insisted for the It results that the appellant’s second assignment of error is well taken, and the compound interest must be
appellant that this agreement for the extension of the time of payment had the effect of abrogating the eliminated from the judgment. With respect to the amount improperly charged, we accept the estimate
stipulation of the original contract with respect to the acceleration of the maturity of the debt by non- submitted by the president and manager of the Mabalacat Sugar Company, who says that the amount
compliance with the terms of the mortgage. As the trial court pointed out, this contention is untenable. The improperly included in the computation made by the plaintiff’s bookkeeper is P879.84, in addition to the
agreement to extend the time of payment was voluntary and without consideration so far as the creditor is amount of P256.28 covered by Exhibit 1 of the Mabalacat Sugar Company. But the plaintiff creditor had the
concerned; and the failure of the debtor to comply with the terms of the extension justified the creditor in right to charge interest, in the manner adopted by it, upon insurance premiums which it had paid out; and if
treating it as of no effect. The first error is therefore without merit.  any discrepancy of importance is discoverable by the plaintiff in the result here reached, it will be at liberty to
submit a revised computation in this court, upon motion for reconsideration, wherein interest shall be
The second error is directed to the propriety of the interest charges made by the plaintiff in estimating the computed in accordance with this opinion, that is to say, that no accumulation of interest will be permitted at
amount of the indebtedness. In this connection we note that, under the second clause of the mortgage, monthly intervals, as regards the capital of the debt, but such unpaid interest shall draw interest at the rate of
interest should be calculated upon the indebtedness at the rate of 12 per cent per annum. In the same clause, 6 per cent from the date of the institution of the action. 
but in a separate paragraph, there is another provision with respect to the payment of interest expressed in
Spanish in the following words:jgc:chanrobles.com.ph In the third assignment of error the appellant complains, as excessive, of the attorney’s fees allowed by the
court in accordance with stipulation in the mortgage. The allowance made on the principal debt was around 4
"Los intereses seran pagados mensualmente a fin de cada mes, computados teniendo en cuenta el capital de per cent, and about the same upon the fee allowed to the bank. Under the circumstances we think the debtor
prestano aun no pagado." Translated into English this provision reads substantially as has no just cause for complaint upon this score. 
follows:jgc:chanrobles.com.ph
The fourth assignment of error complains of the failure of the trial court to permit an amendment to be filed by
"Interest, to be computed upon the still unpaid capital of the loan, shall be paid monthly, at the end of each the debtor to its answer, the application therefor having been made on the day when the cause had been set
month."cralaw virtua1aw library for trial, with notice that the period was non- extendible. The point was a matter in the discretion of the court,
and no abuse of discretion is shown. 
It is well settled that, under article 1109 of the Civil Code, as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be compounded; and rests for the computation of From what has been stated, it follows that the appealed judgment must be modified by deducting the sum of
compound interest can certainly be made monthly, as well as quarterly, semiannually, or annually. But in the P1,136.12 from the principal debt, so that the amount of said indebtedness shall be P162,398.61, with interest
absence of express stipulation for the accumulation of compound interest, no interest can be collected upon at 12 per cent per annum, from May 1, 1929. In other respects the judgment will be affirmed, and it is so
interest until the debt is judicially claimed, and then the rate at which interest upon accrued interest must be ordered, with costs against the Appellant. 
computed is fixed at 6 per cent per annum. 

In the present case, however, the language which we have quoted above does not justify the charging of
interest upon interest, so far as interest on the capital is concerned. The provision quoted merely requires the
debtor to pay interest monthly at the end of each month, such interest to be computed upon the capital of the
loan not already paid. Clearly this provision does not justify the charging of compound interest upon the
interest accruing upon the capital monthly. It is true that in subsections (a), (b) and (c) of article IV of the
mortgage, it is stipulated that the interest can be thus computed upon sums which the creditor would have to
pay out (a) to maintain insurance upon the mortgaged property, (b) to pay the land tax upon the same
property, and (c) upon disbursements that might be made by the mortgagee to maintain the property in good
19
G.R. No. L-52478 October 30, 1986
THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner-appellant,  properties covered by TCT Nos. 49234, 49235 and 49236, to bear interest at 9% per annum compounded
vs.
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA and JOSEFINA G. MEDINA, respondents-
appellants.
Coronel Law Office for private respondents.
Alberto C. Lerma collaborating counsel for private respondents
PARAS, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. No. 62541-R
(Nemencio R. Medina and Josefina G. Medina, Plaintiffs-Appellants vs. The Government Service Insurance
System, Defendant-Appellant) affirming the January 21, 1977 Decision of the trial court, and at the same time
ordering the GSIS to reimburse the amount of P9,580.00 as over-payment and to pay the spouses Nemencio
R. Medina and Josefina G. Medina P3,000.00 and P1,000.00 as attorney's fees and litigation expenses.
In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G. Medina (Medinas for
short) applied with the herein petitioner Government Service Insurance System (GSIS for short) for a loan of
P600,000.00. The GSIS Board of Trustees, in its Resolution of December 20, 1961, approved under
Resolution No. 5041 only the amount of P350,000.00, subject to the following conditions: that the rate of
interest shall be 9% per annum compounded monthly; repayable in ten (10) years at a monthly amortization of
P4,433.65 including principal and interest, and that any installment or amortization that remains due and
unpaid shall bear interest at the rate of 9%/12% per month. The Office of the Economic Coordinator, in a 2nd
Indorsement dated March 26, 1962, further reduced the approved amount to P295,000.00. On April 4, 1962,
the Medinas accepting the reduced amount, executed a promissory note and a real estate mortgage in favor
of GSIS. On May 29, 1962, the GSIS, and on June 6, 1962, the Office of the Economic Coordinator, upon
request of the Medinas, both approved the restoration of the amount of P350,000.00 (P295,000.00 +
P55,000.00) originally approved by the GSIS. This P350,000.00 loan was denominated by the GSIS as
Account No. 31055.
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment of Real Estate Mortgage, the
pertinent portion of which reads:
WHEREAS, on the 4th day of April, 1962, the Mortgagor executed signed and delivered a
real estate mortgage to and in favor of the Mortgagee on real estate properties located in
the City of Manila, ... to secure payment to the mortgages of a loan of Two Hundred Ninety
Five Thousand Pesos (P295,000.00) Philippine Currency, granted by the mortgagee to the
Mortgagors, ...;
WHEREAS, the parties herein have agreed as they hereby agree to increase the
aforementioned loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00) to
Three Hundred Fifty Thousand Pesos (P350,000.00), Philippine Currency;
NOW, THEREFORE, for and in consideration of the foregoing premises, the
aforementioned parties have amended and by these presents do hereby amend the said
mortgage dated April 4, 1962, mentioned in the second paragraph hereof by increasing the
loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00) to Three Hundred
Fifty Thousand Pesos (P350,000.00) subject to this additional condition.
(1) That the mortgagor shall pay to the system P4,433.65 monthly including principal and
interest.
It is hereby expressly understood that with the foregoing amendment, all other terms and
conditions of the said real estate mortgage dated April 4, 1962 insofar as they are not
inconsistent herewith, are hereby confirmed, ratified and continued in full force and effect
and that the parties thereto agree that this amendment be an integral part of said real
estate mortgage. (Rollo, p. 153-154).
Upon application by the Medinas, the GSIS Board of Trustees adopted Resolution No. 121 on January 18,
1963, as amended by Resolution No. 348 dated February 25, 1963, approving an additional loan of
20
P230,000.00 in favor of the Medinas on the security of the same mortgaged properties and the additional
monthly and repayable in ten years. This additional loan of P230,000.00 was denominated by the GSIS as
Account No. 31442.
On March 18, 1963, the Economic Coordinator thru the Auditor General interposed no objection thereto,
subject to the conditions of Resolution No. 121 as amended by Resolution No. 348 of the GSIS.
Beginning 1965, the Medinas having defaulted in the payment of the monthly amortization on their loan, the
GSIS imposed 9%/12% interest on an installments due and unpaid. In 1967, the Medinas began defaulting in
the payment of fire insurance premiums.
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in the aggregate amount of
P575,652.42 as of April 18, 1974 (Exhibit 9, p. 149, Joint Record on Appeal, Rollo, p. 79), and demanded
payment within seven (7) days from notice thereof, otherwise, it would foreclose the mortgage. 
On April 21, 1975, the GSIS filed an Application for Foreclosure of Mortgage with the Sheriff of the City of
Manila (Exhibit "22," pp. 63 and 149; Rollo, p. 79). On June 30, 1975, the Medinas filed with the Court of First
Instance of Manila a complaint, praying, among other things, that a restraining order or writ of preliminary
injunction be issued to prevent the GSIS and the Sheriff of the City of Manila from proceeding with the extra-
judicial foreclosure of their mortgaged properties (CFI Decision, p. 121; Rollo, p. 79). However, in view of
Section 2 of Presidential Decree No. 385, no restraining order or writ of preliminary injunction was issued by
the trial court (CFI Decision, p. 212; Rollo, p. 79). On April 25, 1975, the Medinas made a last partial payment
in the amount of P209,662.80.
Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975, the real properties of the Medinas
covered by Transfer Certificates of Title Nos. 32231, 43527, 51394, 58626, 60534, 63304, 67550, 67551 and
67552 of the Registry of Property of the City of Manila were sold at public auction to the GSIS as the highest
bidder for the total amount of P440,080.00 on January 12, 1976, and the corresponding Certificate of Sale
was executed by the Sheriff of Manila on January 27, 1976 (CFI Decision, pp. 212-213; Rollo, p. 79).
On January 30, 1976, the Medinas filed an Amended Complaint with the trial court, praying for (a) the
declaration of nullity of their two real estate mortgage contracts with the GSIS as well as of the extra-judicial
foreclosure proceedings; and (b) the refund of excess payments, plus damages and attorney's fees (CFI
Decision, p. 213; Rollo, p. 79).
On March 19, 1976, the GSIS filed its Amended Answer (Joint Record on Appeal, pp. 99-105; Rollo, p. 79).
After trial, the trial court rendered a Decision dated January 21, 1977 (Joint Record on Appeal, pp. 210-232),
the pertinent dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered declaring the extra-judicial foreclosure
conducted by the Sheriff of Manila of real estate mortgage contracts executed by plaintiffs
on April 4, 1962, as amended on July 6, 1962, and February 17, 1963, null and void and
the Sheriff's Certificate of Sale dated January 27, 1976, in favor of the GSIS of no legal
force and effect; and directing plaintiffs to pay the GSIS the sum of P1,611.12 in full
payment of their obligation to the latter with interest of 9% per annum from December 11,
1975, until fully paid.
Dissatisfied with the said judgment, both parties appealed with the Court of Appeals.
The Court of Appeals, in a Decision promulgated on January 18, 1980 (Record, pp. 72-77), ruled in favor of
the Medinas —
WHEREFORE, the defendant GSIS is ordered to reimburse the amount of P9,580.00 as
overpayment and to pay plaintiffs P3,000.00 and Pl,000.00 as attorney's fees and litigation
expenses, respectively. With these modifications, the judgment appealed from is
AFFIRMED in all other respects, with costs against defendant GSIS."
Hence this petition.
The Second Division of this Court, in a Resolution dated April 25, 1980 (Rollo, p.. 88), resolved to deny the
petition for lack of merit.
Petitioner filed on June 26, 1980 a Motion for Reconsideration dated June 17, 1980 (Rollo, pp. 95-103), of the
above-stated Resolution and respondents in a Resolution dated July 9, 1980 (Rollo, p. 105), were required to
comment thereon which comment they filed on August 6, 1980. (Rollo, pp. 106-116).
The petition was given due course in the Resolution dated July 6, 1981 (Rollo, p. 128). Petitioner filed its brief
on November 26, 1981 (Rollo, pp. 147-177); while private respondents filed their brief on January 27, 1982
(Rollo, pp. 181-224), and the case was considered submitted for decision in the Resolution of July 19, 1982
(Rollo, p. 229).
The issues in this case are:
1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE
AMENDMENT OF REAL ESTATE MORTGAGE DATED JULY 6, 1962 SUPERSEDED
THE MORTGAGE CONTRACT DATED APRIL 4, 1962, PARTICULARLY WITH
RESPECT TO COMPOUNDING OF INTEREST;
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE
RESPONDENT-APPELLEE SPOUSES MEDINA'S CLAIM OR OVERPAYMENT, BY
CREDITING THE FIRE INSURANCE PROCEEDS IN THE SUM OF P11,152.02 TO THE
TOTAL PAYMENT MADE BY SAID SPOUSES AS OF DECEMBER 11, 1975;
3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE
INTEREST RATES ON THE LOAN ACCOUNTS OF RESPONDENT-APPELLEE
SPOUSES ARE USURIOUS;
4. WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE
ANNULMENT OF THE SUBJECT EXTRAJUDICIAL FORECLOSURE AND SHERIFF'S
CERTIFICATE OF SALE; AND
5. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THE GSIS
LIABLE FOR ATTORNEY'S FEES, EXPENSES OF LITIGATION AND COSTS.
The petition is impressed with merit.
There is no dispute as to the facts of the case. By agreement of the parties the issues in this case are limited
to the loan of P350,000.00 denominated as Account No. 31055 (Rollo, p. 79; Joint Record on Appeal, p. 129)
subject of the Amendment of Real Mortgage dated July 6, 1962, the interpretation of which is the major issue
in this case.
GSIS claims that the amendment of the real estate mortgage did not supersede the original mortgage contract
dated April 4, 1962 which was being amended only with respect to the amount secured thereby, and the
amount of monthly amortizations. All other provisions of aforesaid mortgage contract including that on
compounding of interest were deemed rewritten and thus binding on and enforceable against the respondent
spouses. (Rollo, pp. 162-166).
Accordingly, payments made by the Medinas in the total amount of P991,845.53 was applied as follows: the
amount of P600,495.51 to Account No. 31055, P466,965.31 of which to interest and P133,530.20 to principal
and P390,845.66 to Account No. 31442, P230,774.29 to interest and P159,971.37 to principal. (Joint Record
on Appeal, p. 216; Rollo, p. 79).
On the other hand the Medinas maintain that there is no express stipulation on compounded interest in the
amendment of mortgage contract of July 6, 1962 so that the compounded interest stipulation in the original
mortgage contract of April 4, 1962 which has been superseded cannot be enforced in the later mortgage.
(Rollo, p. 185).
Hence the Medinas claim an overpayment in Account No. 31055. The application of their total payment in the
amount of P991,845.53 as computed by the trial court and by the Court of Appeals is as follows:
... It appearing and so the parties admit in their own exhibits that as of December 11, 1975,
plaintiffs had paid a total of P991,241.17 excluding fire insurance, P532,038.00 of said
amount should have been applied to the full payment of Acct. No. 31055 and the balance
of P459,203.17 applied to the payment of Acct. No. 31442.
According to the computation of the GSIS (Exhibit C, also Exhibit 38) the total amounts,
collected on Acct. No. 31442 as of December 11, 1975 total P390,745.66 thus leaving an
unpaid balance of P70,028.63. The total amount plaintiffs should pay on said account
should therefore be P460,774.29. Deduct this amount from P459,163.17 which has been
shown to be the difference between the total payments made by plaintiffs to the G.S.I.S. as
21
of December 11, 1975 and the amount said plaintiffs should pay under their Acct. No.
31055, there remains an outstanding balance of P1,611.12. This amount represents the
balance of the obligation of the plaintiffs to the G.S.I.S. on Acct. No. 31442 as of December
11, 1975." (Decision, Civil Case No. 98390; Joint Record on Appeal, pp. 227-228; Rollo, p.
79).
To recapitulate, the difference in the computation lies in the inclusion of the compounded interest as
demanded by the GSIS on the one hand and the exclusion thereof, as insisted by the Medinas on the other.
It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are clear and leave
no doubt as to the intention of the contracting parties, the literal meaning of the stipulations shall control but
when the words appear contrary to the evident intention of the parties, the latter shall prevail over, the former.
In order to judge the intention of the parties, their contemporaneous and subsequent acts shall be principally
considered. (Sy v. Court of Appeals, 131 SCRA 116; July 31, 1984).
There appears no ambiguity whatsoever in the terms and conditions of the amendment of the mortgage
contract herein quoted earlier. On the contrary, an opposite conclusion cannot be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162166), a careful perusal of the title, preamble and
body of the Amendment of Real Estate Mortgage dated July 6, 1962, taking into account the prior,
contemporaneous, and subsequent acts of the parties, ineluctably shows that said Amendment was never
intended to completely supersede the mortgage contract dated April 4, 1962.
First, the title "Amendment of Real Estate Mortgage" recognizes the existence and effectivity of the previous
mortgage contract. Second, nowhere in the aforesaid Amendment did the parties manifest their intention to
supersede the original contract. On the contrary in the WHEREAS clauses, the existence of the previous
mortgage contract was fully recognized and the fact that the same was just being amended as to amount and
amortization is fully established as to obviate any doubt. Third, the Amendment of Real Estate Mortgage dated
July 6, 1962 does not embody the act of conveyancing the subject properties by way of mortgage. In fact the
intention of the parties to be bound by the unaffected provisions of the mortgage contract of April 4, 1962
expressed in unmistakable language is clearly evident in the last provision of the Amendment of Real Estate
Mortgage dated July 6, 1962 which reads:
It is hereby expressly understood that with the foregoing amendment, all other terms and
conditions of the said real estate mortgage dated April 4, 1962, insofar as they are not
inconsistent herewith, are hereby confirmed, ratified and continued to be in full force and
effect, and that the parties hereto agree that the amendment be an integral part of said real
estate mortgage. (Emphasis supplied).
A review of prior, contemporaneous, and subsequent acts supports the conclusion that both contracts are fully
subsisting insofar as the latter is not inconsistent with the former. The fact is the GSIS, as a matter of policy,
imposes uniform terms and conditions for all its real estate loans, particularly with respect to compounding of
interest. As shown in the case at bar, the original mortgage contract embodies the same terms and conditions
as in the additional loan denominated as Account No. 31442 while the amendment carries the provision that it
shall be subject to the same terms and conditions as the real estate mortgage of April 4, 1962 except as to
amount and amortization.
Furthermore, it would be contrary to human experience and to ordinary practice for the mortgagee to impose
less onerous conditions on an increased loan by the deletion of compound interest exacted on a lesser loan.
II
There is an obvious error in the ruling of the Court of Appeals in its Decision dated January 18, 1980, which
reads:
... We agree that plaintiff should be credited with P11,152.02 of the fire insurance proceeds
as the same is admitted in paragraph (4) of its Answer and should be added to their
payments. (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
That they (GSIS) specifically deny the allegations in Paragraph 11, the truth being that
plaintiffs are not entitled to a credit of P19,381.07 as fire insurance proceeds since they
were only entitled to, and were credited with, the amount of P11,152.02 as proceeds of
their fire insurance policy. (par. 4, Amended Answer).
As can be gleaned from the foregoing, petitioner-appellant GSIS had already credited the amount of
P11,152.02. Thus, when the Court of Appeals made the aforequoted ruling, it was actually doubly crediting the
amount of P11,152.02 which had been previously credited by petitioner-appellant GSIS (Rollo, pp. 170-171).
III.
As to whether or not the interest rates on the loan accounts of the Medinas are usurious, it has already been
settled that the Usury Law applies only to interest by way of compensation for the use or forbearance of
money (Lopez v. Hernaez, 32 Phil. 631; Bachrach Motor Co. v. Espiritu, 52 Phil. 346; Equitable Banking
Corporation v. Liwanag, 32 SCRA 293, March 30, 1970). Interest by way of damages is governed by Article
2209 of the Civil Code of the Philippines which provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon,...  prove their case. The court a quo denied the motion in an order, dated 5 September 1988, and on 20 October
In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a
penalty apart from the interest. Should there be such an agreement, the penalty does not include the interest,
and as such the two are different and distinct things which may be demanded separately. Reiterating the
same principle in the later case of Equitable Banking Corp. (supra), where this Court held that the stipulation
about payment of such additional rate partakes of the nature of a penalty clause, which is sanctioned by law.
IV.
Based on the finding that the GSIS had the legal right to impose an interest 9% per annum, compounded
monthly, on the loans of the Medinas and an interest of 9%/12% per annum on all due and unpaid
amortizations or installments, there is no question that the Medinas failed to settle their accounts with the
GSIS which as computed by the latter reached an outstanding balance of P630,130.55 as of April 12, 1975
and that the GSIS had a perfect right to foreclose the mortgage.
In the same manner, there is obvious error in invalidating the extra-judicial foreclosure on the basis of a
typographical error in the Sheriff's Certificate of Sale which stated that the mortgage was foreclosed on May
17, 1963 instead of February 17, 1963.
There is merit in GSIS' contention that the Sheriff's Certificate of Sale is merely provisional in character and is
not intended to operate as an absolute transfer of the subject property, but merely to Identify the property, to
show the price paid and the date when the right of redemption expires (Section 27, Rule 39, Rules of Court,
Francisco, The Revised Rules of Court, 1972 Vol., IV-B, Part I, p. 681). Hence the date of the foreclosed
mortgage is not even a material content of the said Certificate. (Rollo, p. 174).
V.
PREMISES CONSIDERED, the decision of the Court of Appeals, in CA-G.R. No. 62541-R Medina, et al. v.
Government Service Insurance System et al., is hereby REVERSED and SET ASIDE, and a new one is
hereby RENDERED, affirming the validity of the extra-judicial foreclosure of the real estate mortgages of the
respondent-appellee spouses Medina dated April 4, 1962, as amended on July 6, 1962, and February 17,
1963.SO ORDERED.
G.R. No. 138677               February 12, 2002
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,  signed, we take cognizance of their plea for the application of the provisions of Article 1229 x x x.
vs.
HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and Trust
Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory note
binding themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per annum
upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest in case of
default. In addition, petitioners agreed to pay 10% of the total amount due by way of attorney’s fees if the
matter were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. The obligation
matured on 8 September 1981; the bank, however, granted an extension but only up until 29 December 1981.
22
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners informing
them that they had five days within which to make full payment. Since petitioners still defaulted on their
obligation, the bank filed on 3 November 1982, with the Regional Trial Court of Makati, Branch 143, a
complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27 March
1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the case reset
on two consecutive occasions. In view of the absence of petitioners and their counsel on 28 August 1985, the
third hearing date, the bank moved, and the trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the trial
court declaring them as having waived their right to present evidence and prayed that they be allowed to
1989, it rendered its decision,1 the dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the
latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service
charge and 5% per month penalty charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as
attorney’s fees; and
"3. To pay the costs of the suit."2 
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of their
motion to present evidence and assailing the imposition of the 2% service charge, the 5% per month penalty
charge and 10% attorney's fees. In its decision3 of 7 March 1996, the appellate court affirmed the judgment of
the trial court except on the matter of the 2% service charge which was deleted pursuant to Central Bank
Circular No. 783. Not fully satisfied with the decision of the appellate court, both parties filed their respective
motions for reconsideration.4 Petitioners prayed for the reduction of the 5% stipulated penalty for being
unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be commenced
not from the date of filing of complaint but from the time of default as so stipulated in the contract of the
parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest thereon must
commence not on the date of filing of the complaint as we have previously held in our decision but on the date
when the obligation became due.
"Default generally begins from the moment the creditor demands the performance of the obligation. However,
demand is not necessary to render the obligor in default when the obligation or the law so provides.
"In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the
obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in case of
non-payment from the date of default.
"x x x           x x x          x x x
"While we maintain that defendants-appellants must be bound by the contract which they acknowledged and
"Considering that defendants-appellants partially complied with their obligation under the promissory note by
the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally settle
their obligation, it is our view and we so hold that in the interest of justice and public policy, a penalty of 3%
per month or 36% per annum would suffice.
"x x x           x x x          x x x
"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-appellants
Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and
Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorney’s fees."5 
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly discovered
evidence,6 alleging that while the case was pending before the trial court, petitioner Tolomeo Ligutan and his
wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure the existing
indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners contended that the execution of
the real estate mortgage had the effect of novating the contract between them and the bank. Petitioners
further averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that they were not
informed about it, and the bank did not credit them with the proceeds of the sale. The appellate court denied
the omnibus motion for reconsideration and to admit newly discovered evidence, ratiocinating that such a
second motion for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of Civil
Procedure. Furthermore, the appellate court said, the newly-discovered evidence being invoked by petitioners
had actually been known to them when the case was brought on appeal and when the first motion for
reconsideration was filed.7  the banking business and the core of a bank's existence.19
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this Court
on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court, submitting thusly -
"I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by private
respondent bank on petitioners’ loan obligation are still manifestly exorbitant, iniquitous and
unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten
(10%) percent award of attorney’s fees which is highly and grossly excessive, unreasonable and
unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting petitioners’ newly discovered
evidence which could not have been timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of the
cause of action of private respondent’s complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this case and the subsequent
foreclosure of the mortgage."8  why defendants-appellants raised the alleged newly-discovered evidence only at this stage when they could
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be deleted
by petitioners was even insufficient to fully cover and compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis the U.S. dollar,
taking into account the time frame of its occurrence. The Bank would stress that only the amount of P5,584.00
had been remitted out of the entire loan of P120,000.00.9  party’s ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly discovered
A penalty clause, expressly recognized by law,10 is an accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force of the
obligation11 and to provide, in effect, for what could be the liquidated damages resulting from such a breach.
The obligor would then be bound to pay the stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach.12 Although a court may not at liberty ignore
the freedom of the parties to agree on such terms and conditions as they see fit that contravene neither law
nor morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the principal obligation has been partly or
irregularly complied with.13  new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.22 In order that
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like, the application of which, by and large, is addressed
to the sound discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,14 just an
example, the Court has tempered the penalty charges after taking into account the debtor’s pitiful situation
and its offer to settle the entire obligation with the creditor bank. The stipulated penalty might likewise be
reduced when a partial or irregular performance is made by the debtor. 15 The stipulated penalty might even be
deleted such as when there has been substantial performance in good faith by the obligor, 16 when the penalty
clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it.17  conditions, such as a change of the nature of the prestation; or (3) the subjects, such as the substitution of a
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest from
5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention the
23
repeated acts of breach by petitioners of their contractual obligation, the Court sees no cogent ground to
modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the interest stipulation, on its face, does not appear as being
that excessive. The essence or rationale for the payment of interest, quite often referred to as cost of money,
is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive
of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be
demanded.18 What may justify a court in not allowing the creditor to impose full surcharges and penalties,
despite an express stipulation therefor in a valid agreement, may not equally justify the non-payment or
reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of
 
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees for
being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of services
rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of attorney’s fees
has been agreed to by the parties and intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court, deems the award of 10% attorney’s fees to be
reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to admit
newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be entertained. Considering that the instant motion is
already a second motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newly-discovered evidence
being invoked by defendants-appellants have actually been existent when the case was brought on appeal to
this court as well as when the first motion for reconsideration was filed.1âwphi1 Hence, it is quite surprising
have done so in the earlier pleadings filed before this court.
"The propriety or acceptability of such a second motion for reconsideration is not contingent upon the
averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented and
rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, depending on the
errors' therein, or thinking up some injury or prejudice to the rights of the movant for reconsideration."20 
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would not
have resulted in the extinguishment of the original contract of loan because of novation. Petitioners
acknowledge that the real estate mortgage contract does not contain any express stipulation by the parties
intending it to supersede the existing loan agreement between the petitioners and the bank.21 Respondent
bank has correctly postulated that the mortgage is but an accessory contract to secure the loan in the
promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to the
an obligation may be extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligation be on every point incompatible with each
other.23 An obligation to pay a sum of money is not extinctively novated by a new instrument which merely
changes the terms of payment or adding compatible covenants or where the old contract is merely
supplemented by the new one.24 When not expressed, incompatibility is required so as to ensure that the
parties have indeed intended such novation despite their failure to express it in categorical terms. The
incompatibility, to be sure, should take place in any of the essential elements of the obligation, i.e., (1) the
juridical relation or tie, such as from a mere commodatum to lease of things, or from negotiorum gestio to
agency, or from a mortgage to antichresis, 25 or from a sale to one of loan; 26 (2) the object or principal
debtor27 or the subrogation of the creditor. Extinctive novation does not necessarily imply that the new
agreement should be complete by itself; certain terms and conditions may be carried, expressly or by
implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

24
G.R. No. 173227               January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,  to him, inclusive of interest, and that she would issue several postdated checks to guarantee the payment of
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the
Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R.
CV No. 71814, which affirmed in toto the Decision,4 dated 26 January 2001, of the Las Pinas City Regional
Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against petitioner
Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case
No. LP-98-0068. Respondent alleged that she was a businesswoman engaged in supplying office materials
and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner
was a military officer and comptroller of the PNO from 1991 to 1996.  averments, he asked the RTC to dismiss respondent’s complaint.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her
the amount of ₱540,000.00. Since she needed capital for her business transactions with the PNO, she
accepted petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was no stipulation
as to the payment of interest for the loan.6
On 31 August 1993, respondent issued a check worth ₱500,000.00 to petitioner as partial payment of the
loan. On 31 October 1993, she issued another check in the amount of ₱200,000.00 to petitioner as payment
of the remaining balance of the loan. Petitioner told her that since she paid a total amount of ₱700,000.00 for
the ₱540,000.00 worth of loan, the excess amount of ₱160,000.00 would be applied as interest for the loan.
Not satisfied with the amount applied as interest, petitioner pestered her to pay additional interest. Petitioner
threatened to block or disapprove her transactions with the PNO if she would not comply with his demand. As
all her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and
fearing that petitioner might block or unduly influence the payment of her vouchers in the PNO, she conceded.
Thus, she paid additional amounts in cash and checks as interests for the loan. She asked petitioner for
receipt for the payments but petitioner told her 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 ₱1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite
absence of agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the
loan because there was no agreement between her and petitioner regarding payment of interest. Since she
paid petitioner a total amount of ₱1,200,000.00 for the ₱540,000.00 worth of loan, and upon being advised by
her lawyer that she made overpayment to petitioner, she sent a demand letter to petitioner asking for the
return of the excess amount of ₱660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim
for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) ₱660,000.00 plus
legal interest from the time of demand; (2) ₱300,000.00 as moral damages; (3) ₱50,000.00 as exemplary
damages; and (4) an amount equivalent to 25% of ₱660,000.00 as attorney’s fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He averred that in
1992, respondent approached and asked him if he could grant her a loan, as she needed money to finance
her business venture with the PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an acquaintance of his officemate, he
agreed to grant her a loan. Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the
previous loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the
payment of the loan because she could not give full payment on the due date. He acceded to her request.
Thereafter, respondent pleaded for another restructuring of the payment of the loan. This time he rejected her
25
plea. Thus, respondent proposed to execute a promissory note wherein she would acknowledge her obligation
her obligation. Upon his approval of respondent’s request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an amount of
₱1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in March 1995.
Respondent also issued to him six postdated checks amounting to ₱1,240,000.00 as guarantee of compliance
with her obligation. Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he filed
criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The
cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent admitted in the latter’s promissory note
that her monetary obligation as of 12 September 1994 amounted to ₱1,240,000.00 inclusive of interests. He
argued that respondent was already estopped from complaining that she should not have paid any interest,
because she was given several times to settle her obligation but failed to do so. He maintained that to rule in
favor of respondent is tantamount to concluding that the loan was given interest-free. Based on the foregoing
After trial, the RTC rendered a Decision on 26 January 2001 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 ₱540,000.00, 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 ₱660,000.00 through mistake, petitioner should return
the said amount to respondent pursuant to the principle of solutio indebiti.13
The RTC also ruled that 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. 
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence on
the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of ₱660,000.00 plus legal interest of 12% per
annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of ₱300,000.00 as moral damages; 
(3) Ordering defendant to pay plaintiff the amount of ₱50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of ₱660,000.00 as attorney’s
fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its
Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed decision [is]
AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate court’s decision but this was denied. 16 Hence,
petitioner lodged the instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO
INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as
monetary interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages.
This is called compensatory interest.18 The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest, 20 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.21
It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was
there convincing proof of written agreement between the two regarding the payment of interest. Respondent
testified that although she accepted petitioner’s offer of loan amounting to ₱540,000.00, there was,
nonetheless, no verbal or written agreement for her to pay interest on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 199423 wherein respondent
purportedly admitted owing petitioner "capital and interest." Respondent, however, explained that it was
petitioner who made a promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO; that petitioner
threatened to disapprove her transactions with the PNO if she would not pay interest; that being unaware of
the law on interest and fearing that petitioner would make good of his threats if she would not obey his
instruction to copy the promissory note, she copied the promissory note in her own handwriting; and that such
was the same promissory note presented by petitioner as alleged proof of their written agreement on
interest.24 Petitioner did not rebut the foregoing testimony. It is evident that respondent did not really consent
to the payment of interest for the loan and that she was merely tricked and coerced by petitioner to pay
interest. Hence, it cannot be gainfully said that such promissory note pertains to an express stipulation of
interest or written agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent
agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly
admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent;
that despite such judicial admission by respondent, the RTC and the Court of Appeals, citing Article 1956 of
the Civil Code, still held that no interest was due him since the agreement on interest was not reduced in
writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the
application of such provision should be made when the borrower admits that a specific rate of interest was
agreed upon as in the present case; and that it would be unfair to allow respondent to pay only the loan when
the latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed
7% rate of interest on the loan.25
We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that
petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly
stated that although petitioner and respondent entered into a valid oral contract of loan amounting to
₱540,000.00, they, nonetheless, never intended the payment of interest thereon.26 While the Court of Appeals
mentioned in its Decision that it concurred in the RTC’s ruling that petitioner and respondent agreed on a
certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of
interest on the loan. The rule is that factual findings of the trial court deserve great weight and respect
especially when affirmed by the appellate court.27 We found no compelling reason to disturb the ruling of both
courts.
Petitioner’s reliance on respondent’s alleged admission in the Batas Pambansa Blg. 22 cases that they had
agreed on the payment of interest at the rate of 7% deserves scant consideration. In the said case,
respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay
interest.28 Respondent did not categorically declare in the same case that she and respondent made
an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed,
monetary interest is due only if there was an expressstipulation in writing for the payment of interest.  ruling in the instant case. The two checks, subject matter of this case, totaling ₱700,000.00 which respondent
There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or
written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the
payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed
26
as indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212
of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent on this point. 
All the same, the interest under these two instances may be imposed only as a penalty or damages for breach
of contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In
other words, the two instances apply only to compensatory interest and not to monetary interest.29 The case at
bar involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that
respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there
was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the
instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as
interest.30
Under Article 1960 of the Civil Code, 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.31 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. 32 We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue interest.33
It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make
such payment because there was no express stipulation in writing to that effect. There was no binding relation
between petitioner and respondent as regards the payment of interest. The payment was clearly a mistake.
Since petitioner received something when there was no right to demand it, he has an obligation to return it. 
We shall now determine the propriety of the monetary award and damages imposed by the RTC and the
Court of Appeals.
Records show that respondent received a loan amounting to ₱540,000.00 from petitioner. 34 Respondent
issued two checks with a total worth of ₱700,000.00 in favor of petitioner as payment of the loan. 35 These
checks were subsequently encashed by petitioner. 36 Obviously, there was an excess of ₱160,000.00 in the
payment for the loan. Petitioner claims that the excess of ₱160,000.00 serves as interest on the loan to which
he was entitled. Aside from issuing the said two checks, respondent also paid cash in the total amount of
₱175,000.00 to petitioner as interest.37 Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit 38 in the
Batas Pambansa Blg. 22 cases that respondent paid him a total amount of ₱175,000.00 cash in addition to
the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from the amounts of ₱160,000.00 and ₱175,000.00
paid as interest, no other proof of additional payment as interest was presented by respondent. Since we have
previously found that petitioner is not entitled to payment of interest and that the principle of solutio
indebiti applies to the instant case, petitioner should return to respondent the excess amount of ₱160,000.00
and ₱175,000.00 or the total amount of ₱335,000.00. Accordingly, the reimbursable amount to respondent
fixed by the RTC and the Court of Appeals should be reduced from ₱660,000.00 to ₱335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against
respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for
issuing five dishonored checks to petitioner. Nonetheless, respondent’s conviction therein does not affect our
claimed as payment of the ₱540,000.00 worth of loan, were not among the five checks found to be dishonored
or bounced in the five criminal cases. Further, the MeTC found that respondent made an overpayment of the
loan by reason of the interest which the latter paid to petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation and similar injury. Respondent testified that she experienced sleepless nights and wounded
feelings when petitioner refused to return the amount paid as interest despite her repeated demands. Hence,
the award of moral damages is justified. However, its corresponding amount of ₱300,000.00, as fixed by the
RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code
instructs that assessment of damages is left to the discretion of the court according to the circumstances of
each case. This discretion is limited by the principle that the amount awarded should not be palpably
excessive as to indicate that it was the result of prejudice or corruption on the part of the trial court. 40 To our
mind, the amount of ₱150,000.00 as moral damages is fair, reasonable, and proportionate to the injury
suffered by respondent.
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. The amount of ₱50,000.00 imposed as exemplary damages by the RTC
and the Court is fitting so as to deter petitioner and other lenders from committing similar and other serious
wrongdoings.41
Jurisprudence instructs that in awarding attorney’s fees, the trial court must state the factual, legal or equitable
justification for awarding the same.42 In the case under consideration, the RTC stated in its Decision that the
award of attorney’s fees equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondent’s lawyer in the instant case
and the fact that it dragged on for several years. 43 Further, respondent testified that she agreed to compensate
her lawyer handling the instant case such amount. 44 The award, therefore, of attorney’s fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to
respondent computed from 3 March 1998 until its full payment. This is erroneous.  who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner claimed that he has not
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that 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
rate of 6% per annum. We further declared that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether it is a loan/forbearance of money or not, shall
be 12% per annum from such finality until its satisfaction, this interim period being deemed equivalent to a
forbearance of credit.
In the present case, petitioner’s obligation arose from a quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded
as well as on the damages awarded and on the attorney’s fees, to be computed from the time of the extra-
judicial demand on 3 March 1998,46 up to the finality of this Decision. In addition, the interest shall become
12% per annum from the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of ₱660,000.00 as refundable amount
of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (₱335,000.00); (2) the
amount of ₱300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND
PESOS (₱150,000.00); (3) an interest of 6% per annum is imposed on the ₱335,000.00, on the damages
awarded and on the attorney’s fees to be computed from the time of the extra-judicial demand on 3 March
1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality
of this Decision up to its satisfaction. Costs against petitioner. SO ORDERED.
G.R. No. 116285            October 19, 2001
ANTONIO TAN, petitioner,  The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it charged interest,
vs.
COURT OF APPEALS and the CULTURAL CENTER OF THE PHILIPPINES, respondents.
DE LEON, JR., J.:
27
Before us is a petition for review of the Decision1 dated August 31, 1993 and Resolution2 dated July 13, 1994
of the Court of Appeals affirming the Decision 3 dated May 8, 1991 of the Regional Trial Court (RTC) of Manila,
Branch 27.
The facts are as follows:
On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the principal amount
of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four Million Pesos (P4,000,000.00)
from respondent Cultural Center of the Philippines (CCP, for brevity) evidenced by two (2) promissory notes
with maturity dates on May 14, 1979 and July 6, 1979, respectively. Petitioner defaulted but after a few partial
payments he had the loans restructured by respondent CCP, and petitioner accordingly executed a
promissory note (Exhibit "A") on August 31, 1979 in the amount of Three Million Four Hundred Eleven
Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) payable in five (5)
installments. Petitioner Tan failed to pay any installment on the said restructured loan of Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32), the
last installment falling due on December 31, 1980. In a letter dated January 26, 1982, petitioner requested and
proposed to respondent CCP a mode of paying the restructured loan, i.e., (a) twenty percent (20%) of the
principal amount of the loan upon the respondent giving its conformity to his proposal; and (b) the balance on
the principal obligation payable in thirty-six (36) equal monthly installments until fully paid. On October 20,
1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his loan obligation until
the following year allegedly due to a substantial deduction in the volume of his business and on account of the
peso devaluation. No favorable response was made to said letters. Instead, respondent CCP, through
counsel, wrote a letter dated May 30, 1984 to the petitioner demanding full payment, within ten (10) days from
receipt of said letter, of the petitioner’s restructured loan which as of April 30, 1984 amounted to Six Million
Eighty-Eight Thousand Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of money,
docketed as Civil Case No. 84-26363, against the petitioner after the latter failed to settle his said restructured
loan obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen,
been able to locate Wilson Lucmen. While the case was pending in the trial court, the petitioner filed a
Manifestation wherein he proposed to settle his indebtedness to respondent CCP by proposing to make a
down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to issue twelve (12) checks every
beginning of the year to cover installment payments for one year, and every year thereafter until the balance is
fully paid. However, respondent CCP did not agree to the petitioner’s proposals and so the trial of the case
ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, ordering
defendant to pay plaintiff, the amount of P7,996,314.67, representing defendant’s outstanding
account as of August 28, 1986, with the corresponding stipulated interest and charges thereof, until
fully paid, plus attorney’s fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs.
Defendant’s counterclaims are ordered dismissed, for lack of merit.
SO ORDERED.4
The trial court gave five (5) reasons in ruling in favor of respondent CCP. First, it gave little weight to the
petitioner’s contention that the loan was merely for the accommodation of Wilson Lucmen for the reason that
the defense propounded was not credible in itself. Second, assuming, arguendo, that the petitioner did not
personally benefit from the said loan, he should have filed a third party complaint against Wilson Lucmen, the
alleged accommodated party but he did not. Third, for three (3) times the petitioner offered to settle his loan
obligation with respondent CCP. Fourth, petitioner may not avoid his liability to pay his obligation under the
promissory note (Exh. "A") which he must comply with in good faith pursuant to Article 1159 of the New Civil
Code. Fifth, petitioner is estopped from denying his liability or loan obligation to the private respondent.
surcharges, attorney’s fees and exemplary damages against the petitioner. In his appeal, the petitioner asked
for the reduction of the penalties and charges on his loan obligation. He abandoned his alleged defense in the
trial court that he merely accommodated his friend, Wilson Lucmen, in obtaining the loan, and instead
admitted the validity of the same. On August 31, 1993, the appellate court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, with the foregoing modification, the judgment appealed from is hereby AFFIRMED.
SO ORDERED.5
In affirming the decision of the trial court imposing surcharges and interest, the appellate court held that:
We are unable to accept appellant’s (petitioner’s) claim for modification on the basis of alleged
partial or irregular performance, there being none. Appellant’s offer or tender of payment cannot be
deemed as a partial or irregular performance of the contract, not a single centavo appears to have
been paid by the defendant.
However, the appellate court modified the decision of the trial court by deleting the award for exemplary
damages and reducing the amount of awarded attorney’s fees to five percent (5%), by ratiocinating as
follows:  immediately due and demandable. (Underscoring supplied)
Given the circumstances of the case, plus the fact that plaintiff was represented by a government
lawyer, We believe the award of 25% as attorney’s fees and P500,000.00 as exemplary damages is
out of proportion to the actual damage caused by the non-performance of the contract and is
excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the petitioner’s motion for reconsideration of
the said decision.
Hence, this petition anchored on the following assigned errors:
I monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary
THE HONORABLE COURT OF APPEALS COMMITTED A MISTAKE IN GIVING ITS IMPRIMATUR TO THE
DECISION OF THE TRIAL COURT WHICH COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING IMPOSITION OF INTEREST FOR
THE PERIOD OF TIME THAT PRIVATE RESPONDENT HAS FAILED TO ASSIST PETITIONER IN
APPLYING FOR RELIEF OF LIABILITY THROUGH THE COMMISSION ON AUDIT AND THE OFFICE OF
THE PRESIDENT.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT DELETING AWARD OF ATTORNEY’S FEES
AND IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his restructured loan under the promissory note
marked Exhibit "A". The first question to be resolved in the case at bar is whether there are contractual and
legal bases for the imposition of the penalty, interest on the penalty and attorney’s fees.
The petitioner imputes error on the part of the appellate court in not totally eliminating the award of attorney’s
fees and in not reducing the penalties considering that the petitioner, contrary to the appellate court’s findings,
has allegedly made partial payments on the loan. And if penalty is to be awarded, the petitioner is asking for
the non-imposition of interest on the surcharges inasmuch as the compounding of interest on surcharges is
not provided in the promissory note marked Exhibit "A". The petitioner takes exception to the computation of
the private respondent whereby the interest, surcharge and the principal were added together and that on the
total sum interest was imposed. Petitioner also claims that there is no basis in law for the charging of interest
on the surcharges for the reason that the New Civil Code is devoid of any provision allowing the imposition of
interest on surcharges.
We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.
In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The
pertinent6 portion of the promissory note (Exhibit "A") imposing interest and penalties provides that:
28
For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE
PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND
FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx           xxx           xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid.
PLUS THREE PERCENT (3%) SERVICE CHARGE. 
In case of non-payment of this note at maturity/on demand or upon default of payment of any portion
of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO
per cent (2%) per month on the total amount due until paid, payable and computed monthly. Default
of payment of this note or any portion thereof when due shall render all other installments and all
existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES
 
xxx           xxx           xxx
The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article 1956 of the New Civil Code. 7 On the other hand,
the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and
distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of
Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the
interest, and as such the two are different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a stipulation about
payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law,
more particularly under Article 2209 of the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default
by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the
stipulated penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified
the same, the next issue to be resolved is whether interest may accrue on the penalty or compensatory
interest without violating the provisions of Article 1959 of the New Civil Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as
added principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition of interest on the penalty charge for the
reason that the law only allows imposition of interest on monetary interest but not the charging of interest on
penalty. He claims that since there is no law that allows imposition of interest on penalties, the penalties
should not earn interest. But as we have already explained, penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering that:
First, there is an express stipulation in the promissory note (Exhibit "A") permitting the compounding of
interest. The fifth paragraph of the said promissory note provides that: "Any interest which may be due if not
paid shall be added to the total amount when due and shall become part thereof, the whole amount to bear
interest at the maximum rate allowed by law."10 Therefore, any penalty interest not paid, when due, shall earn
the legal interest of twelve percent (12%) per annum,11 in the absence of express stipulation on the specific
rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent upon this point." In the instant case, interest
likewise began to run on the penalty interest upon the filing of the complaint in court by respondent CCP on
August 29, 1984. Hence, the courts a quo did not err in ruling that the petitioner is bound to pay the interest on
the total amount of the principal, the monetary interest and the penalty interest.
The petitioner seeks the elimination of the compounded interest imposed on the total amount based allegedly
on the case of National Power Corporation v. National Merchandising Corporation,12 wherein we ruled that the
imposition of interest on the damages from the filing of the complaint is unjust where the litigation was
prolonged for twenty-five (25) years through no fault of the defendant. However, the ruling in the said National
Power Corporation (NPC) case is not applicable to the case at bar inasmuch as our ruling on the issue of
interest in that NPC case was based on equitable considerations and on the fact that the said case lasted for
twenty-five (25) years "through no fault of the defendant." In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual stipulation in the promissory note whereby the petitioner
expressly agreed to the compounding of interest in case of failure on his part to pay the loan at maturity.
Inasmuch as the said stipulation on the compounding of interest has the force of law between the parties and
does not appear to be inequitable or unjust, the said written stipulation should be respected.
The private respondent’s Statement of Account (marked Exhibits "C" to "C-2") 13 shows the following
breakdown of the petitioner’s indebtedness as of August 28, 1986:
Principal P2,838,454.68
Interest P 576,167.89
Surcharge P4,581,692.10
P7,996,314.67
The said statement of account also shows that the above amounts stated therein are net of the partial
payments amounting to a total of Four Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and
Forty-Three Centavos (P452,561.43) which were made during the period from May 13, 1983 to September 30,
1983.14 The petitioner now seeks the reduction of the penalty due to the said partial payments. The principal
amount of the promissory note (Exhibit "A") was Three Million Four Hundred Eleven Thousand Four Hundred
Twenty-One Pesos and Thirty-Two Centavos (P3,411,421.32) when the loan was restructured on August 31,
1979. As of August 28, 1986, the principal amount of the said restructured loan has been reduced to Two
Million Eight Hundred Thirty-Eight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight Centavos
(P2,838,454.68). Thus, petitioner contends that reduction of the penalty is justifiable pursuant to Article 1229
of the New Civil Code which provides that: "The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is iniquitous or unconscionable ." Petitioner insists that the
penalty should be reduced to ten percent (10%) of the unpaid debt in accordance with Bachrach Motor
Company v. Espiritu.15
There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent
(10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial
payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on
the total amount due, compounded monthly, until paid can indeed be justified under the said provision of
Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total
amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent
(2%) penalty charge per month on the total amount due, compounded monthly, for twenty-one (21) years
since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent
(12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account
(Exhibits "C" to "C-2"). We also took into consideration the offers of the petitioner to enter into a compromise
for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers
at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his
financial problems. However, we are not unmindful of the respondent’s long overdue deprivation of the use of
its money collectible from the petitioner.
29
The petitioner also imputes error on the part of the appellate court for not declaring the suspension of the
running of the interest during that period when the respondent allegedly failed to assist the petitioner in
applying for relief from liability. In this connection, the petitioner referred to the private respondent’s
letter16 dated September 28, 1988 addressed to petitioner which partially reads:
Dear Mr. Tan:
xxx           xxx           xxx
With reference to your appeal for condonation of interest and surcharge, we wish to inform you that
the center will assist you in applying for relief of liability through the Commission on Audit and Office
of the President xxx.
While your application is being processed and awaiting approval, the center will be accepting your
proposed payment scheme with the downpayment of P160,000.00 and monthly remittances of
P60,000.00 xxx.
xxx           xxx           xxx
The petitioner alleges that his obligation to pay the interest and surcharge should have been suspended
because the obligation to pay such interest and surcharge has become conditional, that is dependent on a
future and uncertain event which consists of whether the petitioner’s request for condonation of interest and
surcharge would be recommended by the Commission on Audit and the Office of the President to the House
of Representatives for approval as required under Section 36 of Presidential Decree No. 1445. Since the
condition has not happened allegedly due to the private respondent’s reneging on its promise, his liability to
pay the interest and surcharge on the loan has not arisen. This is the petitioner’s contention.
It is our view, however, that the running of the interest and surcharge was not suspended by the private
respondent’s promise to assist the petitioners in applying for relief therefrom through the Commission on Audit
and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been sent by the respondent CCP to the petitioner
is not part of the formally offered documentary evidence of either party in the trial court. That letter cannot be
considered evidence pursuant to Rule 132, Section 34 of the Rules of Court which provides that: "The court
shall consider no evidence which has not been formally offered xxx." Besides, the said letter does not contain
any categorical agreement on the part of respondent CCP that the payment of the interest and surcharge on
the loan is deemed suspended while his appeal for condonation of the interest and surcharge was being
processed.
Second, the private respondent correctly asserted that it was the primary responsibility of petitioner to inform
the Commission on Audit and the Office of the President of his application for condonation of interest and
surcharge. It was incumbent upon the petitioner to bring his administrative appeal for condonation of interest
and penalty charges to the attention of the said government offices.
On the issue of attorney’s fees, the appellate court ruled correctly and justly in reducing the trial court’s award
of twenty-five percent (25%) attorney’s fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with MODIFICATION in
that the penalty charge of two percent (2%) per month on the total amount due, compounded monthly, is
hereby reduced to a straight twelve percent (12%) per annum starting from August 28, 1986. With costs
against the petitioner.
SO ORDERED.