Credit-transactions-case-digest-and-doctrines-midterms-2019.docx

Credit Transactions Atty. Niedo 2nd Semester, AY 2018-2019

Chapter 1: LOAN Loan distinguished from discounting a paper People v. Concepcion FACTS: Concepcion, the president of PNB, authorized the extension of credit to a copartnership where his wife was a partner. This special authorization was in view of the memorandum order limiting the discretional power of the local manager to grant loans and discount negotiable documents. Credit was granted and 6 demand notes were the only security required. The notes and the interest were eventually taken up. As a member of the BOD, Concepcion was held guilty with violation of Act 2747 prohibiting the granting of loans, directly or indirectly, to any member of the BOD nor to the agents of banks. The defendant avers the following: 1. The documents of record do not prove that authority to make a loan was given, but only show concession of credit 2. The Insular Auditor opined that the prohibition referred to loans only and not on discounts and the defendant relied on this. The Insular Auditor ruled that the demand notes were not discount paper because interest was not deducted from the face of the notes and they were single-name paper and not double-name paper. ISSUE/S: Whether the granting of credit was a loan - YES HELD: The judgment is affirmed. RATIO DECIDENDI: Credit - ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. Loan - delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit."

DISCOUNT

LOAN

Interest is deducted in advance

Interest is taken at the expiration of credit

On double-name paper

On single-name paper

The purpose of the Legislature in enacting section 35 of Act No. 2747 was to erect a wall of safety against temptation for a director of the PNB. A loan to a partnership of which the wife of a director is a member falls within the prohibition. BANKS AND BANKING; "CREDIT" AND "LOAN," DEFINED AND DISTINGUISHED.—The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. A "loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without interest. The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount fixed in the "credit." "LOAN" AND "DISCOUNT" DISTINGUISHED.—To discount a paper is a mode of loaning money, with these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on singlename paper. SECTION 35 OF ACT No. 2747; PROHIBITION AGAINST INDIRECT LOANS.—The purpose of the Legislature in enacting section 35 of Act No. 2747 was to erect a wall of safety against temptation for a director of the Philippine National Bank. The prohibition against indirect loans is a recognition of the familiar maxim that no man may serve two masters—that where personal interest clashes with fidelity to duty the latter almost always suffers. A loan to a partnership of which the wife of a director is a member falls within the prohibition in section 35 of Act No. 2747 against indirect loans.

Binding effect of accepted promise to lend Saura Import and Export Co. v. DBP FACTS: A complaint was filed to assail the judgment requiring DBP to pay actual and consequential damages to Saura for the non-disbursement of the loan proceeds. Saura applied for a loan from DBP premised on several conditions. When the negotiations on the conditions came to a standstill, Saura requested DBP to cancel the mortgage which was in view of the registration of a mortgage contract over the same property in favor of Prudential Bank. The deed of cancellation was executed by DBP and delivered to Saura himself. After almost 9 years, Saura commenced the present suit for damages alleging failure of DBP to comply with its obligation to release the proceeds of the loan, thereby preventing him of completing his contractual commitments. ISSUE/S: Whether there was a perfected contract of loan – YES HELD: The complaint is dismissed. RATIO DECIDENDI: Where an application for a loan of money was approved by resolution of the defendant corporation and the corresponding mortgage was executed and registered, there arises a perfected-consensual contract of loan. There was offer and acceptance in this case but falls short of resolving the claim that defendant failed to fulfill its obligation and that the plaintiff is entitled to recover damages. Where after approval of his loan, the borrower, instead of insisting for its release, asked that the mortgage given as security be cancelled and the creditor acceded thereto, the action taken by both parties was in the nature of mutual desistance which is a mode of extinguishing obligations. It is a concept that derives from, the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. The subsequent conduct of Saura confirmed the desistance where he did not protest any alleged breach of contract. Obligations and Contracts; When contract of simple loan perfected.—Where an application for a loan of money was approved by resolution of the defendant corporation and the corresponding mortgage was executed and registered, there arises a perfected-consensual contract of loan.

Extinguishment of obligations by mutual desistance.—Where after approval of his loan, the borrower, instead of insisting for its release, asked that the mortgage given as security be cancelled and the creditor acceded thereto, the action taken by both parties was in the nature of mutual desistance—what Manresa terms “mutuo disenso”—which is a mode of extinguishing obligations. It is a concept that derives from, the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. BPI Investment Corporation v. CA FACTS: A petition was filed to assail the decision of CA holding that the private respondents were not in default and the extrajudicial foreclosure by BPIIC was premature. The petitioner avers the following: 1. A contract of loan is a consensual contract and a loan contract is perfected at the time the contract of mortgage is executed (March 31, 1981), hence, the amortization and interests on the loan should be computed from said date. 2. 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 the mortgage on Roa’s loan. 3. The delay in the release of the loan was attributable to ALS as they required to reduce Roa’s loan, which they were only able to do so in August 1982. The private respondent asserts the following: 1. A simple loan is perfected upon the delivery of the object of the contract. In this case, even though the loan contract was signed on March 1981, it was perfected only on September 1982 when the full loan was released to private respondents 2. Even assuming that the loan was perfected on 1981, there was no delay since a perfected loan agreement is a reciprocal obligation where the obligation of each party is the consideration of the other party. They did not incur in delay when they did not commence paying the monthly amortization as it was only in 192 when petitioner complied with its obligation under the contract. ISSUE/S: Whether a contract of loan is a consensual contract – NO HELD: The CA decision is affirmed with modification as to the award of damages.

RATIO DECIDENDI: A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. It is an accepted promise to deliver something by way of simple loan. A perfected consensual contract can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other; It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the date of the second release of the loan. Following the intentions of the parties on the commencement of the monthly amortization, as found by the Court of Appeals, private respondents’ obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract. BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released to private respondents and the date when it was released. Such negligence resulted in damage to private respondents, for which an award of nominal damages should be given in recognition of their rights which were violated by BPIIC. A loan contract is not a consensual contract but a real contract, perfected only upon the delivery of the object of the contract.—We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. Petitioner misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. While a perfected loan contract can give rise to an action for damages, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower.—In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application through a board resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for damages. We recognized in could have made the bank liable for not releasing the loan. However, since

the fault was attributable to petitioner therein, the court did not award it damages. A perfected consensual contract, as shown above, can give rise to an action for damages. However, said contract does not constitute the real contract of loan which requires the delivery of the object of the contract for its perfection and which gives rise to obligations only on the part of the borrower. this case, a perfected consensual contract which under normal circumstances. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other; It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him.—We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. As averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only when a party has performed his part of the contract can he 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. Bonnevie v. CA FACTS: Bonnevie filed for the annulment of the Deed of Mortgage executed in favor of PBCOM by spouses Lozano and the extrajudicial foreclosure. Spouses Lozano are the owners of the property which they mortgaged to secure the payment of the loan they were about to obtain from PBCOM. They then executed a deed of sale with assumption of mortgage with Bonnevie in favor of PBCOM while the loan proceeds was not yet received by them but Lim signed the promissory note for that. Bonnevie then made payments to PBCOM and assigned his rights to his brother. Subsequently, PBCOM foreclosed the mortgage. It was alleged by the petitioner that: 1. The Deed of Mortgage lacks consideration as the loan proceeds have not yet been received 2. The mortgage was executed by one who was not the owner of the mortgaged property.

3.

The property was foreclosed not in compliance with the conditions imposed.

indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

On the other hand, the Bank raised the following: 1. The defendant has not given its consent on the sale of the mortgaged property to the plaintiff 2. The law on contracts requires the bank’s consent before Lozano can be released from his agreement with the bank and before it may be substituted 3. The property remained in the name of Lozano 4. The mortgage was without consideration as the signing and delivery of the promissory note and the disbursement of the proceeds are mere implementation of the basic consensual contract of loan.

A mortgage is not rendered null and void by the use thereof as security in the renewal of the original loan after the property mortgaged had already been sold to another without the sale being registered.—This argument failed to consider the provision of the contract of mortgage which prohibits the sale, disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is constituted. These provisions are expressly made part and parcel of the Deed of Sale with Assumption of Mortgage.

ISSUE/S: Whether the foreclosure on the mortgage is validly executed – YES

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

HELD: The decision of CA is affirmed. RATIO DECIDENDI: The mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution. The argument that the mortgage is null and void due to the subsequent renewals of the original loan, using as security the property which was already sold to Bonnevie failed to consider that the disposition of the mortgaged property without written consent is prohibited and the vendee shall assume the mortgage in terms and conditions it is constituted. A mortgage contract does not become invalid by mere failure of debtor to get the mortgage consideration on the date the mortgage was executed. A loan is a consensual contract.—This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at the sametime the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of

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

Central Bank of the Philippines v. CA FACTS: The bank approved the loan application of Tolentino for the amount of P80,000 and executed a real estate mortgage over a 100-hectare land. However, a mere P17,000 was partially released and advance interest for the whole amount was deducted. After being informed that there was no fund available yet, the pre-deducted interest was refunded to Tolentino. The Monetary Board, after finding that the bank was suffering liquidity problems issued a resolution prohibiting it from making new loans and investments. In view of the nonpayment of the P17,000 and interest, the bank filed an extrajudicial foreclosure of the real estate mortgage covering the land. Tolentino then filed a petition for specific performance on the delivery of the balance of the loan and rescission of the real estate mortgage. ISSUE/S: Whether the action for specific performance shall prosper – NO Whether Tolentino is liable to pay the P17,000 covered by the promissory note – YES Whether the real estate mortgage may be foreclosed – NOT WHOLLY HELD: Tolentino is ordered to pay P17,000 plus interest If he fails to pay, his real estate mortgage covering 21.25 hectares shall be foreclosed The real estate mortgage covering the remaining area is declared unenforceable and released to Tolentino. RATIO DECIDENDI: When Island Savings Bank and Tolentino entered into an P80,000.00 loan agreement, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other. and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay. the Bank's delay in furnishing the entire loan started when the Monetary Board of the Central Bank issued Resolution No. 967, which prohibited Island Savings Bank from doing further business. However, this cannot interrupt the default of Island Savings Bank in releasing the P63,000 balance as it is not a new loan but a loan agreement previously contracted. The mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance. The fact that Tolentino demanded and accepted the refund of the prededucted interest amounting to P4,800.00 for the supposed P80,000.00 loan

covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The receipt by Tolentino of the pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned. Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt 21.25 hectares is more than sufficient to secure a P17,000.00 debt. The rule of indivisibility of mortgage is inapplicable to the case at bar since it presupposes several heirs of the debtor or creditor. Banks; Obligations; Loans; Where a bank approved a loan for P80,000.00 but was able to deliver only P1 7,000.00, it is in default for P63,000.00 to the borrower.— When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the ?80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question. The fact that the creditor is insolvent or was stopped by the Central Bank from granting further loans is no defense to its fulfillment to extend the loan applied for and approved by it to the full amount.—The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot interrupt the default of Island Savings

Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit Island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him (Vol. 17A, 1974 ed., CJS p. 650). Acceptance of refund of excess pre-deducted interest for a supposed loan of P80,000.00 does not constitute a waiver of right to collect the P63,000.00 unreleased balance of the P80,000.00 loans. —The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a nonexisting debt. Thus, the receipt by Sulpicio M. Tolentino of the prededucted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other. The bank must not rely on representations by its borrowers of the value of their collaterals. The bank shall bear the risk in case of over-valuation.—The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as loan security is a patent nonperformance of this responsibility. If ever, bank officials and employees totally rely on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be overvalued. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court, on objections of Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n., Sept. 15, 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court. Due to CB prohibition, release of the entire loan cannot be granted; only rescission of the loan agreement to the extent of the unreleased loan balance can be granted by the courts.—Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the P80,000.00

loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. A bank borrower who did not pay the partial loan release as per the terms of the promissory note signed by him is in default to that extent even if the entire loan cannot be released anymore.—The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Mortgages; Where only P 17,000.00 of the approved P80,000.00 loan was released, the real estate mortgage thereon can be foreclosed only to the extent of 21.25%.—Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares, The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt 21.25 hectares is more than sufficient to secure a P17,000.00 debt. Rule of indivisibility of a mortgage under Art. 2089, NCC does not apply where bank released only part of the approved mortgage loan.—The rule of indivisibility, of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. x x x The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply. Commodatum essentially gratuitous Republic v. Bagtas FACTS: Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls for breeding purposes subject to a breeding fee of 10% of the book value of the bulls. Upon expiry, the borrower asked for renewal for another year but was only granted for one bull. He then offered to buy the bulls at a value with a deduction on the yearly depreciation but he failed to pay

the same or return them. After some time, the two bulls were returned to the Bureau but the third bull died from gunshot wounds inflicted during a Huk raid. The appellant contends that the contract was commodatum and that the appellee retained the ownership of the bull should it suffer loss due to force majeure. ISSUE/S: Whether Bagtas is liable to pay the dead bull HELD: Yes. The writ of execution appealed from is set aside. RATIO DECIDENDI: The loan of the 3 bulls for breeding purposes subject to the payment of breeding fee, if considered a compensation, the contract should be a lease of the bulls. It could not be a contract of commodatum, because the latter is essentially gratuitous. The lessee would be subject to the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the possession of the bull after the expiry of the contract. Even if the contract be commodatum, the appellant is still liable because a bailee in a contract of commodatum is liable even if it should be through fortuitous event: 1. If he keeps it longer than the period stipulated 2. If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from responsibility in case of a fortuitous event Loan of bulls for breeding purposes; Nature of contract affected by payment of fee.—The loan by the Bureau of Animal Industry to the defendant of three bulls for breeding purposes for a period of one year, later on renewed for another as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. If the breeding fee be considered a compensation, the contract would be a lease of the bulls; it could not be a contract of commodatum, because that contract is essentially gratuitous. Proceedings for administration and settlement of estate of the deceased; Enforcement of money judgments.—Where special proceedings for the administration and settlement of the estate of the deceased have been instituted, the money judgment rendered in favor of a party cannot be enforced by means of a writ of execution, but must be presented to the probate court for payment by the administrator appointed by the court.

Pajuyo v Court of Appeals Pajuyo purchased the rights over a property from Pedro Perez. Thereafter, he constructed a house and he and his family lived there. Later, Pajuyo agreed to let Guevarra live in the house for free provided that Guevarra maintain cleanliness and orderliness of the house. They also agreed that Guevarra should leave upon demand. But when Pajuyo later told Guevarra that he needed the house, Guevarra refused, hence an ejectment case was filed. Supreme Court held that the contract is not a commodatum. “In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum.” Pari Delicto; One of the exceptions to the application of the pari delicto principle is where its application would violate wellestablished public policy.— Articles 1411 and 1412 of the Civil Code embody the principle of pari delicto. We explained the principle of pari delicto in these words: The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and ‘in pari delicto potior est condition defedentis.’ The law will not aid either party to an illegal agreement. It leaves the parties where it finds them. The application of the pari elicto principle is not absolute, as there are exceptions to its application. One of these exceptions is where the application of the pari delicto rule would violate well-established public policy. Squatting; The application of the principle of pari delicto to a case of ejectment between squatters is fraught with danger; Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters—courts should not leave squatters to their own devices in cases involving recovery of possession.—Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the latter had illegally occupied, emboldened by the knowledge that the courts would leave them where they are. Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at all cost. Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of possession seek to prevent. Even the owner who has title over the disputed property cannot take the law into his own hands to regain

possession of his property. The owner must go to court. Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The determination of priority and superiority of possession is a serious and urgent matter that cannot be left to the squatters to decide. To do so would make squatters receive better treatment under the law. The law restrains property owners from taking the law into their own hands. However, the principle of pari delicto as applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters or violently retake possession of properties usurped from them. Courts should not leave squatters to their own devices in cases involving recovery of possession. Contracts; Commodatum; Precarium; Words and Phrases; An essential feature of commodatum is that it is gratuitous, while another feature is that the use of the thing belonging to another is for a certain period; If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium; Precarium is a kind of commodatum.—In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum. Contracts; Human Relations; Squatting; There must be honor even between squatters.—Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy. Guevarra insists that the contract is void. Guevarra should know that there must be honor even between squatters. Guevarra freely entered Guevarra freely entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it. The Kasunduan binds Guevarra. Producers Bank v Court of Appeals FACTS: Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services (“Sterela” for brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money from said account within a month’s time. With this, Mrs.

Vivies, Sanchez and a certain Estrella Dumagpi, secretary of Doronilla, went to the bank to open an account with Mrs. Vives and Sanchez as signatories. A passbook was then issued to Mrs. Vives. Subsequently, private respondent learned that part of the money was withdrawn without presentment of the passbook as it was his wife got hold of such. Mrs. Vives could not also withdraw said remaining amount because it had to answer for some postdated checks issued by Doronilla who opened a current account for Sterela and authorized the bank to debit savings. Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his client’s money. Doronilla issued another check for P212,000.00 in private respondent’s favor but the check was again dishonored for insufficiency of funds. Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The RTC ruled in favor of the private respondent which was also affirmed in toto by the CA. Hence this petition. ISSUE: WHETHER THE TRANSACTION BETWEEN THE DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN. HELD: NO. A circumspect examination of the records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise: By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination. Loan; Distinguished from Commodatum; Article 1933 of the Civil Code distinguishes between the two kinds of loans.—By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Meaning of fungible things Republic v. Grijaldo FACTS: Jose Grijaldo obtained five crop loans from the branch office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These loans are evidenced by five promissory notes executed by the appellant in favor of the Bank. All notes without due dates, but because the loans were crop loans it was considered that the loans were due one year after they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the standing crops on his land known as Hacienda Campugas. By virtue of “Trading with the Enemy Act” the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States which were subsequently transferred to the Republic of the Philippines. Grijaldo failed to pay the crop loans despite the extra-judicial demand of the Government of the Philippines. He argued that the Government has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and those crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished.

ISSUE: Whether or not Grijaldo’s obligation to pay the crop loans had extinguished due to the crops that were lost or destroyed through enemy action. HELD/RATIO: NO. The obligation of the Grijaldo under the five promissory notes was not to deliver a determinate thing; namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing the amount of money representing the total sum of the five loans, with interest. The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops. The court ordered the estate of Grijaldo to answer for the settlement of the crop loans. Obligations and contracts; Crop loans obtained from the Bank of Taiwan, Ltd.; Right of Philippine Government to collect the loans.—In 1943, appellant obtained crop loans from the Bank of Taiwan, Ltd., Bacolod City Branch, evidenced by promissory notes. To secure payment of the loans, appellant executed a chattel mortgage over the standing crops on his land. After the war, the Republic of the Philippines brought the present action to collect from appellant the unpaid account. Held: It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loans. However, pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., were vested in the United States Government. Pursuant, further, to the Philippine Property Act of 1946 and Transfer Agreements dated July 20, 1954 and June 15, 1957, between the United States Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the Philippines. The successive transfers of the rights over the loans in question from the Bank of Taiwan, Ltd. to the United States Government, and from the United States Government to the government of the Republic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interests in said loans, thereby creating a privity of contract between the appellee and the appellant. Destruction of crop through enemy action; Effect on the obligation.—Appellant maintains, in support of his contention that the appellee has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on the land owned by him and those crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. Held: This argument is untenable. The obligation of the appellant under the promissory notes was not to deliver a determinate thing. namely, the crops to be harvested

from his land, but to pay a generic thing—the amount of money representing the total sum of his loans, with interest. The chattel mortgage on the crops simply stood as a security for the fulfillment of appellant's obligation covered by the, promissory notes, and the loss of the crops did not 'extinguish his obligation to pay, because the ac count could still be paid from other sources aside from the mortgaged crops. Prescription of actions; Prescription does not run against the government.— The complaint in the present case was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions, to protect the interests of the State ever a public property. This Court has held that the statute of limitations does not run against the right of action of the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751). Effect of moratorium laws.— Moreover, the running of the period of prescription . of the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders Nos. 25, dated November 18. 1944; Executive Order No. 32, dated March 10, 1945; and Republic Act No. 432, approved on July 26, 1948). Computed accordingly, the prescriptive period was suspended for 8 years and 6 months. Hence, appellee's action had not yet prescribed. Payment in Japanese war notes; Application of Ballantyne scale of values.— Contracts stipulating for payments presumably in Japanese war notes may be enforced after the liberation to the extent of the just obligation of the contracting parties and, as said notes have become worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place where the obligation was incurred unless the parties had agreed otherwise. (Hilado vs. De la Costa L-150 April 30. 1049, 46 Off. Gaz. 5472.) Effect of retention or adverse claim by bailee Catholic Vicar Apostolic of the Mt. Province v. Court of Appeals FACTS: Catholic Vicar Apostolic was ordered to return and surrender 2 lots to the plaintiffs. The subject lots, being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls. The heirs of the plaintiffs assert ownership and title on the subject lots. ISSUE/S: Whether Catholic Vicar Apostolic was the rightful owner of the subject lots

HELD: No. The petition was denied for lack of merit. RATIO DECIDENDI: The petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of the 2 lots, it had been in possession in concept of an owner only for 11 years. Ordinary acquisitive prescription requires 10 years with just title. Extraordinary acquisitive prescription requires 30 years. Private respondents were able to prove that their predecessors’ house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees’ failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. Civil Law; Credit Transactions; Commodatum; Property; Adverse Possession; Adverse Claim; Acquisitive Prescription; When petitioner borrowed the house of private respondents’ predecessors, and petitioner was allowed its free use, private respondents became bailors in commodatum, and petitioner, the bailee.—Private respondents were able to prove that their predecessors’ house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees’ failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title. Case when contract is precarium Quintos and Ansaldo v. Beck FACTS: An action was brought to compel the defendant to return to her certain furniture which she lent him for his use. 3 gas heaters and 4 electric lamps were found in the possession of the Sheriff. The defendant was a tenant of the plaintiff, the latter granting the use of the furniture gratuitously subject to the condition

that the defendant would return them to the plaintiff upon the latter’s demand. Thereafter, the plaintiff required the defendant to return all the furniture transferred to him for his use. The defendant declined to make deliver of all of them.

stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said value. Should the defendant fail to deliver some of the furniture, the value thereof should be later determined by the trial Court through evidence which the parties may desire to present.

ISSUE/S: Whether the defendant should return the furniture

Liability for interest even in the absence of stipulation

HELD: Yes. The defendant is ordered to return and deliver to the plaintiff. RATIO DECIDENDI: The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitous granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's demand.

Cortes v. Venturanza FACTS: The remaining balance of Debtor’s indebtedness to Creditor is P576,573.90 with an agreed interest at the rate of6% per annum from January 1, 1959, secured by Real Estate Mortgage on Debtor’s land. Then Debtor defaulted. So,Creditor filed a suit for foreclosure of mortgage on December 12, 1962. ISSUE: How much interest is payable?

The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps.

HELD: The interest at 6% per annum from January 1, 1959 to December 12, 1962 is P136,482.13. This is to be added tothe principal amount, thus making a total of P713,056.03 which shall earn legal interest at 6% (now 12%) per annumfrom December 12, 1962 until fully paid. Such interest is not due by stipulation but by the mandate of the law, i.e.,Article 2212

COMMODATUM; OBLIGATION OF THE PARTIES.—The contract entered into between the parties is one of commodatum, because under it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the latter's demand (Clause 7 of the contract, Exhibit "A"; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or house. The defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps.

Contracts; Filing of complaint not premature effects of default had already arisen from non-payment of contractual obligations.—With respect to the first issues— whether the complaint was filed prematurely—there is no dispute that plaintiffs filed their complaint on December 12, 1962; that under the terms of the contract, x x x, the defendants were given until January 1, 1962 within which to pay their obligation; and that January 1, 1962 had passed without the defendants having paid to the plaintiffs the sum of P576,573.90 and the corresponding interest thereon notwithstanding repeated demands for payment made upon and duly received by them x x x. Therefore, when plaintiffs filed the complaint on December 12, 1962, the effects of default as against the defendants had already arisen. Besides no less than the defendants Venturanzas themselves admitted in their brief that they were delayed in the payment of the balance of their obligation to the plaintiffs.

EXPENSES FOR DEPOSIT OF FURNITURE.—As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the defendant wanted to retain the three gas heaters and the four electric lamps. VALUE OF FURNITURE.—As to the value of the furniture. we do not believe that the plaintiff is entitled to the payment thereof by the defendant in case of his inability to return some of the furniture, because under paragraph 6 of the

Admission of a party in delay in the payment of an obligation means that obligation had already become due and demandable; Failure to pay unjustified when cause of delay is not force majeure nor an Act of God.—One cannot admit being delayed in the payment of his obligation unless he believes that his obligation is already due and demandable. Stated otherwise, there is no delay if the obligation is not yet due. The alleged cause of their default in paying the balance of the price, is not force majeure nor an act of God. Hence, their failure to pay is not justified.

If intention of the parties is that the consummation of the contract, Deed of Sale with Purchase Money Mortgage should be dependent on the ability of the buyer collect the purchase price on their two haciendas, the intention should have been clearly stated in the contract; When deed of sale specifies with a period it is an obligation with a definite period case at bar. —x x x A careful reading of the Deed of Sale with Purchase Money Mortgage, Exhibit B, reveals the conspicuous absence of any provision making the consummation of the said contract dependent on the ability of defendants Venturanzas to collect the purchase price of their two haciendas. If this were the intention of the parties, they should have clearly tated it in the contract. x x x The deed of sale with purchase money mortgage clearly indicates that the balance of P576,573.90 shall be paid by the defendants, jointly and severally, within three (3) years from January 1, 1959, with interest at the rate of 6% per annum, until fully paid. On January 1, 1962, the defendants failed and refused to pay their obligation. This is a clear case of an obligation with a definite period ex die, hich period was incidentally established for the benefit of the defendants. The evidence presented by the plaintiffs to substantiate these facts approaches moral certainty, not merely preponderance of evidence. x x x x x x Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith; Deed of sale did not contravene limitations of freedom of contract.—Furthermore, according to Article 1159 of the New Civil Code, obligations arising from contracts have the force of law between the contracting parties, and should be complied with in good faith. The deed does not show on its face that any of the limitations of the freedom of contract under Article 1306 of the same Code, such as law, morals, good customs, public order, or public policy, exists. On the contrary, the terms of said exhibit are so clear and leave no doubt with respect to the intention of the contracting parties. Hence, the literal meaning of its stipulations shall control. This is so because the intention of the parties is clearly manifested and they are presumed to know the consequences of their voluntary acts. x x x. Since the period of payment of the mortgage on the land had become due, and no payment therefor had been received, foreclosure of mortgage would be proper.—We, therefore, see no reason to overturn the finding of the court a quo that the defendants are indebted to the plaintiffs on the mortgage constituted by them over the 33 parcels of land in question since the period for payment of the obligation had become due and, therefore, plaintiffs are entitled to a foreclosure of the said mortgage. Novation; Concept and nature of novation as a mode of extinguishing obligations.—According to Manresa, novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person to the rights of the creditor. Unlike other modes of extinction of obligations, novation is a juridical act with a dula function—it extinguishes an

obligation and creates a new one in lieu of the old. x x x Under the provision on Novations, there are two forms of novation by substituting the person of the debtor, and they are: (1) expromision and (2) delegacion. In the former, the initiative for the change does not come from the debtor and may even be made without his knowledge, since it consists in a third person assuming the obligation. As such, it logically requires the consent of the third person and the creditor. In the latter, the debtor offers and the creditor accepts a third person who consents to the substitution and assumes the obligation x x x. In these two modes of substitution, the consent of the creditor is an indispensable requirement. While the documents of sale of the property between defendants and crossdefendants might have created a judicial relation as between them, it cannot however affect the relation of said defendants and plaintiffs since the latter as creditors are not privies to said agreement and they have not given their consent to the substitution of the person of the debtor; Reasons for requirement.—x x x suffice it to state that while the Agreement and Deed of Sale of Undivided Share in Real Estate x x x, might have created a juridical relation as between defendants Venturanzas and Oledans, it cannot however affect the relation between them on one hand, and the plaintiffs, on the other, since the latter are not privies to the said agreement, and this kind of novation cannot be made without the consent of the plaintiffs. One reason for the requirement of the creditor’s consent to such substitution is obvious. Substitution of one debtor for another may delay or prevent the fulfillment of the obligation by reason of the financial inability or insolvency of the new debtor; hence, the creditor should agree to accept the substitution in order that it may be binding on him. x x x In the case at bar, the agreement x x relied upon by the defendants Oledas dows not show on its face that the plaintiffs intervened in, much less gave their consent to, the substitution; as a matter of fact, plaintiff Cortes vehemently denied having consented to the transfer of rights from the Oledans to the Venturanzas alone. Res inter alios acta alteri nocere non debet x x x There is thus a complete absence of animus novandi, whether express or implied, on the part of the creditors —the Corteses. Tolentino and Manio vs. Gonzalez Sy Chiam Tolentino purchased land from Luzon Rice Mills for Php25,000 payable in three installments. Tolentino defaulted on the balance so the owner sent a letter of demand to him. To pay, Tolentino applied for loan from Gonzalez on condition that he would execute a pacto de retro sale on the property in favor of Gonzalez. Upon maturation of loan, Tolentino defaulted so Gonzalez is demanding recovery of the land. Tolentino contends that the pacto de retro sale is a mortgage and not an absolute sale. The Supreme Court held that upon its terms, the deed of pacto de retro sale is an absolute sale with right of repurchase and not a mortgage. Thus, Gonzalez is

the owner of the land and Tolentino is only holding it as a tenant by virtue of a contract of lease. **LOAN: A contract of loan signifies the giving of a sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same thing. It has been defined as an advancement of money, goods, or credits upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with the terms of the contract. The moment the contract is completed, the money, goods or chattels given cease to be the property of the former owner and become the property of the obligor to be used according to his own will, unless the contract itself expressly provides for a special or specific use of the same. At all events, the money, goods or chattels, the moment the contract is executed, cease to be the property of the former owner and become the sole property of the obligor. RENTAL CONTRACTS; USURY.—A contract for the lease of property is not a "loan." Under the Usury Law the defense of usury cannot be based thereon. The Usury Law in this jurisdiction prohibits a certain rate of interest on "loans." A contract of "loan" is a very different contract from that of "rent." A "loan," as that term is used in the statute, signifies the giving of a sum of money, goods or credit to another, with a promise to repay, but not a promise to return the same thing. In a contract of "rent' the owner of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract. In a contract of rent the relation between the contractors is that of landlord and tenant. In a contract of loan of money, goods, chattels or credits, the relation between the parties is that of obligor and obligee. RENTS, CONTRACT OF ; DEFINED.—A contract of "rent" may be defined as the compensation either in money, provisions, chattels or labor, received by the owner of the soil or the property rented, f rom the occupant thereof. LOAN, CONTRACT OF; DEFINED.—A contract of "loan," as that term is used in the statute, signifies the giving of a sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same thing. It has been defined as an advancement of money, goods or credits upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with the terms of the contract. The moment the contract is completed, the money, goods or chattels given cease to be the property of the former owner and become the property of the obligor to be used according to his own will, unless the contract itself expressly provides for a special or specific use of the same. At all events, the money, goods or chattels, the moment the contract is executed, cease to be the property of the former owner and become the sole property of the obligor. A contract of "loan" differs materially and essentially from a contract of "rent." USURY; DEFINED.—Usury may be defined as contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance

of money, goods or chattels. It is the taking of more interest for the use of money, goods or chattels or credits than the law allows. Usury has been regarded with abhorrence from the earliest times.

Chapter 2: SIMPLE LOAN OR MUTUUM Garcia v Thio FACTS Respondent Thio received from petitioner Garcia two crossed checks which amount to US$100,000 and US$500,000, respectively, payable to the order of Marilou Santiago. According to petitioner, respondent failed to pay the principal amounts of the loans when they fell due and so she filed a complaint for sum of money and damages with the RTC. Respondent denied that she contracted the two loans and countered that it was Marilou Satiago to whom petitioner lent the money. She claimed she was merely asked y petitioner to give the checks to Santiago. She issued the checks for P76,000 and P20,000 not as payment of interest but to accommodate petitioner’s request that respondent use her own checks instead of Santiago’s. RTC ruled in favor of petitioner. CA reversed RTC and ruled that there was no contract of loan between the parties. ISSUE (1) Whether or not there was a contract of loan between petitioner and respondent. (2) Who borrowed money from petitioner, the respondent or Marilou Santiago? HELD (1)

(2)

The Court held in the affirmative. A loan is a real contract, not consensual, and as such I perfected only upon the delivery of the object of the contract. Upon delivery of the contract of loan (in this case the money received by the debtor when the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount. It is undisputed that the checks were delivered to respondent. However, the checks were crossed and payable not to the order of the respondent but to the order of a certain Marilou Santiago. Delivery is the act by which the res or substance is thereof placed within the actual or constructive possession or control of another. Although respondent did not physically receive the proceeds of the checks, these instruments were placed in her control and possession under an arrangement whereby she actually re-lent the amount to Santiago.

Petition granted; judgment and resolution reversed and set aside.

Contracts; A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract.—A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract. Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount.—Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed) the Delivery is the act by which the res or substance thereof is placed debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount. within the actual or constructive possession or control of another.—Delivery is the act by which the res or substance thereof is placed within the actual or constructive possession or control of another. Although respondent did not physically receive the proceeds of the checks, these instruments were placed in her control and possession under an arrangement whereby she actually relent the amounts to Santiago. Loans; Interests; Article 1956 of the Civil Code provides that “no interest shall be due unless it has been expressly stipulated in writing.”— We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the US$100,000 and P500,000 loans respectively. There was no written proof of the interest payable except for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the Civil Code provides that “[n]o interest shall be due unless it has been expressly stipulated in writing.” While there can be no stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code.—Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code. It is well-settled that: When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

Development Bank of the Philippines v Guarina Agricultural and Realty Development Corporation FACTS: In July 1976, Guariña Corporation applied for a loan from DBP to finance the development of its resort complex. The loan, in the amount of P3,387,000.00, was approved on August 5, 1976. Guariña Corporation executed a promissory note that would be due on November 3, 1988. On October 5, 1976, Guariña Corporation executed a real estate mortgage over several real properties in favor of DBP as security for the repayment of the loan. On May 17, 1977, Guariña Corporation executed a chattel mortgage over the personal properties existing at the resort complex and those yet to be acquired out of the proceeds of the loan, also to secure the performance of the obligation. Prior to the release of the loan, DBP required Guariña Corporation to put up a cash equity of P1,470,951.00 for the construction of the buildings and other improvements on the resort complex. The loan was released in several installments, and Guariña Corporation used the proceeds to defray the cost of additional improvements in the resort complex. In all, the amount released totaled P3,003,617.49, from which DBP withheld P148,102.98 as interest. Guariña Corporation demanded the release of the balance of the loan, but DBP refused. Instead, DBP directly paid some suppliers of Guariña Corporation over the latter’s objection. DBP found upon inspection of the resort project, its developments and improvements that Guariña Corporation had not completed the construction works. In a letter dated February 27, 1978, and a telegram dated June 9, 1978, DBP thus demanded that Guariña Corporation expedite the completion of the project, and warned that it would initiate foreclosure proceedings should Guariña Corporation not do so. Unsatisfied with the non-action and objection of Guariña Corporation, DBP initiated extrajudicial foreclosure proceedings ISSUE: Whether or not Guarina was in delay in performing its obligation making DBP’s action to foreclose the mortgage proper. HELD: NO. The Court held that the foreclosure of a mortgage prior to the mortgagor’s default on the principal obligation is premature, and should be undone for being void and ineffectual. The mortgagee who has been meanwhile given possession of the mortgaged property by virtue of a writ of possession issued to it as the purchaser at the foreclosure sale may be required to restore the

possession of the property to the mortgagor and to pay reasonable rent for the use of the property during the intervening period. The agreement between DBP and Guariña Corporation was a loan. Under the law, a loan requires the delivery of money or any other consumable object by one party to another who acquires ownership thereof, on the condition that the same amount or quality shall be paid. Loan is a reciprocal obligation, as it arises from the same cause where one party is the creditor, and the other the debtor. The obligation of one party in a reciprocal obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a loan, the creditor should release the full loan amount and the debtor repays it when it becomes due and demandable. The loan agreement between the parties is a reciprocal obligation. Appellant in the instant case bound itself to grant appellee the loan amount of P3,387,000.00 condition on appellee’s payment of the amount when it falls due. The appellant did not release the total amount of the approved loan. Appellant therefore could not have made a demand for payment of the loan since it had yet to fulfil its own obligation. Moreover, the fact that appellee was not yet in default rendered the foreclosure proceedings premature and improper. By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact on Guariña Corporation the latter’s compliance with its own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be obliged to perform what is expected of it while the other’s obligation remains unfulfilled. In other words, the latter party does not incur delay. Contracts; Loans; Under the law, a loan requires the delivery of money or any other consumable object by one party to another who acquires ownership thereof, on the condition that the same amount or quality shall be paid.—The agreement between DBP and Guariña Corporation was a loan. Under the law, a loan requires the delivery of money or any other consumable object by one party to another who acquires ownership thereof, on the condition that the same amount or quality shall be paid. Loan is a reciprocal obligation, as it arises from the same cause where one party is the creditor, and the other the debtor. The obligation of one party in a reciprocal obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a loan, the creditor should release the full loan amount and the debtor repays it when it becomes due and demandable. Mortgages; By its nature, a mortgage remains an accessory contract dependent on the principal obligation, such that enforcement of the mortgage contract will depend on whether or not there has been a violation of the principal obligation.—DBP’s actuations were legally unfounded. It is true that loans are often secured by a mortgage constituted on real or personal property to protect the creditor’s interest in case of the default of the debtor. By its nature, however,

a mortgage remains an accessory contract dependent on the principal obligation, such that enforcement of the mortgage contract will depend on whether or not there has been a violation of the principal obligation. While a creditor and a debtor could regulate the order in which they should comply with their reciprocal obligations, it is presupposed that in a loan the lender should perform its obligation — the release of the full loan amount — before it could demand that the borrower repay the loaned amount. In other words, Guariña Corporation would not incur in delay before DBP fully performed its reciprocal obligation. Central Bank v Court of Appeals G.R. No. L-45710 October 3, 1985 Facts: Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan. The loan called for a lump sum of P80,000, repayable in semi-annual installments for 3 yrs, with 12% annual interest. After the agreement, a mere P17K partial release of the loan was made by the bank and Tolentino and his wife signed a promissory note for the P17,000 at 12% annual interest payable w/in 3 yrs. An advance interest was deducted fr the partial release but this prededucted interest was refunded to Tolentino after being informed that there was no fund yet for the release of the P63K balance. Monetary Board of Central Bank, after finding that bank was suffering liquidity problems, prohibited the bank fr making new loans and investments. And after the bank failed to restore its solvency, the Central Bank prohibited Island Savings Bank from doing business in the Philippines. Island Savings Bank in view of the non-payment of the P17K filed an application for foreclosure of the real estate mortgage. Tolentino filed petition for specific performance or rescission and damages with preliminary injunction, alleging that since the bank failed to deliver P63K, he is entitled to specific performance and if not, to rescind the real estate mortgage. Issues:  Whether or not Tolentino’s can collect from the bank for damages  Whether or not the mortgagor is liable to pay the amount covered by the promissory note  Whether or not the real estate mortgage can be foreclosed Held: (1) Whether or not Tolentino’s can collect from the bank for damagesThe loan agreement implied reciprocal obligations. When one party is willing and ready to perform, the other party not ready nor willing incurs in delay. When Tolentino executed real estate mortgage, he signified willingness to pay. That time, the bank’s obligation to furnish the P80K loan accrued. Now, the

Central Bank resolution made it impossible for the bank to furnish the P63K balance. The prohibition on the bank to make new loans is irrelevant bec it did not prohibit the bank fr releasing the balance of loans previously contracted. Insolvency of debtor is not an excuse for non-fulfillment of obligation but is a breach of contract. The bank’s asking for advance interest for the loan is improper considering that the total loan hasn’t been released. A person can’t be charged interest for nonexisting debt. The alleged discovery by the bank of overvaluation of the loan collateral is not an issue. The bank officials should have been more responsible and the bank bears risk in case the collateral turned out to be overvalued. Furthermore, this was not raised in the pleadings so this issue can’t be raised. The bank was in default and Tolentino may choose bet specific performance or rescission w/ damages in either case. But considering that the bank is now prohibited fr doing business, specific performance cannot be granted. Rescission is the only remedy left, but the rescission should only be for the P63K balance. (2) Whether or not the mortgagor is liable to pay the amount covered by the promissory note The promissory note gave rise to Sulpicio M. Tolentino’s reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages. (3) Whether or not the real estate mortgage can be foreclosed Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

Obligations; Loans; Where a bank approved a loan for P80,000.00 but was able to deliver only P1 7,000.00, it is in default for P63,000.00 to the borrower.—When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the ?80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question. The fact that the creditor is insolvent or was stopped by the Central Bank from granting further loans is no defense to its fulfillment to extend the loan applied for and approved by it to the full amount.—The Monetary Board Resolution No. 1049 issued on August 13, 1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and investments, and nowhere did it prohibit Island Savings Bank from releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but instead it is taken as a breach of the contract by him. Acceptance of refund of excess pre-deducted interest for a supposed loan of P80,000.00 does not constitute a waiver of right to collect the P63,000.00 unreleased balance of the P80,000.00 loans. —The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a nonexisting debt. Thus, the receipt by Sulpicio M. Tolentino of the pre-

deducted interest was an exercise of his right to it, which right exist independently of his right to demand the completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the other. A bank borrower who did not pay the partial loan release as per the terms of the promissory note signed by him is in default to that extent even if the entire loan cannot be released anymore.—The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay. Mortgages; Where only P 17,000.00 of the approved P80,000.00 loan was released, the real estate mortgage thereon can be foreclosed only to the extent of 21.25%.—Since Island Savings Bank failed to furnish the P63,000.00 balance of the P80,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares, The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt 21.25 hectares is more than sufficient to secure a P17,000.00 debt. Rule of indivisibility of a mortgage under Art. 2089, NCC does not apply where bank released only part of the approved mortgage loan.—The rule of indivisibility, of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. x x x The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply. YONG CHAN KIM vs .PEOPLE In commodatum, the bailor retains the ownership of the thing loaned, while in simpleloan, ownership passes to the borrower. Facts: Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Departmentof the Southeast Asian Fisheries Development Center (SEAFDEC) with head station at Tigbauan,Province of Iloilo. As Head of the Economics Unit of the Research Division, he conducted prawnsurveys which required him to travel to various selected provinces in the country where there arepotentials for prawn culture.On 15 June 1982, petitioner was issued Travel Order No. 2222

which covered his travels todifferent places in Luzon from 16 June to 21 July 1982, a period of thirty five (35) days, where hereceived P6,438.00 as cash advance to defray his travel expenses. Within the same period, petitioner was issued another travel order, T.O. 2268, requiringhim to travel from the Head Station at Tigbauan, Iloilo to Roxas City from 30 June to 4 July 1982,a period of five (5) days, where petitioner received a cash advance of P495.00. On 14 January 1983, petitioner presented both travel orders for liquidation, submittingTravel Expense Reports to the Accounting Section. When the Travel Expense Reports wereaudited, it was discovered that there was an overlap of four (4) days (30 June to 3 July 1982) inthe two (2) travel orders for which petitioner collected per diems twice.Petitioner was required to comment on the internal auditor's report regarding the allegedanomalous claim for per diems. In his reply, petitioner denied the alleged anomaly, claiming thathe made makeup trips to compensate for the trips he failed to undertake under T.O. 2222because he was recalled to the head office and given another assignment. Issue: Was petitioner under obligation to return the same money (cash advance), which he hadreceived? Held: No. Excutive Order No. 10, dated 12 February 1980 provides as follows: "B. Cash Advance for Travel "4. All cash advances must be liquidated within 30 days after date of projected return of the person. Otherwise, corresponding salary deduction shall be made immediately following the expiration day." Liquidation simply means the settling of indebtedness. An employee, such as herein petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan of money advanced to him by his employer, as per diems and allowances. Similarly, as stated in the assailed, decision of the lower court, if the amount of the cash advance he received is less than the amount he spent for actual travel x x x he has the right to demand reimbursement from his employer the amount he spent coming from his personal funds ."In other words, the money advanced by either party is actually a loan to the other. Fiduciary relationship between the complainant and the accused is an essential element of estafa by misappropriation or conversion.—The ruling of the trial judge that ownership of the cash advanced to the petitioner by private respondent was not transferred to the latter is erroneous. Ownership of the money was transferred to the petitioner. x x x Since ownership of the money (cash advance) was ransferred to petitioner, no fiduciary relationship was

created. Absent this fiduciary relationship between petitioner and private respondent, which is an essential element of the crime of estafa by misappropriation or conversion, petitioner could not have committed estafa. Consolidated Bank and Trust Corporation v. CA, G.R. No. 114286, April 19, 2001 FACTS: Respondents Continental Cement Corporation (Corporation) and Gregory T. Lim obtained, frompetitioner Consolidated Bank and Trust Corporation, Letter of Credit No. DOM-23277 in the amount ofP 1,068,150.00. The letter of credit was used to purchase around five hundred thousand liters of bunkerfuel oil from Petrophil Corporation, which the latter delivered directly to respondent Corporation in itsBulacan plant. In relation to the same transaction, a trust receipt for the amount of P 1,001,520.93 wasexecuted by respondent Corporation, with respondent Lim as signatory. Claiming that respondents failed to turn over the goods covered by the trust receipt or theproceeds thereof , petitioner filed a complaint for sum of money with application for preliminaryattachment. In answer to the complaint, respondents averred that the transaction between them wasa simple loan and not a trust receipt transaction, and that the amount claimed by petitioner did nottake into account payments already made by them. Respondent Lim also denied any personal liability inthe subject transactions.The trial court dismissed the Complaint. Both parties appealed to the Court of Appeals, whichpartially modified the Decision by deleting the jaward of attorney's fees in favor of respondents and,instead, ordering respondent Corporation to pay petitioner P37,469.22 as and for attorney's fees andlitigation expenses. ISSUE: Whether the transaction was a trust receipt transaction? RULING: NO.The Supreme Court held that petitioner failed to convince them that the transaction is really atrust receipt transaction instead of merely a simple loan, as found by the lower court and the CA.As held in Colinares v. Court of Appeals, which appears to be foursquare with the facts obtainingin the case at bar, inasmuch as the debtor received the goods subject of the trust receipt before thetrust receipt itself was entered into, the transaction in question was a simple loan and not a trustreceipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods wasalready transferred to the debtor. This situation is inconsistent with what normally obtains in a puretrust receipt transaction, wherein the goods belong in ownership to the bank and are only released tothe importer in trust after the loan is granted Loans; Banks and Banking; Letters of Credit; Interest Rates; Compensation; It would be onerous to compute interest and other charges on the face value of

the letter of credit which a bank issued, without first crediting or setting off the marginal deposit which the borrower paid to it— compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount.—Petitioner’s contention that the marginal deposit made by respondent Corporation should not be deducted outright from the amount of the letter of credit is untenable. Petitioner argues that the marginal deposit should be considered only after computing the principal plus accrued interests and other charges. However, to sustain petitioner on this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no interest in favor of the debtordepositor, the bank is not only able to use the same for its own purposes, interestfree, but is also able to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and other charges on the face value of the letter of credit which the petitioner issued, without first crediting or setting off the marginal deposit which the respondent Corporation paid to it. Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount. Floating Rates of Interest; Trust Receipts Law; A stipulation for a floating rate of interest in a letter of credit in which there is no reference rate set either by it or by the Central Bank, leaving the determination thereof to the sole will and control of the lender bank is invalid; While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates.—Neither do we find error when the lower court and the Court of Appeals set aside as invalid the floating rate of interest exhorted by petitioner to be applicable. The pertinent provision in the trust receipt agreement of the parties fixing the interest rate states: I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the Central Bank floated the interest rate, and to pay additionally the penalty of 1% per month until the amount/s or installment/s due and unpaid under the trust receipt on the reverse side hereof is/are fully paid. We agree with respondent Court of Appeals that the foregoing stipulation is invalid, there being no reference rate set either by it or by the Central Bank, leaving the determination thereof at the sole will and control of petitioner. While it may be acceptable, for practical reasons given the fluctuating economic conditions, for banks to stipulate that interest rates on a loan not be fixed and instead be made dependent upon prevailing market conditions, there should always be a reference rate upon which to peg such variable interest rates. Trust Receipts Law; Where the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question is a simple loan and not a trust receipt agreement.— The recent case of

Colinares v. Court of Appeals appears to be foursquare with the facts obtaining in the case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted. In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent Corporation’s Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982. Further, the oil was used up by respondent Corporation in its normal operations by August, 1982. On the other hand, the subject trust receipt was only executed nearly two months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of funds on the part of the borrower, which are the gravamen of a trust receipt violation.—Respondent Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as shown by the various receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan with a principal amount of only P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of funds on the part of respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore, respondent Corporation is not an importer which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did title over the oil pass to petitioner, but directly to respondent Corporation to which the oil was directly delivered long before the trust receipt was executed. Colinares v CA G.R. No. 90828. September 5, 2000 The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. Facts: Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latter’s convent at Camaman-an, Cagayan de Oro City. Colinares applied for a commercial letter of credit with the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of

CM Builders Centre. PBC approved the letter of credit for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma trust receipt as security. PBC debited P6,720 from Petitioners’ marginal deposit as partial payment of the loan. After the initial payment, the spouses defaulted. PBC wrote to Petitioners demanding that the amount be paid within seven days from notice. Instead of complying with PBC’s demand, Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until 15 June 1980 to settle the account. Colinares proposed that the terms of payment of the loan be modified P2,000 on or before 3 December 1980, and P1,000 per month . Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4 December 1980, and thereafter P500 on 11 February 1981, 16 March 1981, and 20 April 1981. Concurrently with the separate demand for attorney’s fees by PBC’s legal counsel, PBC continued to demand payment of the balance. On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code During trial, petitioner Veloso insisted that the transaction was a “clean loan” as per verbal guarantee of Cayo Garcia Tuiza, PBC’s former manager. He and petitioner Colinares signed the documents without reading the fine print, only learning of the trust receipt implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere formality. The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. Issue: Whether or not the transaction of Colinares falls within the ambit of the Law on Trust Receipt Held: Colinares received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was only a day later, 31 October 1979 that they went to the bank to apply for a loan to pay for the merchandise. This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a “security interest” in the goods as holder of a security title for the advances it had made to the entrustee. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. To secure that the bank shall be

paid, it takes full title to the goods at the very beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession. In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to “return” it (devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal Code, without need of proving intent to defraud. Criminal Law; Trust Receipts Law (P.D. 115); Words and Phrases; “Trust Receipt Transaction,” Defined.—Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction by and between a person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds absolute title or security interest over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed document called a “trust receipt” wherein the entrustee binds himself to hold the designated goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. Estafa; Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt is punishable as estafa.—There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to “return” it (devolvera) to the owner. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to return said goods if they were not disposed of in accordance with the terms of the trust receipt shall be punishable as estafa under Article 315 (1) of the Revised Penal Code, without need of proving intent to defraud. In a pure trust receipt transaction, the goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan—the bank acquires a “security interest” in the goods as holder of a security title for the

advances it had made to the entrustee; In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price.— Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was only a day later, 31 October 1979, that they went to the bank to apply for a loan to pay for the merchandise. This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a “security interest” in the goods as holder of a security title for the advances it had made to the entrustee. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. To secure that the bank shall be paid, it takes full title to the goods at the very beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession. In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The Trust Receipts Law does not seek to enforce the payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another.— The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in the situation of the accused—they employed no artifice in dealing with the bank and never did they evade payment of their obligation nor attempt to abscond.—The Information charges Petitioners with intent to defraud and misappropriating the money for their personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in Petitioners’ situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation.

The fact that the accused are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust receipt and at no time did the title pass to the bank impresses upon the trust receipt in question vagueness and ambiguity which should not be the basis for criminal prosecution in the event of violation of its provisions.— Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation of its provisions. Banks and Banking; Contracts; Contracts of Adhesion; The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible.—The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its Affidavit of Desistance. PEOPLE VS. PUIG Facts: Respondents were 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 P15,000.00, Philippine Currency, to the damage and prejudice of the said bank in the aforesaid amount. However, the trial court did not find the existence of probable cause because (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.".

Issue: 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. Held: Yes. 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. 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. 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. 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 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. Banks, where monies are deposited, are considered the owners thereof; The relationship between banks and depositors has been held to be that of creditor and debtor.—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. 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.—People v. Locson, 57 Phil. 325 (1932), 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. Banks and Banking; Criminal Law; Qualified Theft; The Bank acquires ownership of the money deposited by its clients; and the employee 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.—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. BPI FAMILY BANK VS. FRANCO FACTS: On August 15, 1989, Tevesteco opened a savings and current account with BPIFB. Soon thereafter, FMIC also opened a timedeposit account with the same branch of BPI-FBOn August 31, 1989, Franco opened three accounts, namely, a current, savings, and time deposit, with BPI-FB. The total amountof P2,000,000.00 used to open these accounts is traceable to a check issued by Tevesteco allegedly in consideration of Franco’s introduction of Eladio Teves, to Jaime Sebastian, who was then BPI-FB SFDM’s Branch Manager. In turn, the funding for theP2,000,000.00 check was part of the P80,000,000.00 debited by BPIFB from FMIC’s time deposit account and credited toTevesteco’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. BPI-FB, debited Franco’s savings and current accounts for the amounts remaining therein. In the meantime, two checks drawn by Franco against his BPI-FB current account were dishonored and stamped with a notation “account under garnishment.” Apparently, Franco’s current account was garnished by virtue of an Order ofNotably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to Franco’s receipt ofnotice that his accounts were under garnishment. It was only on May 15, 1990, that Franco was impleaded in the Makati case.Immediately, upon receipt of

such copy, Franco filed a Motion to Discharge Attachment. On May 17, 1990, Franco pre-terminatedhis time deposit account.BPI-FB deducted the amount of P63,189.00 from the remaining balance of the time deposit account representingadvance interest paid to him. Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze his accounts andrelease his deposits therein, Franco filed on June 4, 1990 with the Manila RTC the subject suit. ISSUE: WON Respondent had better right to the deposits in the subject accounts which are part of the proceeds of a forgedAuthority to Debit HELD: NOThere 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 inbanks is governed by the Civil Code provisions on simple loan or mutuum. 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. Although 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 everyright 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 suspicionthat the funds therein were proceeds of the multi-million peso scam Franco was allegedly involved in. To grant BPI-FB, or anybank for that matter, the right to take whatever action it pleases on deposits which it supposes are derived from shadytransactions, would open the floodgates of public distrust in the banking industry. 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 FMICTevesteco transfer, BPI-FB cannot now shift liability thereon to Franco and the other payees of checks issued by Tevesteco, or prevent withdrawals fromtheir respective accounts without the appropriate court writ or a favorable final judgment. Mercantile Law; Banking Laws; Money as a Medium of Exchange; Money, which had passed through various transactions in the general course of banking business, even if of traceable origin, bears no earmarks of peculiar ownership.— It bears emphasizing that money bears no earmarks of peculiar ownership, 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. Money, which had passed through various transactions in the general course of banking business, even if of traceable origin, bears no earmarks of peculiar ownership. Nature of a Bank; 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 the relationship.—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. REPUBLIC vs. Grijaldo Art 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. FACTS: Jose Grijaldo obtained five crop loans from the branch office of the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum, compounded quarterly. These loans are evidenced by five promissory notes executed by the appellant in favor of the Bank. All notes without due dates, but because the loans were crop loans it was considered that the loans were due one year after they were incurred. To secure the payment of the loans the appellant executed a chattel mortgage on the standing crops on his land known as Hacienda Campugas. By virtue of “Trading with the Enemy Act” the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States which were subsequently transferred to the Republic of the Philippines. Grijaldo failed to pay the crop loans despite the extra-judicial demand of the Government of the Philippines. He argued that the Government has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on a land owned by him and those crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. ISSUE: Whether or not Grijaldo’s obligation to pay the crop loans had extinguished due to the crops that were lost or destroyed through enemy action.

HELD/RATIO: NO. The obligation of the Grijaldo under the five promissory notes was not to deliver a determinate thing; namely, the crops to be harvested from his land, or the value of the crops that would be harvested from his land. Rather, his obligation was to pay a generic thing the amount of money representing the total sum of the five loans, with interest. The chattel mortgage on the crops growing on appellant's land simply stood as a security for the fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops did not extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops. The court ordered the estate of Grijaldo to answer for the settlement of the crop loans. Obligations and contracts; Crop loans obtained from the Bank of Taiwan, Ltd.; Right of Philippine Government to collect the loans.—In 1943, appellant obtained crop loans from the Bank of Taiwan, Ltd., Bacolod City Branch, evidenced by promissory notes. To secure payment of the loans, appellant executed a chattel mortgage over the standing crops on his land. After the war, the Republic of the Philippines brought the present action to collect from appellant the unpaid account. Held: It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction between the appellant and the Bank of Taiwan was a private contract of loans. However, pursuant to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., were vested in the United States Government. Pursuant, further, to the Philippine Property Act of 1946 and Transfer Agreements dated July 20, 1954 and June 15, 1957, between the United States Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. Were transferred to and vested in the Republic of the Philippines. The successive transfers of the rights over the loans in question from the Bank of Taiwan, Ltd. to the United States Government, and from the United States Government to the government of the Republic of the Philippines, made the Republic of the Philippines the successor of the rights, title and interests in said loans, thereby creating a privity of contract between the appellee and the appellant. Destruction of crop through enemy action; Effect on the obligation.—Appellant maintains, in support of his contention that the appellee has no cause of action, that because the loans were secured by a chattel mortgage on the standing crops on the land owned by him and those crops were lost or destroyed through enemy action his obligation to pay the loans was thereby extinguished. Held: This argument is untenable. The obligation of the appellant under the promissory notes was not to deliver a determinate thing. namely, the crops to be harvested from his land, but to pay a generic thing—the amount of money representing the total sum of his loans, with interest. The chattel mortgage on the crops simply stood as a security for the fulfillment of appellant's obligation covered by the,

promissory notes, and the loss of the crops did not 'extinguish his obligation to pay, because the account could still be paid from other sources aside from the mortgaged crops. Prescription of actions; Prescription does not run against the government.— The complaint in the present case was brought by the Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions, to protect the interests of the State ever a public property. This Court has held that the statute of limitations does not run against the right of action of the Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738-751). Effect of moratorium laws.—Moreover, the running of the period of prescription . of the action to collect the loan from the appellant was interrupted by the moratorium laws (Executive Orders Nos. 25, dated November 18. 1944; Executive Order No. 32, dated March 10, 1945; and Republic Act No. 432, approved on July 26, 1948). Computed accordingly, the prescriptive period was suspended for 8 years and 6 months. Hence, appellee's action had not yet prescribed. Payment in Japanese war notes; Application of Ballantyne scale of values.— Contracts stipulating for payments presumably in Japanese war notes may be enforced after the liberation to the extent of the just obligation of the contracting parties and, as said notes have become worthless, in order that justice may be done and the party entitled to be paid can recover their actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when and at the place where the obligation was incurred unless the parties had agreed otherwise. (Hilado vs. De la Costa L-150 April 30. 1049, 46 Off. Gaz. 5472.) DE LA PAZ V L & J DEVELOPMENT COMPANY 734 SCRA 364 (2014) FACTS: Out of trust and confidence, Rolando dela Paz lent a sum of money worth Php 350,000 to L & J Development Corporation, a property developer represented by Atty. Esteban Salonga as its president and general manager. The loan was executed without any security and no maturity date. It was however agreed between the parties that the loan will have a 6% monthly interest (amounting to Php 21,000). So far, L&J paid a total of Php 576,000 already – including interest charges from December 2000 to August 2003. L&J later failed to make payments due to financial difficulties in the business. Rolando then filed a collection case with the MTC and alleged as of January 2005, L&J still owes him Php 772,000 inclusive of monthly interests. L&J (represented by Atty. Salonga) did not deny that they did incurred a debt from Rolando, and admitted that they failed to pay due to a fortuitous event

(financial difficulties). They also contended that the 6% monthly interest is unconscionable and that their total payment of Php 576,000 should be applied to the principal loan which only amounts to Php 350,000. Rolando also contends that Atty. Salonga tricked him to execute the said loan plus interest without reducing the agreement in writing. He also said that the 6% interest rate was at the suggestion and insistence of L&J. The MTC rendered judgment in favor of Rolando and upheld the 6% interest rate as valid since L&J complied to it as evidenced by the payment they made from December 2000 to August 2003. L&J is now estopped to impugn said interest rate. The MTC also reduced the legal interest rate to 12% per annum on the remaining loan for reasons of equity. They did not grant the prayer of moral damages to Rolando since there was no bad faith on the part of L&J. L&J appealed the decision to the RTC – contending once again that the 6% interest rate is unconscionable, and that their previous payment which totaled Php 576,000 should be used to set off the principal loan of Php 350,000. RTC however affirmed the decision of the MTC. L&J appealed to the CA. CA ruled in favor of L&J, noting that the agreed 6% interest rate was not reduced in a written agreement and hence, it should not be considered due. CA ruled that the loan was already paid, and that Rolando should return the excess Php 226,000 with interest of 12% per annum. The case has now reached the Supreme Court. ISSUE: Whether or not the unwritten 6% interest agreement should be honored. HELD: No. The Supreme Court held that, as provided under the Civil Code, an agreement regarding loan interests should be stipulated in writing. Even if the 6% monthly rate was done in writing, it will still be void for being unconscionable and contrary to morals and public policy – for at this time, an interest rate of 3% and higher is considered excessive and exorbitant. Furthermore, the lack of maturity date puts the total interest to a whooping 72% per annum which the Supreme Court considered to be “definitely outrageous and inordinate.” The Supreme Court affirmed CA’s ruling, but as to Rolando’s obligation to pay the excess Php 226,000, the interest rate was reduced from 12% to 6% per annum. Interest Rates; Jurisprudence holds that for interest to be due and payable, two conditions must concur: a) express stipulation for the payment of interest; and b) the agreement to pay interest is reduced in writing.—Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. Jurisprudence on the matter also holds that for interest to be due and

payable, two conditions must concur: a) express stipulation for the payment of interest; and b) the agreement to pay interest is reduced in writing. Usury Law; At present, usury has been legally nonexistent in view of the suspension of the Usury Law by Central Bank Circular No. 905 S. 1982. 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.—Indeed at present, usury has been legally nonexistent in view of the suspension of the Usury Law by Central Bank Circular No. 905 S.1982. 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, 490 SCRA 1 (2006), we said: While the Court recognizes the right of the parties to enter into contracts and who are expected to 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 one case, may be just in another. Central Bank Circular No. 799; Pursuant to Central Bank Circular No. 799 S. 2013 which took effect on July 1, 2013, the interest imposed by the Court of Appeals (CA) must be accordingly modified. The P226,000.00 which Rolando is ordered to pay L&J shall earn an interest of 6% per annum from the finality of this Decision.—Pursuant to Central Bank Circular No. 799 S. 2013 which took effect on July 1, 2013, the interest imposed by the CA must be accordingly modified. The P226,000.00 which Rolando is ordered to pay L&J shall earn an interest of 6% per annum from the finality of this Decision. Relucio vs. Brillante-Garfin G.R. No. 76518. July 13, 1990. FACTS: Private respondent Zeida B. Brillante-Garfin filed a complaint for specific performance with damages against petitioner Irene P. Relucio, to compel the latter to execute, in compliance with the Contract to Buy and Sell, a final deed of sale in favor of the former over two (2) residential subdivision lots in the Mariano Village Subdivision, Naga City. Private respondent alleged that the lots, which have a total contract price of P10,800.00, have already been paid for, as she had already paid P200.00 as down payment, and had subsequently completed payment of 128 equal monthly installments of P89.45 each amounting to P11,450.00; that as the law allows the charging of interest only as monetary interest or as compensatory interest, none of which have obtained in her case, as she had never incurred in delay in the payment of installments due, the stipulated interest of six percent (6%) per annum on the outstanding balance is null and void; and that the amount of 650.00 representing overpayment be returned to her. Petitioner alleged that private respondent is obliged to pay

interest on the installment payments of the unpaid outstanding balance even if paid on their "due dates" per schedule of payments; that private respondent had actually been in arrears in the amount of P4,269.40, representing such interest as of June 1979, which therefore entitled petitioner to cancel the contract in question. ISSUE: Whether or not petitioner has the right to rescind the contract for private respondent's continued refusal to pay the monthly installments on the contract price HELD: No. Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day commercial life. Despite private respondent's failure to fully pay the stipulated price of the two lots in question, petitioner, however, could not validly rescind the contract not being lawfully entitled to do so. Petitioner failed to rebut private respondents' allegations that the former had failed to introduce required improvements in the subdivision. Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price.—Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day commercial life. Presidential Decree No. 957; The law vests upon the buyer the option to demand reimbursement of the total amount paid or to wait for further development of the subdivision.—In this respect, the trial court was correct in holding that petitioner could not rescind the contract. As the law vests upon the buyer the option to demand reimbursement of the total amount paid, or to wait for further development of the subdivision, private respondent who opted for the latter alternative by waiting for the proper development of the site, may not be ousted from the subdivision.

State Investment House, Inc. vs. Court of Appeals G.R. No. 90676. June 19, 1991 Facts: Nora Moulic issued to Corazon Victoriano, as security for pieces of jewellery to be sold on commission, two postdated checks in the amount of fifty thousand each. Thereafter, Victoriano negotiated the checks to State Investment House, Inc. When Moulic failed to sell the jewellry, she returned it to Victoriano before the maturity of the checks. However, the checks cannot be retrieved as they have been negotiated. Before the maturity date Moulic withdrew her funds from the bank contesting that she incurred no obligation on the checks because the jewellery was never sold and the checks are negotiated without her knowledge and consent. Upon presentment of for payment, the checks were dishonoured for insufficiency of funds. Issues: 1. Whether or not State Investment House inc. was a holder of the check in due course 2. Whether or not Moulic can set up against the petitioner the defense that there was failure or absence of consideration Held: Yes, Section 52 of the NIL provides what constitutes a holder in due course. The evidence shows that: on the faces of the post dated checks were complete and regular; that State Investment House Inc. bought the checks from Victoriano before the due dates; that it was taken in good faith and for value; and there was no knowledge with regard that the checks were issued as security and not for value. A prima facie presumption exists that a holder of a negotiable instrument is a holder in due course. Moulic failed to prove the contrary. No, Moulic can only invoke this defense against the petitioner if it was a privy to the purpose for which they were issued and therefore is not a holder in due course. No, Section 119 of NIL provides how an instruments be discharged. Moulic can only invoke paragraphs c and d as possible grounds for the discharge of the instruments. Since Moulic failed to get back the possession of the checks as provided by paragraph c, intentional cancellation of instrument is impossible. As provided by paragraph d, the acts which will discharge a simple contract of payment of money will discharge the instrument. Correlating Article 1231 of the Civil Code which enumerates the modes of extinguishing obligation, none of those modes outlined therein is applicable in the instant case. Thus, Moulic may not unilaterally discharge herself from her liability by mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her check to a holder in due course. Moreover, the fact that the petitioner failed to give notice of dishonor is of no moment. The need for such notice is not absolute; there are exceptions provided by Sec 114 of NIL.

Civil Law; Damages; The appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon.––It must be stressed in this connection that under Article 2209 of the Civil Code x x x the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money, is the payment of penalty interest at the rate agreed upon; and in the absence of a stipulation of a particular rate of penalty interest, then the payment of additional interest at a rate equal to the regular monetary interest; and if no regular interest had been agreed upon, then payment of legal interest or six percent (6%) per annum. Fact that respondent Aquino spouses were not in default did not mean that they were relieved from the payment not only of penalty or compensatory interest of 24% per annum but also of regular or monetary interest of 17% per annum.––The fact that the respondent Aquino spouses were not in default did not mean that they, as a matter of law were relieved from the payment not only of penalty or compensatory interest at the rate of twenty-four percent (24%) per annum but also of regular or monetary interest of seventeen percent (17%) per annum. The regular or monetary interest continued to accrue under the terms of the relevant promissory note until actual payment is effected. The payment of egular interest constitutes the price or cost of the use of money and thus, until the principal sum due is returned to the creditor, regular interest continues to accrue since the debtor continues to use such principal amount. Payment; Consignation; Conditions to be complied with by debtor desirous of being released from his obligation.––Where the creditor unjustly refuses to accept payment, the debtor desirous of being released from his obligation must comply with two (2) conditions: (a) tender of payment; and (b) consignation of the sum due. Tender of payment must be accompanied or followed by consignation in order that the effects of payment may be produced. Thus, in Llamas v. Abaya, the Supreme Court stressed that a written tender of payment alone, without consignation in court of the sum due, does not suspend the accruing of regular or monetary interest. Respondent spouses Aquino failed to consign in Court in amount due at the time of the maturity of Account No. IF-82-0904-AA.––In the instant case, respondent spouses Aquino, while they are properly regarded as having made a written tender of payment to petitioner State, failed to consign in court the amount due at the time of the maturity of Account No. IF-82-0904-AA. It follows that their obligation to pay principal-cum-regular or monetary interest under the terms and conditions of Account No. IF-82-0904-AA was not extinguished by such tender of payment alone.

Eastern Shipping Lines, Inc. vs. Court of Appeals G.R. No. 97412. July 12, 1994 FACTS: Eastern Shipping Lines [Eastern] is a common carrier engaged in transportation of goods. It was supposed to deliver goods to the consignee wherein the latter’s goods was covered by marine insurance policy by Mercantile Insurance Company, Inc. [Mercantile]. The goods upon reaching the consignee were damaged and thus claimed benefits from Mercantile which made the latter be subrogated to the case at bar. Mercantile filed damage against Eastern which was granted by the lower court with the imposition of 12% interest. Eastern contends that neither the contract was explicit in imposing the rate of interest, thus, at most, the interest after the judgment should have only been 6%. ISSUE: Whether the imposition of 12% interest by the lower court was justified. HELD: No. In deciding the case, the Court laid down principle with regard to the imposition of interest for the payment of damages, to wit: “When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing [Art 1956 NCC]. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. Damages; Interest Rates; Rules of thumb for future guidance in the award of damages and interest rates.—The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way

of clarification and reconciliation, to suggest the following rules of thumb for future guidance. When an obligation is breached, the contravenor can be held liable for damages.—When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of the Civil Code govern in determining the measure of recoverable damages. Interests in the Concept of Actual and Compensatory Damages; In a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum.—With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. In case of other obligations, the interest on the amount of damages may be imposed at the discretion of the court at the rate of 6% per annum.—When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.—When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being

deemed to be by then an equivalent to a forbearance of credit. New Sampaguita Builders Construction, Inc. (NSBCI) vs. Philippine National Bank G.R. No. 148753. July 30, 2004 Sampaguita loaned money from PNB. PNB unilaterally increased rates of interest in the loan w/o informing Sampaguita. PNB claimed they were authorized to do it as there was a clause in the agreement that they may do so. Besides, Usury law was no longer in force The SC ruled on the negative. PNB cannot do so; it will violate mutuality of contracts under 1308. Besides, SC may intervene when amount of interest is unconscionable. Facts: Sampaguita secured a loan from PNB in an aggregate amount of 8M pesos, mortgaging the properties of Sampaguita’s president and chairman of the board. Sampaguita also executed several promissory notes due on different dates (payment dates). The first promissory note had 19.5% interest rate. The 2nd and 3rd had 21.5%. a uniform clause therein permitted PNB to increase the rate “within the limits allowed by law at any time depending on whatever policy it may adopt in the future x x x,” without even giving prior notice to petitioners. There was also a clause in the promissory note that stated that if the same is not paid 2 years after release then it shall be converted to a medium term loan – and the interest rate for such loan would apply. Later on, Sampaguita defaulted on its payments and failed to comply with obligations on promissory notes. Sampaguita thus requested for a 90 day extension to pay the loan. Again they defaulted, so they asked for loan restructuring. It partly paid the loan and promised to pay the balance later on. AGAIN they failed to pay so PNB extrajudicially foreclosed the mortgaged properties. It was sold for 10M. PNB claimed that Sampaguita owed it 12M so they filed a case in court asking sampaguita to pay for deficiency. RTC found that Sampaguita was automatically entitled to the debt relief package of PNB and ruled that the latter had no cause of action against the former. CA reversed, saying Sampaguita was not entitled, thus ordered them to pay the deficiency – Appeal = Went to SC. Sampaguita claims the loan was bloated so they don’t really owe PNB anymore, but it just overcharged them! Issue: Whether PNB could unilaterally increase interest rates: NO Held: Sampaguita’s accessory duty to pay interest did not give PNB unrestrained freedom to charge any rate other than that which was agreed upon. No

interest shall be due, unless expressly stipulated in writing. It would be the zenith of farcicality to specify and agree upon rates that could be subsequently upgraded at whim by only one party to the agreement. The “unilateral determination and imposition” of increased rates is “violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality. Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money on long-term contracts, giving respondent an unbridled right to adjust the interest independently and upwardly would completely take away from petitioners the “right to assent to an important modification in their agreement” and would also negate the element of mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts “dependent exclusively upon the uncontrolled will” of respondent and was therefore void. Besides, the pro forma promissory notes have the character of a contract d’adhésion, “where the parties do not bargain on equal footing, the weaker party’s [the debtor’s] participation being reduced to the alternative ‘to take it or leave it.’” Circular that lifted the ceiling of interest rates of usury law did not authorize either party to unilaterally raise the interest rate without the other’s consent. The interest ranging from 26 percent to 35 percent in the statements of account -- “must be equitably reduced for being iniquitous, unconscionable and exorbitant.” Rates found to be iniquitous or unconscionable are void, as if it there were no express contract thereon. Above all, it is undoubtedly against public policy to charge excessively for the use of money. It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of petitioners for loan restructuring or from their lack of response to the statements of account sent by respondent. Such request does not indicate any agreement to an interest increase; there can be no implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose. Besides, the statements were not letters of information sent to secure their conformity; and even if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to modify a loan contract, especially interest -- a vital component -- is “obliged to answer the proposal.” Besides, PNB did not comply with its own stipulation that should the loan not be paid 2 years after release of money then it shall be converted to a medium term loan. *Court applied 12% interest rate instead for being a forbearance of money

(there were some pieces of evidence presented by PNB in court that sampaguita objected to. Lower courts overruled the objections but SC said the objections were correct and the evidence should not have been admitted. i.e. contract wasn’t signed by the parties, a part of the contract wasn’t properly annexed/no reference was made in the main contract.)

exclusively upon the uncontrolled will” of respondent and was therefore void. Besides, the pro forma promissory notes have the character of a contract d’adhésion, “where the parties do not bargain on equal footing, the weaker party’s [the debtor’s] participation being reduced to the alternative ‘to take it or leave it.’ ”

In addition to the preceding discussion, it is then useless to labor the point that the increase in rates violates the impairment clause of the Constitution, because the sole purpose of this provision is to safeguard the integrity of valid contractual agreements against unwarranted interference by the State in the form of laws. Private individuals’ intrusions on interest rates is governed by statutory enactments like the Civil Code.

Usury Law; While the Usury Law ceiling on interest rates was lifted by Central Bank Circular No. 905, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. —“While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular No. 905, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.” In fact, we have declared nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law, “authorized either party to unilaterally raise the interest rate without the other’s consent.”

Obligations and Contracts; Loans; Promissory Notes; Interest Rates; Escalation Clauses; Principle of Mutuality of Contracts; A borrower’s accessory duty to pay interest does not give the lender unrestrained freedom to charge any rate other than that which was agreed upon—it would be the zenith of farcicality to specify and agree upon rates that could be subsequently upgraded at whim by only one party to the agreement; The “unilateral determination and imposition” of increased rate is violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.—In each drawdown, the Promissory Notes specified the interest rate to be charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third. However, a uniform clause therein permitted respondent to increase the rate “within the limits allowed by law at any time depending on whatever policy it may adopt in the future x x x,” without even giving prior notice to petitioners. The Court holds that petitioners’ accessory duty to pay interest did not give respondent unrestrained freedom to charge any rate other than that which was agreed upon. No interest shall be due, unless expressly stipulated in writing. It would be the zenith of farcicality to specify and agree upon rates that could be subsequently upgraded at whim by only one party to the agreement. The “unilateral determination and imposition”of increased rates is “violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.” One-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality. Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money on long-term contracts, giving the lender an unbridled right to adjust the interest independently and upwardly would completely take away from the borrower the “right to assent to an important modification in their agreement” and would also negate the element of mutuality in their contracts.— Although escalation clauses are valid in maintaining fiscal stability and retaining the value of money on long-term contracts, giving respondent an unbridled right to adjust the interest independently and upwardly would completely take away from petitioners the “right to assent to an important modification in their agreement” and would also negate the element of mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts “dependent

Rates found to be iniquitous or unconscionable are void, as if there were no express contract thereon.—A similar case eight years ago pointed out to the same respondent (PNB) that borrowing signified a capital transfusion from lending institutions to businesses and industries and was done for the purpose of stimulating their growth; yet respondent’s continued “unilateral and lopsided policy” of increasing interest rates “without the prior assent” of the borrower not only defeats this purpose, but also deviates from this pronouncement. Although such increases are not usurious, since the “Usury Law is now legally inexistent”— the interest ranging from 26 percent to 35 percent in the statements of account—“must be equitably reduced for being iniquitous, unconscionable and exorbitant.” Rates found to be iniquitous or unconscionable are void, as if it there were no express contract thereon. Above all, it is undoubtedly against public policy to charge excessively for the use of money. A borrower’s request for restructuring does not indicate any agreement to an interest increase—there can be no implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose; No one receiving a proposal to modify a loan contract, especially interest—a vital component—is obliged to answer the proposal.—It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of petitioners for loan restructuring or from their lack of response to the statements of account sent by respondent. Such request does not indicate any agreement to an interest increase; there can be no implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose. Besides, the statements were not letters of information sent to secure their conformity; and even if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to modify a loan contract, especially interest—a vital component—is “obliged to answer the proposal.”

Where the disclosure statements, as well as the credit agreements, do not provide for any increase in the specified interest rates, none would be permitted.—In sum, the three disclosure statements, as well as the two credit agreements considered by this Court, did not provide for any increase in the specified interest rates. Thus, none would now be permitted. When crossexamined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan Branch, even testified that the bases for computing such rates were those sent by the head office from time to time, and not those indicated in the notes or disclosure statements. Disclosure Statements; Truth in Lending Act; The effect, when the borrower is not clearly informed of the Disclosure Statements—prior to the consummation of the availment or drawdown—is that the lender will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes; The time is now ripe to give teeth to the often ignored forty-one-year old “Truth in Lending Act” and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless borrowers.—No penalty charges or increases thereof appear either in the Disclosure Statements or in any of the clauses in the second and the third Credit Agreements earlier discussed. While a standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes still remaining unpaid or unrenewed when they fell due, there is no stipulation therein that would justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed of the Disclosure Statements—prior to the consummation of the availment or drawdown—is that the lender will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes. The time is now ripe to give teeth to the often ignored forty-oneyear old “Truth in Lending Act” and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless borrowers. Damages; Liquidated damages intended as penalty shall be equitably reduced to zilch where iniquitous or unconscionable.—We have earlier said that the Notes are contracts of adhesion; although not invalid per se, any apparent ambiguity in the loan contracts—taken as a whole—shall be strictly construed against respondent who caused it. Worse, in the statements of account, the penalty rate has again been unilaterally increased by respondent to 36 percent without petitioners’ consent. As a result of its move, such liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch for being iniquitous or unconscionable. Castelo vs. Court of Appeals G.R. No. 96372. May 22, 1995 FACTS On 15 October 1982, petitioners Antonio Castelo, Bernabe Banson, Lourdes Banson and Pompeyo Depante entered into a contract denominated as a "Deed of Conditional Sale" with private respondent Milagros Dela Rosa involving a parcel of land. The agreed price of the land was P269,408.00. Upon signing

the contract, private respondent paid petitioners P106,000.00 leaving a balance of P163,408.00. The Deed of Conditional Sale also stipulated that: "xxx xxx xxx b.)The balance of P163,408.00 to be paid on or before December 31, 1982 without interest and penalty charges; c.)Should the said balance [remain unpaid] by the VENDEE, the VENDORS hereby agree to give the VENDEE a grace period of SIX (6) months or up to June 30, 1983 to pay said balance provided that interest at the rate of 12% per annum shall be charged and 1% penalty charge a month shall be imposed on the remaining diminishing balance. Private respondent Dela Rosa was unable to pay the remaining balance. Petitioners filed an action for specific performance with damages. RTC rendered the decision ordering the rescission of the Deed of Conditional Sale. Petitioners went on Certiorari to CA. They claimed that rescission of the contract was only an alternative relief available under the Civil Code, while they in their complaint before the RTC, had asked for specific performance with damages.CA reversed the RTC decision. Writ of execution was issued. Private respondent Dela Rosa was required to pay petitioners a total of P197,723.68. Petitioners filed a motion for reconsideration and a separate motion for alias writ of execution contending that the sum of P197,723.68 was erroneous. They argued that the obligation of private respondent was to pay (a) interest at the rate of twelve percent (12%) per annum plus (b) one percent (1%) penalty charge per month, from default, i.e, from 1 January 1983; that the amount to be paid by the Defendant should be P398,814.88 instead and not P197,723.68 or a difference of P201,091.20. RTC denied the motion. Further contends that the phrase "to pay interest" found in the dispositive portion of the CA’s November 21, 1986 decision did not refer to the stipulation in the "Deed of Conditional Sale" but rather to the legal rate of interest imposed by the CA which started to run from 12 February 1987, the date of entry of judgment. Petitioner filed on certiorari to CA. CA dismissed it. But stated that the part of the dispositive portion, ordering the "defendant . . . to pay the balance of the conditional sale in the amount of P163,408.00, to pay interest . . . ." Being a "new" judgment or decision, the computation of the "interest" on the balance of the conditional sale should commence from the date of its ENTRY on February 12, 1987, when the decision became FINAL and EXECUTORY. ISSUE What is the correct interpretation of the phrase "to pay interest" set out in the dispositive portion of the CA decision?

HELD The established doctrine is that when the dispositive portion of a judgment, which has become final and executory, contains a clerical error or an ambiguity arising from an inadvertent omission, such error or ambiguity may be clarified by reference to the body of the decision itself. SC believe and so hold that the phrase “to pay interest,” found in the dispositive portion of the CA decision must, under applicable law, refer to the interest stipulated by the parties in the Deed of Conditional Sale which they had entered into on 15 October 1982. SC note, in the first place, that the phrase “to pay interest” comes close upon the heels of the preceding phrase "to comply with her obligation under the conditional sale to pay the balance — of P163,408.00." A strong inference thus arises that the "interest" required to be paid is the interest stipulated as part of the “obligation [of private respondent dela Rosa] under the conditional sale [agreement] to pay the balance of [the purchase price of the land. In the computation for the amount to be paid, The question is whether, during the period of 1 January 1983 up to 30 June 1983, 12% interest per annum plus 1% penalty charge a month was payable "on the remaining diminishing balance;" or whether during the period from 1 January 1983 to 30 June 1983, only 12% per annum interest was payable while the 1% per month penalty charge would in addition begin to accrue on any balance remaining unpaid as of 1 July 1983. SC believed the parties intended the latter view. The interpretation SC adopted is also supported by the principle that in case of ambiguity in contract language, that interpretation which establishes a less onerous transmission of rights or imposition of lesser burdens which permits greater reciprocity between the parties, is to be adopted (Art. 1378). WHEREFORE, the writ of certiorari is hereby GRANTED. “xxx xx xx (2)ordering the defendant to comply with her obligation under the conditional sale to pay the balance of the conditional sale in the amount of P163,408.00, to pay interest on the amount of the balance remaining unpaid during the period from 1 January 1983 to 30 June 1983 at the rate of 12% per annum; and, from 1 July 1983 until full payment of the amount due, to pay interest at the rate of 12% per annum plus another 12% per annum (i.e., 1% penalty charge per month), or a total of 24% per annum, on the balance remaining unpaid; and (3)in default thereof, the rescission of the "Deed of Conditional Sale" is the alternative." Art. 2209 of the Civil Code; Interests; Damages; The appropriate measure for damages in case of delay in discharging an obligation consisting of a payment of a sum of money is the payment of penalty interest.—Under Article 2209, the appropriate measure for damages in case of delay in discharging an obligation consisting of the payment of a sum of money is the payment of penalty interest at the rate agreed upon in the contract of the parties. In the absence of a stipulation of a particular rate of penalty interest, payment of additional interest

at a rate equal to the regular or monetary interest, becomes due and payable. Finally, if no regular interest had been agreed upon by the contracting parties, then the damages payable will consist of payment of legal interest which is six percent (6%) or, in the case of loans or forbearances of money, twelve percent (12%) per annum. The “obligation consisting in the payment of a sum of money” referred to in Article 2209 is not confined to a loan or forbearance of money.—The contention of private respondent that Article 2209 of the Civil Code is not applicable in this case because the interest referred to therein is given as compensation for the use of money, not for the incurring of delay as in the instant case, need not detain us for long. Article 2209 governs transactions involving the payment of indemnity in the concept of damages arising from delay in the discharge of obligations consisting of the payment of a sum of money. The “obligation consisting in the payment of a sum of money” referred to in Article 2209 is not confined to a loan or forbearance of money. Contracts; In case of ambiguity in contract language, that interpretation which establishes a less onerous transmission of rights or imposition of lesser burdens which permits greater reciprocity between the parties, is to be adopted.—The interpretation we adopt is also supported by the principle that in case of ambiguity in contract language, that interpretation which establishes a less onerous transmission of rights or imposition of lesser burdens which permits greater reciprocity between the parties, is to be adopted. Nacar vs. Gallery Frames G.R. No. 189871. August 13, 2013 Facts: Nacar was constructively dismissed by Gallery Frames at the NLRC. A decision favoring Nacar was made by the NLRC on October 15, 1998. Respondents appealed the decision but was denied at the NLRC. At the CA, the ruling of the NLRC was upheld. Upon relief at the SC, the respondents’ petition was denied. However, on November 5, 2002, petitioner asked for re-computation of his backwages from his dismissal on 1997 up to the decision of the SC on May 27, 2002. An increase of backwages was later awarded to Nacar. Respondents filed a motion to quash. After a final computation, and in lieu of the Monetary Board Resolution No. 796 that took effect on July 1, 2013, the computation of awards provided to Nacar were as follows: Interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction. Issue: Whether the computation of the LA on October 15, 1998’s decision be applied on Nacar’s backwages. –NO.

Held: The SC ruled that since the finality of the decision was on May 27, 2002, backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became final and executory shall be applied. Likewise, since there is an absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping Lines 40 and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for NonBank Financial Institutions, before its amendment by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Thus, interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction shall be applied. Doctrine: The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982: Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per annum. Section 2. In view of the above, Subsection X305.1 36 of the Manual of Regulations for Banks and Sections 4305Q.1, 37 4305S.3 38 and 4303P.1 39 of the Manual of Regulations for Non-Bank Financial Institutions are hereby amended accordingly. This Circular shall take effect on 1 July 2013. This rule does apply retroactively. Interest Rates; In the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping Lines vs. Court of Appeals, 234 SCRA 78 (1994), and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSPMB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013.—In the absence of an express stipulation as to the rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994) and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-

MB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable. Monetary Board; The Bangko Sentral ng PilipinasMonetary Board may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions.—In the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral Monetary Board, 688 SCRA 530 (2013), this Court affirmed the authority of the BSPMB to set interest rates and to issue and enforce Circulars when it ruled that “the BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries.” When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing; In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.—When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the NCC. . When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.—When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably established at the time the

demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, shall be 6% per annum from such finality until its satisfaction.—When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. DE CORTES V VENTURANZA 79 SCRA 709 (1977) Facts: The plaintiffs sold and delivered to the defendants all the thirty-three (33) parcels of land with all the improvements thereon for the total sum of P716,573.90 where the defendants agreed to pay jointly and severally the plaintiffs the sum of P100,000.00 upon the signing and execution of a deed of sale and P40,000.00 on January 1, 1959 thereby leaving a balance of P576,573.90 which the defendants agreed and bound themselves to pay plaintiffs jointly and severally within three (3) years from January 1, 1959 with interest thereon at the rate of 6% per annum. They agreed and bound themselves to secure the payment of the said balance of P576,573.90 with a first mortgage. Thereafter, the defendants have already paid the plaintiffs the total sum of P140,000.00 that of the unpaid balance owing to plaintiffs, P169,484.24 pertain(ing)s to plaintiff Felix Cortes and P407,089.66 pertains to plaintiff Noel J. Cortes. Issue: How much is the interest is payable? Held: The judgment is hereby rendered in favor of plaintiffs and against the defendants, ordering the latter jointly and severally to pay to the former or to deposit with the clerk of court the sum of P576,573.90 with interest thereon at the stipulated rate of 6% per annum until fully paid, within 90 days from notice hereof. In default of such payment the mortgaged property will be sold at public auction to realize the mortgage indebtedness and costs, in accordance with law. Hence, for the period from January 1, 1959 to December 12, 1962, the date of the filing of the complaint, plaintiffs are entitled to collect from the defendants,

by way of interest at six percent per annum, the sum of P136,482.13. Applying the Article 2212 of the New Civil Code, which provides: “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.”, this amount of P136,482.13 should be added to the principal of P576,573.90, making a total of P713,056.03, which shall earn legal interest stipulated at six percent per annum from December 13, 1962 until fully paid. Such interest is not due to stipulation; rather it is due to the mandate of the law hereinbefore quoted. Ligutan vs. Court of Appeals G.R. No. 138677. February 12, 2002 Facts: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained 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, 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 and also a 10% attorney’s fees if the matter were indorsed to a lawyer for collection. The obligation matured, the petitioners were not able to settle the obligation; The bank gave an extension, still the same happened. Since the petitioners still defaulted, the former filed a complaint for recovery of the due amount. Issue: Whether the interest and penalty charge imposed by private respondent bank on petitioners’ loan are manifestly exorbitant, iniquitous and unconscionable? Held: 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. 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. 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. The CA exercised good judgment in reducing the stipulated penalty interest from 5% to 3% a month. It was also been held that the 15.189% per annum stipulated interest and the 10% attorney’s is reasonable and not excessive. The

interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank's existence. Penalty Clauses; Words and Phrases; A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation; 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.—A penalty clause, expressly recognized by law, 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 obligation 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. 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. The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective.—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, 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. The stipulated penalty might even be deleted such as when there has been substantial performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or when exceptional circumstances so exist as to warrant it. Interests; 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, and 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; 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.—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. 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 nonpayment or reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part of the banking business and the core of a bank’s existence. Philippine National Bank vs. Court of Appeals G.R. No. 107569. November 8, 1994 It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. FACTS: On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually. To secure the loan, (private respondents) executed a Real Estate Mortgage and a Chattel Mortgage. The agreement herewith authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law." During the term of the agreement, PNB on several occasion imposed interest rate of 25% per annum to 30% to 42% on Private Respondents plus a penalty of 6% per annum on past dues."

Private respondents filed a suit for specific performance against petitioner PNB and the NACIDA. The trial court dismissed private respondents' complaint. The Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in interest rates. Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that the increase in interest rates are unauthorized. ISSUE: Can a creditor raise the legal interest based on a certain clause in the contract and without consent from the debtor HELD: No. We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held — . . . The unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code: Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force or law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that the loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. Civil Law; Contracts; P.D. No. 1684 and C.B. Circular No. 905 did not authorize either party to unilaterally raise the interest rate without the other’s consent.— P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties

to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other’s consent. No one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silence per se cannot be construed as an acceptance.—Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silenceper se cannot be construed as an acceptance. In the case at bench, the circumstances do not show that private respondents implicitly agreed to the proposed increases in interest rate which by any standard were too sudden and too stiff. Solid Bank Corporation vs. Permanent Homes, Incorporated G.R. No. 171925. July 23, 2010 FACTS: The records disclose that PERMANENT HOMES is a real estate development company, and to finance its housing project known as the “Buena Vida Townhome” located within Merville Subdivision, Parañaque City, it applied and was subsequently granted by SOLIDBANK with an “Omnibus Line” credit facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE MILLION as time loan for a term of up to three hundred sixty (360) days, with interest thereon at prevailing market rates, and subject to monthly repricing. The remaining ONE MILLION was available for domestic bills purchase. To secure the aforesaid loan, PERMANENT HOMES initially mortgaged three(3) townhouse units within the Buena Vida project in Parañaque. At the time, however, the instant complaint was filed against SOLIDBANK, a total of thirty six (36) townhouse units were mortgaged with said bank. Of the 60 million available to PERMANENT HOMES, it availed of a total of 41.5 million pesos covered by three(3) promissory notes. There was a standing agreement by the parties that any increase or decrease in interest rates shall be subject to the mutual agreement of the parties. For the three loan availments that PERMANENT HOMES obtained, the herein respondent argued that SOLIDBANK unilaterally and arbitrarily accelerated the interest rates without any declared basis of such increases, of which PERMANENT HOMES had not agreed to, or at the very least, been informed of. On July 5, 2002, the trial court promulgated its Decision in favor of Solidbank. Permanent then filed an appeal before the appellate court which was granted, in which reversed and set aside the assailed decision dated July 5, 2002. Hence, the present petition.

ISSUES: (1) Whether the Honorable Court of Appeals was correct in ruling that the increases in the interest rates on Permanent’s loans are void for having been unilaterally imposed without basis. (2) Whether the Honorable Court of Appeals was correct in ordering the parties to enter into an express agreement regarding the applicable interest rates on Permanent’s loan availments subsequent to the initial thirty-day (30) period. Held: (1) Yes. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing of which was not provided by petitioner. (2) Yes. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential quality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties is void. There was no showing that either Solidbank or Permanent coerced each other to enter into the loan agreements. The terms of the Omnibus Line Agreement and the promissory notes were mutually and freely agreed upon by the parties. Usury Law; Interest Rates; The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983; These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity; the effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan, the virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account.—The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing.

Silos vs. Philippine National Bank G.R. No. 181045. July 2, 2014. Summary: Sps. Silos obtained a revolving credit line from PNB, secured by a mortgage. The interest rate was initially agreed upon at 19.5% but a Supplement to the Credit Agreement provided that the Bank may modify the interest rate in the Loan depending on whatever policy the Bank may adopt in the future, including without limitation, the shifting from the floating interest rate system to the fixed interest rate system, or vice versa. The spouses were able to pay the interests on the loan up until their last promissory note which covered the principal amount. Because of this their properties were foreclosed and sold by auction to PNB. The spouses filed a petition to annul the foreclosure sale and for the accounting of PNB’s credit. The RTC dismissed their petition. The CA affirmed. The SC annulled and set aside the CA decision Doctrine: n loan agreements, it cannot be denied that the rate of interest is a principal condition, if not the most important component. Thus, any modification thereof must be mutually agreed upon; otherwise, it has no binding effect. Moreover, the Court cannot consider a stipulation granting a party the option to prepay the loan if said party is not agreeable to the arbitrary interest rates imposed. Premium may not be placed upon a stipulation in a contract which grants one party the right to choose whether to continue with or withdraw from the agreement if it discovers that what the other party has been doing all along is improper or illegal. Issue: Whether the interest rate provision in the credit agreement and the amendment to the same is null and void for leaving the interest at the sole and unilateral determination of the bank. YES What interest rate should be applied to the loan? 19.5% asto the 1st promissory note and 12% as to all the other notes Held: 1. The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code :Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void.

Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative “to take it or leave it” . . . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. Article 1956 also provides that “No interest shall be due unless it has been expressly stipulated in writing.” What has been “stipulated in writing” from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds 2.

With regard to interest, the Court finds that since the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated rate of interest, and upon maturity, the amount due shall be subject to legal interest at he rate of 12% per annum. This is the uniform ruling adopted in previous cases. Thus, the parties’ original agreement stipulated the payment of 19.5% interest; however, this rate was intended to apply only to the first promissory note which expired on November 21, 1989 and was paid by petitioners; it was not intended to apply to the whole duration of the loan. Subsequent higher interest rates have been declared illegal; but because only the rates are found to be improper, the obligation to pay interest subsists, the same to be fixed at the legal rate of 12% per annum. However, the 12% interest shall apply only until June 30, 2013. Starting July 1, 2013, the prevailing rate of interest shall be 6% per annum pursuant to our ruling in Nacar v. Gallery Frames and Bangko Sentral ng Pilipinas-Monetary Board Circular No. 799

Delos Santos vs. Metropolitan Bank and Trust Company G.R. No. 153852. October 24, 2012 Facts: From December 9, 1996 until March 20, 1998, the petitioners took out several loans totaling P12,000,000.00 from Metrobank, Davao City Branch, the proceeds of which they would use in constructing a hotel on their 305-square-meter parcel of land located in Davao City and covered by Transfer Certificate of Title No. I218079 of the Registry of Deeds of Davao City.

They executed various promissory notes covering the loans, and constituted a mortgage over their parcel of land to secure the performance of their obligation. The stipulated interest rates were 15.75% per annum for the long term loans (maturing on December 9, 2006) and 22.204% per annum for a short term loan of P4,400,000.00 (maturing on March 12, 1999). The interest rates were fixed for the first year, subject to escalation or de-escalation in certain events without advance notice to them. The loan agreements further stipulated that the entire amount of the loans would become due and demandable upon default in the payment of any installment, interest or other charges. On December 27, 1999, Metrobank sought the extrajudicial foreclosure of the real estate mortgage after the petitioners defaulted in their installment payments. The petitioners were notified of the foreclosure and of the forced sale being scheduled on March 7, 2000. The notice of the sale stated that the total amount of the obligation was P16,414,801.36 as of October 26, 1999. On April 4, 2000, prior to the scheduled foreclosure sale (i.e., the original date of March 7, 2000 having been meanwhile reset to April 6, 2000), the petitioners filed in the RTC a complaint (later amended) for damages, fixing of interest rate, and application of excess payments (with prayer for a writ of preliminary injunction). They alleged therein that Metrobank had no right to foreclose the mortgage because they were not in default of their obligations; that Metrobank had imposed interest rates (i.e., 15.75% per annum for two long-term loans and 22.204% per annum for the short term loan) on three of their loans that were different from the rate of 14.75% per annum agreed upon; that Metrobank had increased the interest rates on some of their loans without any basis by invoking the escalation clause written in the loan agreement; that they had paid P2,561,557.87 instead of only P1,802,867.00 based on the stipulated interest rates, resulting in their excess payment of P758,690.87 as interest, which should then be applied to their accrued obligation; that they had requested the reduction of the escalated interest rates on several occasions because of its damaging effect on their hotel business, but Metrobank had denied their request; and that they were not yet in default because the longterm loans would become due and demandable on December 9, 2006 yet and they had been paying interest on the short-term loan in advance. Issue: Is the escalation clause valid? Held: Yes. escalation clauses like those affecting the petitioners were not void per se, and that an increase in the interest rate pursuant to such clauses were not necessarily void. In Philippine National Bank v. Rocamora, Court has said: Escalation clauses are valid and do not contravene public policy. These clauses are common in credit agreements as means of maintaining fiscal stability and retaining the value of money on long-term contracts. To avoid any resulting one-

sided situation that escalation clauses may bring, we required in Banco Filipino the inclusion in the parties’ agreement of a de-escalation clause that would authorize a reduction in the interest rates corresponding to downward changes made by law or by the Monetary Board. The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give creditors the unbridled right to adjust interest rates unilaterally. As we said in the same Banco Filipino case, any increase in the rate of interest made pursuant to an escalation clause must be the result of an agreement between the parties. The minds of all the parties must meet on the proposed modification as this modification affects an important aspect of the agreement. There can be no contract in the true sense in the absence of the element of an agreement, i.e., the parties’ mutual consent. Thus, any change must be mutually agreed upon, otherwise, the change carries no binding effect. A stipulation on the validity or compliance with the contract that is left solely to the will of one of the parties is void; the stipulation goes against the principle of mutuality of contract under Article 1308 of the Civil Code. Medel v CA and Cruz 299 SCRA 481; GR No. 131622, November 27, 1998

On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including interests and other charges. Declaring that the due execution and genuineness of the four promissory notes has been duly proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on the loans was unconscionable and “revolting to the conscience” and ordered the payment of the amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty. On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties. The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law has become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and the borrower could agree on any interest that may be charged on the loan, and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month interest and 2& service charge per annum , and 1% per month as penalty charges.

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and retained P3, 000.00 as advance interest for 1 month at 6% per month.

Defendants filed the present case via petition for review on certiorari.

Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2 months, at 6% interest per month. They executed a promissory note to evidence the loan and received only P84, 000.00 out of the proceeds of the loan.

Held: No.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00, maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the proceeds of the loan. Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness. Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional amount of 1% per month as penalty charges.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is usurious.

A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous, unconscionable and exorbitant, but it cannot be considered “usurious” because Central Bank Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now “legally inexistent.” Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law. Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but simply suspended the latter’s effectivity (Security Bank and Trust Co vs RTC). Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon. Law: Article 2227, Civil Code The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets (Almeda vs. CA, 256 SCRA 292 [1996]). Usury Law; Interest Rates; A stipulated rate of interest at 5.5% per month on a P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant; The Usury Law is now “legally inexistent.”—We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate “usurious” because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now “legally inexistent.” C.B. Circular No. 905 “did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity.”—In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 “did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity.” Indeed, we have held that “a Central Bank Circular can not repeal a law. Only a law can repeal another law.” In the recent case of Florendo vs. Court of Appeals, the Court reiterated the ruling that “by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective.” “Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.” The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.—We find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals (“contra bonos mores”), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable. RELUCIO vs. BRILLANTE-GARFIN G.R. NO. 76518, JULY 13, 1990 FACTS: Private respondent Zeida B. Brillante-Garfin filed a complaint for specific performance with damages against petitioner Irene P. Relucio, to compel the latter to execute, in compliance with the Contract to Buy and Sell, a final deed of sale in favor of the former over two (2) residential subdivision lots in the Mariano Village Subdivision, Naga City. Private respondent alleged that the lots, which have a total contract price of P10,800.00, have already been paid for, as she had already paid P200.00 as down payment, and had subsequently completed payment of 128 equal monthly installments of P89.45 each amounting to P11,450.00; that as the law allows the charging of interest only as

monetary interest or as compensatory interest, none of which have obtained in her case, as she had never incurred in delay in the payment of installments due, the stipulated interest of six percent (6%) per annum on the outstanding balance is null and void; and that the amount of 650.00 representing overpayment be returned to her. Petitioner alleged that private respondent is obliged to pay interest on the installment payments of the unpaid outstanding balance even if paid on their "due dates" per schedule of payments; that private respondent had actually been in arrears in the amount of P4,269.40, representing such interest as of June 1979, which therefore entitled petitioner to cancel the contract in question. ISSUE: Whether or not petitioner has the right to rescind the contract for private respondent's continued refusal to pay the monthly installments on the contract price HELD: No. Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day commercial life. Despite private respondent's failure to fully pay the stipulated price of the two lots in question, petitioner, however, could not validly rescind the contract not being lawfully entitled to do so. Petitioner failed to rebut private respondents' allegations that the former had failed to introduce required improvements in the subdivision. Civil Law; Sale; Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. —Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment payment system, he is in effect paying interest on the cash price, whether the fact and rate of such interest payment is disclosed in the contract or not. The contract for the purchase and sale of a piece of land on the installment payment system in the case at bar is not only quite lawful; it also reflects a very wide spread usage or custom in our present day commercial life. Presidential Decree No. 957; The law vests upon the buyer the option to demand reimbursement of the total amount paid or to wait for further development of the subdivision.—In this respect, the trial court was correct in holding that petitioner could not rescind the contract. As the law vests upon the buyer the option to demand reimbursement of the total amount paid, or to wait for further development of the subdivision, private respondent who opted for the latter alternative by waiting for the proper development of the site, may not be ousted from the subdivision.

Estoppel to question excessive rates Philippine National Bank vs. Court of Appeals G.R. No. 88880. April 30, 1991 DOCTRINE: Removal of Usury Law Ceiling on interest rates does not authorize banks to unilaterally and successively increase interest rates. FACTS: Ambrosio Padilla, private respondents, was granted by petitioner Philippine National Bank, a credit line, secured by a real estate mortgage, for a term of 2 years, with 18% interest per annum. Private respondent executed in favor of the PNB a Credit Agreement, 2 promissory notes in the amount of P900,000.00 each, and a Real Estate Mortgage Contract. Stipulations in the Promissory Note authorizes PNB to increase the stipulated 18% interest per annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." Padilla requested to the increase in the rate of interest from 18% be fixed at 21% or 24% but was denied by PNB. ISSUE: Whether PNB, within the term of the loan which it granted to the private respondent, may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased. HELD: No. Central Bank Circular No. 905, Series of 1982 removed the Usury law ceiling on interest rates, however, it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to "once every twelve months." Increase of interest rate; The increases imposed by PNB contravene Art. 1956 of the Civil Code.—PNB’s successive increases of the interest rate on the private respondent’s loan, over the latter’s protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms “may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment.” The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that “no interest shall be due unless it has been expressly stipulated in writing.”

Asian Cathay Finance and Leasing Corporation vs. Gravador FACTS: On October 22, 1999, petitioner Asain Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight Hundred Thousand Pesos (₱800,000.00) to respondent Cesario Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty (60) monthly installments of ₱24,000.00 each. To secure the loan, respondent Cesario executed real estate mortgage over his property in Sta. Maria, Bulacan, covered by Transfer Certificate of Title No. T-29234. Respondents paid the initial installment due in November 1999. However, they were unable to pay the subsequent ones. Consequently, on February 1, 2000, respondents received a letter demanding payment of ₱1,871,480.00 within five (5) days from receipt thereof. Respondents requested for an additional period to settle their account, but ACFLC denied the request. Petitioner filed a petition for extrajudicial foreclosure of mortgage with the Office of the Deputy Sherrif of Malolos, Bulacan. ISSUE: Whether the Honorable Court of Appeals erred in invalidating the interest rates imposed on the respondents’ loan, and the waiver of the right of redemption. RULING: No. The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoilation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support on law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals. Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched in clear and unequivocal terms which will leave no doubt as to the intention of a party to give up a right or benefit which legally pertains to him. Additonally, the intention to waive a right or an advantage must be shown clearlly and convincingly. Unfortunately, ACFLC failed to convince us that respondents waived their right of redemption voluntarily. Loans; Interests; Interest rates, whenever unconscionable, may be equitably reduced or even invalidated.—It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in view of Central Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling on interest rate effective January 1, 1983. However, interest rates, whenever unconscionable, may be equitably reduced or even invalidated. In several cases, this Court had declared as null and void stipulations on interest and charges that were found

excessive, iniquitous and unconscionable. Records show that the amount of loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the installment for November 1999, but failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment of P1,871,480.00. In a span of three months, respondents’ obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and on the penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable. Usury Law; Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law; The nullity of the stipulation on the usurious interest does not however, affect the lender’s right to recover the principal of the loan, nor would it affect the terms of the real estate mortgage.— Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. The nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible error.

Chapter III: Usury Law Rono v Gomez On October 5, 1944, Cristobal Roño received as a loan from Jose L. Gomez P4,000.00 in Japanese fiat money (mickey mouse money). The contract of loan is under the condition that said loan will not earn interest and that it will be paid in the currency then prevailing one year after the execution of the contract. After a year, a collection suit was filed by respondent Gomez against petitioner Rono to collect the latter’s debt. Subsequently, the trial court ruled in favor of Gomez. The court ordered Rono to pay the respondent an amount of P4,000.00 in Philippine currency which was then the prevailing currency at the time of payment. Contending such decision, Rono insists that the contract taken in favor of respondent is contrary to law, public order and good morals since his loan then of P4,000.00 “mickey mouse” money is equivalent only to P100.00 of the Philippine currency which is the prevailing currency at the time of payment. CONTENTION OF THE PETITIONER: Roño asserts that the decision of the trial court ruling in favor of respondent is contrary to the Usury law, because on the basis of calculations by Government experts he only received the equivalent of P100 Philippine pesos and now he is required to give four thousand pesos or interest greatly in excess of the lawful rates. CONTENTION OF THE RESPONDENT: That both parties agreed that the loaned amount of P4,000.00 mickey mouse money be paid in “the currency prevailing by the end of one year.” The civil code supports such agreement when it says "obligations arising from contracts shall have the force of law between the contracting parties and must be performed in accordance with their stipulations" (Article 1091). Issue: Whether the contract is legal and obligatory. RESOLUTION OF SC: Yes. The SC ruled that that the contract between the parties is an aleatoty contract. The eventual gain of Gomez is not “interest” within the meaning of the Usury law. In the first place, Rono is not paying an interest. Such is evidenced by the fact that in his promissory note, he indicated that the money loaned “will not earn any interest.” Furthermore, both parties clearly agreed at the time of the execution of the contract that the loaned money (P4,000.00 “mickey mouse) will be paid in “the currency prevailing by the end of the stipulated period of one year.” The devaluation of the Mickey mouse money is due to an event unforseable by any man; that the increased intrinsic value and purchasing power of the current money is consequence of an event (change of currency) which at the time of the contract neither party knew would certainly happen within the period of

one year. However, both parties subjected their rights and obligations to that contingency. Thus, the contract in question is legal and obligatory and is not subject to the operation of the Usury law.

the equivalent of the Japanese currency he had received in 1944. The contract is the law between the parties. Sunga-Chan vs. Court of Appeals

In the first place, the Court of Appeals found that he voluntarily agreed to sign and signed the document without having been misled as to its contents and "in so far as knowledge of war events was concerned" both parties were on "equal footing." In the second place although on October 5, 1944 it was possible to surmise the impending American invasion, the date of victory or liberation was anybody's guess. In the third place there was the possibility that upon reoccupation the Philippine Government would not invalidate the Japanese currency, which after all had been forced upon the people in exchange for valuable goods and property. The odds were about even when Roño and Gomez played their bargaining game. There was no overreaching, nor unfair advantage. Again Roño alleges it is immoral and against public order for man to obtain four thousand pesos in return for an investment of forty pesos (his estimate of the value of the Japanese money he borrowed). According to his line of reasoning it would be immoral for the home owner to recover ten thousand pesos (P10,000), when his house is burned, because he invested only about one hundred pesos for the insurance policy. And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains the first prize of one hundred thousand pesos or over, the whole business is immoral or against public order. In this connection we should explain that this decision does not cover situations where borrowers of Japanese fiat currency promised to repay "the same amount" or promised to return the same number of pesos "in Philippines cur rency" or "in the currency prevailing after the war." There may be room for argument when those litigations come up for adjudication. All we say here and now is that the contract in question is legal and obligatory. A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with the Court of Appeals that the matter may involve a defect in procedure which does not amount to prejudicial error. ObliCon; Validity of Agreement of Loan in Japanese Fiat Money made during enemy occupation; payment to be paid one year after the date with currency then prevailing - on October 5, 1944, received as a loan four thousand pesos in Japanese fiat money from G and agreed to pay said debt one year after date in the currency then pre vailing by signing a promissory note of the following tenor: "For value received, I promise to pay one year after date the sum of four thousand pesos (P4,000), to Jose L. Gomez. It is agreed that this will not earn any interest and the pay ment will be made in currency that will be prevailing by the end of the stipulated period of one year." On October 15, 1945, i. e. after the liberation R was sued for the payment of the aforesaid debt. Held: R must pay 4,000 pesos in Philippine currency. He may not discharge his debt by paying only

Facts: Lamberto Chua & Jacinto Sunga formed a partnership to engage in the marketing of liquefied petroleum gas under the name Shellite Gas Appliance Center (Shellite). When Jacinto died, his widow petitioner Cecilia Sunga and daughter Lilibeth Sunga-Chan continued with the business without Chua’s consent. Since Chua’s demands for accounting and winding up were unheeded, he filed a complaint for Winding Up of a Partnership Affairs, Accounting, Appraisal & Recovery of Shares & Damages with Writ of Preliminary Attachment with the RTC of Zamboanga. The RTC ruled in his favor and the same was upheld by the CA. Chua then asked the trial court to commission a CPA to undertake accounting work but later moved to withdraw and asked for the admission of an accounting report by CPA Cheryl A. Gahuman. The petitioners submitted their own CPA accounting report which limited Chua’s entitlement from the winding up of partnership to P3,154,736.65 only but the RTC rejected it and approved the new computation claims of Chua. Issue: Whether or not RTC can impose interest on a final judgment of unliquidated claims. Held: Petitioners are partly correct. As may be recalled, the trial court admitted and approved Chua’s computation of claims amounting to PhP 8,733,644.75, but rejected that of petitioners, who came up with the figure of only PhP 3,154,736.65. We highlight the substantial differences in the accounting reports on the following items, to wit: (1) the aggregate amount of the partnership assets bearing on the 50% share of Chua thereon; (2) interests added on Chua’s share of the assets; (3) amount of profits from 1988 through May 30, 1992, net of alleged payments made to Chua; and (4) interests added on the amount entered as profits. Forbearance is described as a contractual obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable. 1. When an obligation is breached, the contravenor can be held liable for damages. 2. Regarding award of interest in the concept if actual & compensatory damages, the rate of interest, as well as accrual thereof is imposed as follows: a. Obligation(payment of a sum of money) – interest due should be stipulated in writing. Interest due shall itself earn legal interest from the

time it is judicially demanded. Absence of stipulation, rate shall be 12% p.a. to be computed from default. Obligation(not loans or forbearance of money) – is breached, interest on the amount of damages awarded may be imposed at discretion of court at the rate 6% p.a. No interest on unliquidated claims or damages except when or until the demand can be established with reasonable certainty Judgment(award sum of money) becomes final & executor, rate of legal interest shall be 12% p.a.

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 term “forbearance,” within the context of usury law, has been described as a contractual obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable.

Guided by the foregoing rules, the award to Chua of the amount representing earned but unremitted profits must earn interest at 6% p.a. the total monthly profits inclusive of the add on 6% shall earn 12% p.a.

Facts: The defendant administrator, Domingo Ragaza, is hereby granted ninety days from this date to pay or deposit in the office of the clerk of this Court of First Instance all the amounts mentioned above, and upon failure so to do, this court shall order the sale of the property described in the complaint, in accordance with the law. So ordered." In support of his appeal, the appellant assigns the following alleged errors as committed by the trial court, to wit:  The lower court erred in ordering defendant to pay ten per cent interest, instead of six per cent per annum to the plaintiff, in accordance with the law and the agreement.  The trial court erred in ordering the defendant to pay the plaintiff one hundred and fifty pesos as attorney's fee, and to defray the costs,  The trial court erred in denying the motion for a new trial."

b.

c.

We agree with petitioners that Chua’s share & interest on partnership assets partake of an unliquidated claim and shall not earn interest until reasonably determined. Considering Chua’s computation of claim was submitted only Oct. 15, 2002, no interest in his favor can be added to his share of the partnership assets. The obligation of petitioners is Solidary because of the impossibility of quantifying how much of the partnership assets or profits was misappropriated by each petitioner. The levying and selling at public auction of the property of petitioner Sunga – Chan to answer for the obligation of petitioners is also proper since an absolute community property may be held liable for the obligations contracted by either spouse. Obligations and Contracts; Interests; Words and Phrases; The legal interest at 12% per annum under Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money, and for transactions involving payment of indemnities in the concept of damages arising from default in the performance of obligations in general and/or for money judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest; The term “forbearance,” within the context of usury law, has been described as a contractual obligation of a lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due and payable.—In Reformina v. Tomol, Jr., 139 SCRA 260 (1985), the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions involving payment of indemnities in the concept of damages arising from default in the performance of obligations in general and/or for money judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides: Art. 2209. If the obligation

Rivero vs. Rabe

The following relevant facts are required to decide all the questions of fact and of law raised in this appeal: On the 9th of April, 1919, Inocente Rabe obtained a thousand peso loan from the late Salvador Rivero, payable within the year, with interest at the rate fixed by Act No. 2655, giving by way of security four parcels of land belonging to himself, two of them in the barrio of Cabuloan, municipality of Santa Catalina, one in the barrio of Nalasin, and the other in Bantaoay, municipality of San Vicente, IIocos Sur, all of them being registered pursuant to the Mortgage Law in the register of deeds of said province. Inocente Rabe, the defendant, offered to pay 10 per cent interest, and his heirs after his death still held out the offer, to Salvador Rivero, the plaintiff, and after his death, to his widow, but it was rejected and a demand was made for 12 per centum. Issue: Which among the several rates of interest fixed in the Act did the parties agreed on. Held: The contract between the parties was a loan secured by a mortgage of real estate, the ownership whereof had been duly registered; therefore, when in the deed, the defendantappellant stated that the loan should earn the interest fixed by Act No. 2655, he could not have had in mind anything else than section

2, of said Act No. 2655, quoted above, for that alone fixed the maximum interest chargeable on loans secured by a mortgage, namely, 12 per cent per annum. The question, then, to be determined is, what is the rate agreed upon by the parties, which is not to exceed 12 per cent per annum? Section 1 of the law under discussion, quoted above, fixes 6 per centum as the rate of interest to be charged when the rate is not expressly stipulated. Six per cent per annum certainly is favorable to the defendant-appellant, who maintains that is the rate he must pay; but article 1288 of the Civil Code which also enunciates a rule for the interpretation of contracts, in case of ambiguity or obscurity in the terms used, provides: "ART. 1288. Obscure terms of a contract shall not be so construed as to favor the party who occasioned the obscurity." This rule has been applied by this court in H. E. Heacock Co. vs. Macondray & Co. (42 Phil., 205), and in Rubio vs. Villanueva (45 Phil., 842). Ambiguity or obscurity in a contract must be construed against the party causing it, and inasmuch as it is the defendantappellant who executed the contract in question, and who is therefore responsible for the ambiguity respecting the rate of interest, said ambiguity must be construed against him. Article 1282 of the Civil Code provides as follows: "ART. 1282. In order to judge as to the intention of the contracting parties, attention must be paid principally to their conduct at the time of making the contract and subsequently thereto." The defendant Inocente Rabe, and his heirs after his death, offered to pay the plaintiff Salvador Rivero, and his widow after his death, 10 per cent interest. This subsequent act also indicates that the rate of interest agreed upon by and between the parties is that fixed in section 2, Act No. 2655. MORTGAGE CONTRACT; INTEREST.—Since the contract between the parties was a loan secured by a mortgage on real property and the defendant having stated in the contract that the loan would bear interest at the rate fixed by Act No. 2655, said defendant could only have in mind the provision of section 2 of said Act, fixing the maximum interest which may be collected upon loans secured by a mortgage at 12 per cent per annum; and in accordance with article 1288 of the Civil Code, and the repeated rulings of this court, the interpretation of obscure clauses in a contract should not favor the party who occasioned the obscurity, who in the present case was the said defendant.

Phil. American Accident Insurance Company, Inc. vs. Flores FACTS: Respondent Judge Flores rendered a judgment in favor of the Respondent Navalta asking Petitioner Phil-Am Accident Incurance Company Inc. to pay the former the amount of P75,000.00 with legal interest from Oct. 1968, as attorney’s fees and the cost of the suit. Petitioner paid respondent the principal amount with legal interest at 6% per annum from Oct 1968 to Apr. 30 1978 (in accordance with Art. 2209 of the CC which provides: “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." – This appears to be the basis for the awarding interest at the legal rate from Oct. 1968, although the debt was judicially demanded only on July 6 1970) and attorney’s fees and the cost of the suit. Later on, Respondent advised the petitioner that payment was not in fun satisfaction of the judgment because he has to pay compound interest or additional sum of P10, 375.77. The respondent secured a writ if execution upon the refusal of the petitioner to pay the additional sum claimed; which was affirmed by the Judge. Hence this review. ISSUE: Whether or not the petitioner is obligated to pay compound interest under the judgment. HELD: The questioned Order cannot be sustained. The judgment which was sought to be executed ordered the payment of simple "legal interest" only. It said nothing about the payment of compound interest. Accordingly, when the respondent judge ordered the payment of compound interest he went beyond the confines of his own judgment which had been affirmed by the Court of Appeals and which had become final. Private Respondent invokes Sec. 5 of the Usury Law which reads in part as follows: “In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed in which case it shall draw sic per centum per annum interest xxx as well as Art. 2212 of the Civil Code which stipulates: “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” Both legal provisions are inapplicable for they contemplate the presence of stipulated or conventional interest which had accrued when demand was judicially made. In this case, no interest had been stipulated by the parties. In other words, there was no accrued conventional interest which could further earn interest upon judicial demand. Wherefore, decision was set aside.

Doctrine: Both Art. 2212 of the Civil code and Section 5 of the Usury Law refer to stipulated or conventional interest and does not apply where no interest was stipulated by the parties. Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: “In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or, in default thereof, whenever the debt is judicially claimed in which last case it shall draw six per centum per annum interest x x x” as well as Art. 2212 of the Civil Code which stipulates: “Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.” Both legal provisions are in applicable for they contemplate the presence of stipulated or conventional interest which had accrued when demand was judicially made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [19131; Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann, 46 Phil. 539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930]. In this case no interest had been stipulated by the parties. In other words, there was no accrued conventional interest which could further earn interest upon judicial demand. Banco Filipino Savings & Mortgage Bank vs. Navarro Navarro’s loan secured with a mortgage from Banco Filipino had an escalation clause BASED ON CIRCULAR 494 OF THE CENTRAL BANK providing as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976. Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" and pray that the escalation clause be null and void. BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494. In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that

BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan. THUS, THIS CASE. ISSUE What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause.. RULING; the court may not increase the interest rate on the loan. Although the stipulation of the parties is very clear that the interest rate may be increased “in the event a law should be enacted increasing the lawful rate that maybe charged on this loan” Circular 494 is not strictly a statute or law but an administrative order that has the effect of law. The difference between a law an administrative regulation is recognized in the monetary Board guidelines where under provides that for a loan’s interest to be subject to the increase provided under Circular 494, there must be an ESCALATION clause allowing the increase “ in the event that any law or Central bank regulation is promulgated increasing the max interest for loans. “The guidelines thus presupposes that a central bank regulation is not within the term “any law”. For the escalation clause to be valid; it must specifically provide as follows; 1. 2.

There can be an increase in interest IF INCREASED by law or by the MONETARY BOARD For the stipulation to be valid, it must include a provision for reduction of the stipulated interest “in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board.

While PD no 1684 is not to be given retroactive effect, te absence of Deescalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one –sidedness in favor of the lender. The escalation clause specifically stipulated that the increase in interest was to be “ on this particular kind of loan”’ meaning one secured by registered real estate mortgage COURT RULES THAT WHILE AN ESCALATION CLAUSE LIKE THE ONE IN THIS CASE CAN ORDINARILY BE HELD VALID, NEVERTHELESS PETITIONER BANCO FILIPINO CANNOT RELY THEREON TO RAISE THE INTEREST ON THE BORROWERS LOAN FROM 12% TO 17% PER ANNUM BECAUSE CIRCULAR NO. 494 OF THE MONETARY BOARD WAS NOT THE “LAW” CONTEMPLATED BY THE PARTIES, NOR SHOULD SAID CIRCULAR BE HELD AS APPLICABLE TO LOANS SEECURED BY REGISTERED REAL

ESTATE IN THE ABSENCE OF ANY SUCH SPECIFIC INDICATION AND IN CONTRAVENTION OF THE POLICY BEHIND THE USURY LAW

the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

Contracts; Banking Laws; A contract which embodies an Escalation Clause authorizing automatic increase in interest rates in the event a law increasing the lawful rates of interest that may be charged, does not include a Central Bank Circular, which, altho', having the face and effect of law, is not strictly a statute or a law.—The Escalation Clause reads as follows: "I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law increasing the lawful rates of interest that may be charged on this particular kind of loan." (Paragraphing and italics supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law.

Chapter IV: Deposit

"Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned." The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote: "Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest." Escalation Clause to be valid must include de-escalation clause. —There can be an increase in interest if increased by law or by the Monetary Board; and in order for such stipulation to be valid, it must include a provision for reduction of

CHAN vs. MACEDA, 402 SCRA 352 (2003) FACTS: On July 28, 1976, Bonifacio S. Maceda, Jr., herein respondent, obtained a P7.3 million loan from the Development Bank of the Philippines for the construction of his New Gran Hotel Project in Tacloban City. Thereafter, on September 29, 1976, respondent entered into a building construction contract with Moreman Builders Co., Inc., (Moreman). They agreed that the construction would be finished not later than December 22, 1977. Respondent purchased various construction materials and equipment in Manila. Moreman, in turn, deposited them in the warehouse of Wilson and Lily Chan, herein petitioners. The deposit was free of charge. Unfortunately, Moreman failed to finish the construction of the hotel at the stipulated time. Hence, on February 1, 1978, respondent filed with the then Court of First Instance (CFI, now Regional Trial Court), Branch 39, Manila, an action for rescission and damages against Moreman, docketed as Civil Case No. 113498. Meanwhile, during the pendency of the case, respondent ordered petitioners to return to him the construction materials and equipment which Moreman deposited in their warehouse. Petitioners, however, told them that Moreman withdrew those construction materials in 1977. Hence, on December 11, 1985, respondent filed with the Regional Trial Court, Branch 160, Pasig City, an action for damages with an application for a writ of preliminary attachment against petitioners,7 docketed as Civil Case No. 53044. ISSUES: 1. Has respondent presented proof that the construction materials and equipment were actually in petitioners' warehouse when he asked that the same be turned over to him? NO 2. If so, does respondent have the right to demand the release of the said materials and equipment or claim for damages? NO HELD: Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns and heirs) who execute them. When there is no privity of contract, there is likewise no obligation or liability to speak about and thus no cause of action arises. Specifically, in an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of action. A depositary is obliged to return the thing to

the depositor, or to his heirs or successors, or to the person who may have been designated in the contract. In the present case, the record is bereft of any contract of deposit, oral or written, between petitioners and respondent. If at all, it was only between petitioners and Moreman. And granting arguendo that there was indeed a contract of deposit between petitioners and Moreman, it is still incumbent upon respondent to prove its existence and that it was executed in his favor. However, respondent miserably failed to do so. The only pieces of evidence respondent presented to prove the contract of deposit were the delivery receipts. Significantly, they are unsigned and not duly received or authenticated by either Moreman, petitioners or respondent or any of their authorized representatives. Hence, those delivery receipts have no probative value at all. While our laws grant a person the remedial right to prosecute or institute a civil action against another for the enforcement or protection of a right, or the prevention or redress of a wrong, every cause of action ex-contractu must be founded upon a contract, oral or written, express or implied. Moreover, respondent also failed to prove that there were construction materials and equipment in petitioners' warehouse at the time he made a demand for their return. Considering that respondent failed to prove (1) the existence of any contract of deposit between him and petitioners, nor between the latter and Moreman in his favor, and (2) that there were construction materials in petitioners' warehouse at the time of respondent's demand to return the same, we hold that petitioners have no corresponding obligation or liability to respondent with respect to those construction materials. Anent the issue of damages, petitioners are still not liable because, as expressly provided for in Article 2199 of the Civil Code, actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual amount thereof. It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne.

obliged to return the thing to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract. —Under Article 1311 of the Civil Code, contracts are binding upon the parties (and their assigns and heirs) who execute them. When there is no privity of contract, there is likewise no obligation or liability to speak about and thus no cause of action arises. Specifically, in an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of action. A depositary is obliged to return the thing to the depositor, or to his heirs or successors, or to the person who may have been designated in the contract. US vs. IGPUARA, 27 Phil 619 (1913) Facts: The defendant herein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he had taken on deposit from the former to be at the latter's disposal. The document setting forth the obligation reads: "We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos P2,498), the balance from Juana Montilla's sugar. — Iloilo, June 26, 1911. — Jose Igpuara, for Ramirez & Co." CFI’s ruling:  sentenced the defendant to two years of presidio correccional,  to pay Juana Montilla P2,498 Philippine currency,  and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and the costs. The defendant appealed the CFI’s decision. He argued that Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the defendant to consider the operation of sale on commission closed, leaving the collection of said sum until later, which sum remained as a loan payable upon presentation of the receipt. Issue: WON the defendant is guilty of misappropriating the deposit under his custody.

Considering our findings that there was no contract of deposit between petitioners and respondent or Moreman and that actually there were no more construction materials or equipment in petitioners' warehouse when respondent made a demand for their return, we hold that he has no right whatsoever to claim for damages.

Held: It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial instrument; First, because every commercial instruments payable to order are negotiable. Hence, this instrument not being to order but to bearer, it is not negotiable.

Civil Law; Obligations and Contracts; Deposits; In an action against the depositary, the burden is on the plaintiff to prove the bailment or deposit and the performance of conditions precedent to the right of action; A depositary is

It is also erroneous to assert that the sum of money set forth in said certificate is, according to it, in the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safe-keeping.

In order that the depositary may use or dispose of the things deposited, the depositor's consent is required, and then: "The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed." (Art. 309, Code of Commerce.) The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert the deposit into a loan, commission, or other contract. That demand was not made for restitution of the sum deposited, which could have been claimed on the same or the next day after the certificate was signed, does not operate against the depositor, or signify anything except the intention not to press it. Failure to claim at once or delay for some time in demanding restitution of the thing deposited, which was immediately due, does not imply such permission to use the thing deposited as would convert the deposit into a loan. Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided: "The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be responsible for all damages that may accrue and shall respond to the depositor for the legal interest on the amount." Whereupon the commentators say: "In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses the sacred nature of a deposit and as a means of preventing the desire of gain from leading him into speculations that may be disastrous to the depositor, who is much better secured while the deposit exists that when he only has a personal action for recovery. In a decision of an appeal, the principle was laid down that: "Since he commits the crime of estafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or abstracts money or goods received on commission for delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of the owner or owners of the securities, since he has not restored them, willfully and wrongfully disposed of them by appropriating them to himself or at least diverting them from the purpose to which he was charged to devote them." It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the detriment of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant.

Likewise erroneous is the construction apparently attempted to be given to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs.Morales and Morco, 15 Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited, but denial of having received same. In this connection it was held that failure to return the thing deposited was not sufficient, but that it was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to his own or another's benefit. He was accused of refusing to restore, and it was held that the code does not penalize refusal to restore but denial of having received. So much for the crime of omission; now with reference to the crime of commission, it was not held in that decision that appropriation or diversion of the thing deposited would not constitute the crime of estafa. In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were, he turned over the owner;" and there being no proof of the appropriation, the agent could not be found guilty of the crime of estafa. Being in accord with law and the merits of the case, the judgment appealed from is affirmed, with costs. "ESTAFA"; MISAPPROPRIATION OF DEPOSIT BY AGENT.— The balance of a commission account remaining in possession of the agent at the principal's disposal acquires at once the character of a deposit which the former must return or restore to the latter at any time it is demanded, nor can he lawfully dispose of it without incurring criminal responsibility for appropriating or diverting to his own use another's property. It could only become his as a loan, if so expressly agreed by its owner, who would then be obligated not to demand it until the expiration of the legal or stipulated period for a loan. ID.; ID.; He undoubtedly commits the crime of estafa who, having in his possession a certain amount of another's money on deposit at its owner's disposal, appropriates or diverts it to his own use, with manifest damage to its owner, for he has not restored it and has so acted willfully and wrongfully in abuse of the confidence reposed in him.

BPI vs IAC, 164 SCRA 630 (1988) FACTS: The original parties to the case were Zshornack and Commercial Bank and Trust Company of the Phils (Comtrust). In 1980, BPI absorbed Comtrust through a merger and was substituted as party to the case. Zshornack and his wife maintained in Comtrust a dollar savings account and a peso current account. On Dec 8, 1975, Zshornack delivered to the bank $3000 for safekeeping. When he requested the return of the money, Comtrust explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia. Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia. ISSUE: WON the contract between petitioner and respondent bank is a deposit YES HELD: The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later. The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties

entered into the transaction involved in this case. Under the said circular, safekeeping of the greenbacks without selling them to Central Bank within 1 business day from receipt, is a transaction which is not authorized. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law. Therefore, Zshornack cannot recover under this cause of action. Banking Laws; Central Bank Laws; Foreign Exchange Transactions; CB Circular No. 281; Sec. 6 of CB Circular No. 281 requires that all receipts of foreign exchange by any resident person shall be sold to authorized Central Bank agents within one business day following the receipt of said foreign exchange.— Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides:” SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold to authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any resident person, firm, company or corporation residing or located within the Philippines, who acquires foreign exchange shall not, unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within one business day upon taking ownership or receiving payment of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank. As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intend to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the

contract of depositum would never have been entered into at all. Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Civil Law; Obligations and Contracts; Contract of Deposit; The contract between Zshornack and the bank, as to the $3,000.00, was a contract of deposit defined under Art. 1962 of the New Civil Code.—The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time. Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later. The above arrangement is that contract defined under Article 1962, New Civil Code, which reads: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and for returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Void Contracts; The contract between the parties being void, affords neither of the parties a cause of action against each other.— Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. “When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no cause of action against each other . . .” [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law. TRIPLE-V FOOD SERVICES INC. vs. FILIPINO MERCHANTS INSURANCE COMPANY, GR. No. 160554, February 21, 2005 FACTS: Mary Jo-Anne De Asis dined at petitioner's Kamayan Restaurant. De Asis was using a Mitsubishi Galant Super Saloon Model 1995 issued by her employer Crispa Textile Inc.. On said date, De Asis availed of the valet parking service of petitioner and entrusted her car key to petitioner's valet counter. Afterwards, a certain Madridano, valet attendant, noticed that the car was not in its parking slot and its key no longer in the box where valet attendants usually keep the keys of cars entrusted to them. The car was never recovered. Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino Merchants Insurance Company, Inc. Having indemnified Crispa for the loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed with the RTC at Makati City an action for damages against petitioner Triple-V Food Services, Inc. Petitioner claimed that the complaint failed to adduce facts to support the allegations of recklessness and negligence committed in the

safekeeping and custody of the subject vehicle. Besides, when De Asis availed the free parking stab which contained a waiver of petitioner’s liability in case of loss, she had thereby waived her rights. ISSUE: Whether or not petitioner Triple-V Food Services, Inc. is liable for the loss. HELD: The Supreme Court ruled in the affirmative. In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and returning the same. A deposit may be constituted even without any consideration. It is not necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for safekeeping and to return it later to the depositor. Petitioner cannot evade liability by arguing that neither a contract of deposit nor that of insurance, guaranty or surety for the loss of the car was constituted when De Asis availed of its free valet parking service. THE ROMAN CATHOLIC BISHOP OF JARO vs. GREGORIO DE LA PEÑA FACTS : The plaintiff is the trustee of a charitable bequest made for the construction of a leper hospital and that father Agustin de la Peña was the duly authorized representative of the plaintiff to receive the legacy. The defendant is the administrator of the estate of Father De la Peña. In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the revolution, Father De la Peña was arrested by the military authorities as a political prisoner, and while thus detained made an order on said bank in favor of the United States Army officer under whose charge he then was for the sum thus deposited in said bank. The arrest of Father De la Peña and the confiscation of the funds in the bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus deposited had been collected by him for revolutionary purposes. The money was taken from the bank by the military authorities by virtue of such order, was confiscated and turned over to the Government. While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to the conclusion that said trust funds were a part of the funds deposited and which were removed and confiscated by the military authorities of the United States. ISSUE : Whether or not Father de la Peña is liable for the loss of the money under his trust?

RULING : The court, therefore, finds and declares that the money which is the subject matter of this action was deposited by Father De la Peña in the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly taken from the bank by the armed forces of the United States during the war of the insurrection; and that said Father De la Peña was not responsible for its loss. Father De la Peña's liability is determined by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.) Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could not be foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly mentioned in the law or those in which the obligation so declares." (Art. 1105.) By placing the money in the bank and mixing it with his personal funds De la Peña did not thereby assume an obligation different from that under which he would have lain if such deposit had not been made, nor did he thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or from his house by the military forces of one of the combatants during a state of war, it is clear that under the provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who must respond at all hazards. TRUST FUNDS; LIABILITY OF TRUSTEE.—One who, having in his possession trust funds, deposits them in his personal account in a bank and mixes them with his own funds, does not thereby assume an obligation different from that under which he would have lain if such deposit had not been made; nor does he thereby become liable to repay the money at all hazards; and where such funds are taken from the bank by fuerza mayor, he is relieved from responsibility in relation thereto. ENGLISH AND AMERICAN LAW OF TRUSTS NOT APPLICABLE.—That branch of the law, known in England and America as the law of trusts, has no counterpart in the Roman law and none under the Spanish law. KUCHINSKY, Appellant, v. EMPIRE LOUNGE, INC., Respondent. Action by plaintiff, Thomas J. Kuchinsky, against defendant, Empire Lounge, Inc., to recover damages for the wrongful taking of plaintiff's overcoat, gloves, and keys, while plaintiff was a customer in defendant's cocktail lounge. Plaintiff's complaint alleged two causes of action. The allegation of the first cause of action was that on January 5, 1963, while plaintiff was on defendant's premises as an invitee plaintiff delivered to defendant for safekeeping his overcoat, gloves, and keys, to be safely kept and redelivered to plaintiff on

demand; that defendant received such property upon such conditions; and that defendant failed to deliver back said property to plaintiff on demand because the same had been lost through the negligence and carelessness of defendant's employees. The second cause of action alleged that plaintiff's overcoat, gloves, and keys had been wrongfully taken while plaintiff was a business invitee of defendant and that such wrongful taking was due to the negligence of defendant; and defendant's negligence consisted of the following: (1) It failed to control and manage the conduct of its patrons therein; (2) It failed to adequately protect the interests of its business invitees; (3) It failed to exercise that degree of care imposed upon it as a business invitor. The defendant's answer denied the allegations of bailment set forth in the first cause of action of plaintiff's complaint, and also denied all allegations of negligence contained in both the first and second causes of action. The action was tried to the court without a jury. The county court in addition to filing a memorandum decision also made and filed findings of fact and conclusions of law. Such findings of fact are as follows: "Findings of Fact. " First. That the plaintiff, his wife and another couple were in the Defendant's establishment on the morning of January 6, 1963 at or about 3:00 A. M. " Second. That there was only one waitress working on the morning in question. " Third. That the Plaintiff and his party passed the coat tree as they took their seats and that it was twenty feet from where they sat and in view of at least one of the parties as they were seated. " Fourth. That when the lounge closed at about 3:30 A. M. the Plaintiff went to the tree to get his coat and found that it was not there. " Fifth. That the Plaintiff was at complete liberty to retreive [sic] his coat from the tree without requesting such from the waitress. " Sixth. That no signs were posted on the premises warning the invitees to watch their coat or stating that the management would not be responsible for losses. " Seventh. That the Defendant had no employees whose duties were exclusively to safeguard or protect the garments of the patrons or whose duties included the protecting or safeguarding of the garments of the patrons as part of their duties. " Eighth. That the only facility Defendant provided for the patrons to leave their garments were coat trees in the bar area about five feet from the entrance to the premises." The conclusions of law determined that no bailment had been established and that there was no negligence on the part of defendant and judgment was directed dismissing the complaint upon its merits. Judgment was entered December 29, 1964, which dismissed the complaint on the merits together with costs. Plaintiff has appealed.

CURRIE, C. J. In the absence of a transcript our review is limited to the question of whether the pleadings, decision, findings, and conclusions sustain the judgment. Estate of Reynolds (1964), 24 Wis.2d 370, 374, 129 N.W.2d 251. Appellant plaintiff has raised no issue on this appeal with respect to the trial court's determination that no bailment existed. Thus the issue before us is whether, under the facts as found by the trial court, defendant cocktail-lounge operator, was negligent as a matter of law. A case very much in point is Montgomery v. Ladjing (1899), 30 Misc. 92, 61 N.Y. Supp. 840. There the plaintiff entered the restaurant kept by the defendant with a party of friends; he removed his overcoat and hung it on a hook affixed to a post near the table at which he seated himself; the attention of neither the defendant nor of any of his employees was called to the coat in any way; and fifteen minutes later the coat was missing. The court held that the plaintiff had wholly failed to show failure on the part of the defendant to exercise ordinary care, and declared ( 30 Misc. at p. 96): "The rule to be deduced from all these cases, therefore, is: That, before a restaurant keeper will be held liable for the loss of an overcoat of a customer while such customer takes a meal or refreshments, it must appear either that the overcoat was placed in the physical custody of the keeper of the restaurant or his servants, in which case there is actual bailment, or that the overcoat was necessarily laid aside under circumstances showing at least notice of the fact and of such necessity to the keeper of the restaurant or his servants, in which case there is an implied bailment or constructive custody, or that the loss occurred by reason of the insufficiency of the general supervision exercised by the keeper of the restaurant for the protection of the property of customers temporarily laid aside." In National Fire Ins. Co. v. Commodore Hotel (1961), 259 Minn. 349, 107 N.W.2d 708, the plaintiff was a guest at a luncheon held at the defendant's hotel. She hung her mink jacket in an unattended cloakroom on the main floor across from the lobby desk. After the luncheon and ensuing card party the plaintiff went to the cloakroom to retrieve her jacket and discovered it was gone. The court held that no negligence had been established against the defendant and stated ( 259 Minn. at pp. 353, 354): ". . . In any event, we do not feel that it is incumbent upon a hotel or restaurant owner to keep an attendant in charge of a free cloakroom for luncheon or dinner guests or otherwise face liability for loss of articles placed therein. The maintenance of such rooms without attendants is a common practice, and where the proprietor has not accepted control and custody of articles placed therein, no duty rests upon him to exercise any special degree of care with respect thereto.

"Likewise, failure to post a warning disclaiming responsibility would not seem to constitute negligence when, as here, a guest is aware that a cloakroom is unattended, adjacent to the lobby, and accessible to anyone, and has used it under similar circumstances on many prior occasions. The absence of such warning signs does not appear to have been material in a number of decisions absolving proprietors from liability, although when posted they appear to be regarded as an added factor in establishing such nonliability." See also annotation, "Liability for loss of hat, coat or other property deposited by customer in place of business," 1 A.L.R.2d 802. Under the foregoing authorities we conclude not only do the findings of fact and conclusions of law support the judgment, but also that these findings would not support a judgment in favor of plaintiff. Defendant has requested the imposition of double costs against plaintiff because of alleged flagrant violation of our rules. The most serious of these rule infractions was plaintiff's failure to print in its appendix the trial court's memorandum decision, findings of fact, conclusions of law, and judgment. If it were not for the fact that plaintiff's counsel has been less than a year in practice and this is his first supreme court appeal we would grant the request for double costs. It is incumbent even upon the neophyte lawyer to familiarize himself with the rules of practice of this court set forth in ch. 251, Stats., before drafting his brief and appendix. By the Court. — Judgment affirmed. CA AGRO-INDUSTRIAL DEVELOPMENT CORP. vs. THE HONORABLE COURT OF APPEALS FACTS : Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? Petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land. P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks and based on the agreement the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease stating that the nank is not depositary of the contents of the safe neither the possession nor control of the same and assumes absolutely no liability in connection therewith.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance. In its answer with counterclaim, respondent bank alleges that the petitioner has no cause of action because of the provisions stated in the contract of lease. The trial court rendered a decision adverse to the petitioner. The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the parties. ISSUE : the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee? RULING: We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because: There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted) It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard

key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said: With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 30 (citations omitted) Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present. Civil Law; Deposit; Commercial Law; Banks and Banking; A contract for the rent of a safety deposit box is not an ordinary contract of lease but a special kind of deposit.—We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under

Article 1643 because the full and absolute possession and control of the safety deposit box Was not given to the joint renters. Primary function of banking institutions authorized to rent out safety deposit box, within the parameters of contract of deposit in accord with General Banking Act which adopts prevailing rule in American jurisprudence.—In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act pertinently provides: xxx Note that the primary function is still found within the parameters of a contract of deposit. i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function.\ Any stipulation exempting depository from liability for loss of thing deposited on account of fraud, negligence or delay considered void for being contrary to law and public policy.—The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly the depositary would be liable if, in perform: ng its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. Hence, any stipulation exempting ng the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. Same; Same; Same; Same; Liability of lessor in contract of lease of safety deposit box can be limited by stipulation but any stipulation for exemption shall be held ineffective.—With respect to property deposited in a safe-deposit box by a customer of a safe deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. xxx The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation.

Bank's exoneration from liability not by virtue of characterization of impugned contract as a contract of lease but by reason of the absence of proof as to its knowledge about existing\agreement between the other parties, as well as, that the loss of certificates not attributable to its negligence or fraud.—In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. SIA vs CA, 222 SCRA 24 (1993) Doctrine: Contract of the use of a safety deposit box of a bank is not a deposit but a lease under Sec 72, A of General Banking Act. Accordingly, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. The bank’s negligence aggravated the injury or damage to the stamp collection.. Facts: Plaintiff Luzon Sia rented a safety deposit box of Security Bank and Trust Co. (Security Bank) at its Binondo Branch wherein he placed his collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or at the lowest level of the safety deposit boxes of the defendant bank. During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank’s premises, seeped into the safety deposit box leased by the plaintiff and caused, according damage to his stamps collection. Security Bank rejected the plaintiff’s claim for compensation for his damaged stamps collection. Sia, thereafter, instituted an action for damages against the defendant bank. Security Bank contended that its contract with the Sia over safety deposit box was one of lease and not of deposit and, therefore, governed by the lease agreement which should be the applicable law; the destruction of the plaintiff’s stamps collection was due to a calamity beyond obligation on its part to notify the plaintiff about the floodwaters that inundated its premises at Binondo branch which allegedly seeped into the safety deposit box leased to the plaintiff. The trial court rendered in favor of plaintiff Sia and ordered Sia to pay damages. Issue: Whether or not the Bank is liable for negligence.

Held: Contract of the use of a safety deposit box of a bank is not a deposit but a lease. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides: In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safequarding of such effects. As correctly held by the trial court, Security Bank was guilty of negligence. The bank’s negligenceaggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where the safe deposit box was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent. Article 1170 of the Civil Code, which reads “Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages” is applicable. Hence, the petition was granted. The provisions contended by Security Bank in the lease agreement which are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own agents’ fraud, negligence or delay must be stricken down for being contrary to law and public policy. Civil Law; Deposit; Contract for the use of safety deposit box is a special kind of deposit and the relationship between the parties thereto, with respect to the contents of the box, is that of a bailor and bailee, the bailment being for hire and mutual benefit.—In the recent case of CA Agro-Industrial Development Corp. vs. Court of Appeals, this Court explicitly rejected the contention that a contract for the use of a safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to be strictly governed by the Civil Code provision on deposit; it is, as We declared, a special kind of deposit. The prevailing rule in American jurisprudence—that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benefit has been adopted in this jurisdiction. Conditions in a “Lease Agreement” covering a safety deposit box which exempt the bank from any liability for damage, loss or destruction of the contents thereof arising from its own or its agent’s fraud, negligence or delay are considered null and void, for being contrary to law and public policy.—Assayed in the light of Our aforementioned pronouncements in CA Agro-Industrial Development Corp., it is not at all difficult to conclude that both conditions No. 9 and No. 13

of the “Lease Agreement” covering the safety deposit box in question (Exhibits “A” and “1”) must be stricken down for being contrary to law and public policy as they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own or its agents’ fraud, negligence or delay. Accordingly, SBTC cannot take refuge under the said conditions. Although flooding could be considered a fortuitous event, failure of the bank to give notice to the renter of such fact makes it liable for damages, its negligence caused to aggravate injury or damage to the renter; Case at bar.— Unfortunately, however, the public respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the petition and have been summarized in this ponencia. SBTC’s negligence aggravated the injury or damage to the petitioner which resulted from the loss or destruction of the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent x x x The destruction or loss of the stamp collection which was, in the language of the trial court, the “product of 27 years of patience and diligence” caused the petitioner pecuniary loss; hence, he must be compensated therefor. ANGEL JAVELLANA vs. JOSE LIM, ET AL. FACTS: Angel Javellana filed a complaint on the 30th of October, 1906 against Jose Lim and Ceferino Domingo Lim. It was then alleged that on the 26th of May, 1897, Lim executed and subscribed a document, in favor of Javellana, reading as follows: We have received from Angel Javellana, as a deposit without interest, the sum of two thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman, jointly and severally, on the 20th of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose Lim. — Signed: Ceferino Domingo Lim. It was also alleged that, when the obligation became due, Lim begged Javellana for an extension of time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on the amount of their indebtedness, to which Javellana acceded; that on the 15th of May, 1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the exception of either capital or interest, had thereby been subjected to loss and damages. Lim answered that they admitted the statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of November, 1902, not, however,

as payment of interest on the amount stated in the foregoing document, but on account of the principal, and denied that there had been any agreement as to an extension of the time for payment and the payment of interest at the rate of 15 per cent per annum. ISSUE: WON the contract is a deposit. NO, it was a contract of loan. HELD: The document of indebtedness inserted in the complaint states that the Javellana left on deposit with Lim a given sum of money which they were jointly and severally obliged to return on a certain date fixed in the document; but that, nevertheless, when the document written in the Visayan dialect and followed by a translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that the amount deposited had not yet been returned to Javellana. He was subjected to losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return was again stipulated with the further agreement that the amount deposited should bear interest at the rate of 15 per cent per annum from January 20. The 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued by him to the debtors, would be included, and that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have accomplished the return agreed upon by the delivery of a sum equal to the one received by them. For this reason it must be understood that the debtors were lawfully authorized to make use of the amount deposited, which they have done, as subsequent shown when asking for an extension of the time for the return thereof, inasmuch as, acknowledging that they have subjected the letter, their creditor, to losses and damages for not complying with what had been stipulated, and being conscious that they had used, for their own profit and gain, the money that they received apparently as a deposit, they engaged to pay interest to the creditor from the date named until the time when the refund should be made. Such conduct on the part of the debtors is unquestionable evidence that the transaction entered into between the interested parties was not a deposit, but a real contract of loan.

Depository making use of the thing deposited: When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor asking for an extension of one year, in view of the fact the money was scare, and because neither himself nor the other defendant were able to return the amount deposited, for which reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a matter of fact, he did not have in his possession the amount deposited, he having made use of the same in his business and for his own profit; Express permission: Javellana, the creditor, by granting them the extension, evidently confirmed the express permission previously given to use and dispose of the amount stated as having been deposited, which, in accordance with the loan, to all intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at 15 per cent per annum until its full payment, deducting from the total amount of interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code. Notwithstanding that it does not appear that Jose Lim signed the document executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said document has not been contested as false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the authenticity of the signatures of the witnesses who attested the execution of the same; and from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of the original document of deposit was thus made, and not the least proof is shown in the record that Jose Lim had ever paid the whole or any part of the capital stated in the original document. There was no renewal of the contract deposited converted into a loan, because, as has already been stated, the defendants received said amount by virtue of real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown.

Article 1767 of the Civil Code provides that — The depository can not make use of the thing deposited without the express permission of the depositor. Otherwise he shall be liable for losses and damages.

CONTRACT; BAILMENT OR DEPOSIT; LOAN.—Where money, consisting of coins of legal tender, is deposited with a person and the latter is authorized by the depositor to use and dispose of the same, the agreement thus entered into between the depositor and the depositary is not a contract of deposit, but a loan.

Article 1768 also provides that — When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment. The permission shall not be presumed, and its existence must be proven.

SUBSEQUENT AGREEMENT AS TO INTEREST; NOVATION.—A subsequent agreement between the parties as to interest on the amount said to have been deposited, because the same could not be returned at the time fixed therefor, does not constitute a renewal of an agreement of deposit, but is the best

evidence that the original contract entered into between the parties therein was for a loan under the guise of a deposit. MANUEL GARCIA GAVIERES vs. T.H. PARDO DE TAVERA Art. 1978: When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract. Facts: This is an appeal from a decision made by the Court of First of Tondo, commenced on January 10, 1900 by Don Manuel Garcia Gavieres as Plaintiff and successor in interest of the deceased Doña Ignacia de Gorricho against Don Trinidad H. Pardo de Taverna as universal heir and successor of the deceased Don Felix Pardo de Taverna. The Plaintiff alleges that Doña Ignacia deposited with Don Trinidad the amount of 3000 pesos in gold, as a deposit payable on two months’ notice in advance, with interest at 6% per annum that was evidenced by an agreement signed by the two parties on October 31, 1859. Don Manuel came before the court to seek aid in recovering the balance of 1,423 pesos and 75 cents from the estate of Don Trinidad. The Defendant in answering the original complaint alleged that the document which the complaint is based upon was not a contract of deposit but one for a contract of loan. The defendant further presented evidence that showed that the principal obligation was paid by Don Trinidad through his agent and that in case of non-payment of the balance that any action is barred by prescription. Issue: WON the document presented by the plaintiff a contract of loan or that of a deposit Held/Ratio: The Court Held that the contract was that of a contract of loan. Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire document it clearly appears that the contract was a loan and that such was the intention of the parties. The obligation of the depositary to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depositary should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. All personal actions, such as those which arise from a contract of loan, cease to have legal effect after twenty years according to the former law and after fifteen years according to the Civil Code now in force. The document dated January 8, 1869, executed by Don Felix Garcia Gavieres, husband and legal

representative of Doña Ignacia Gorricho, acknowledges the receipt of 1,224 pesos from Don Manuel Darvin, representative of the deceased Don Felix Pardo de Tavera. This sum is declared in the document was the balance due upon the debt of 2,000 pesos. This was more or less the amount which remained as due upon the original obligation after deducting the payment which was admitted to have been made. In the absence of evidence disclosing that there were other claims in favor of Gavieres it is reasonably to be supposed that this payment was made to satisfy the balance due upon the original obligation. He who by laches in the exercise of his rights has caused a failure of proof has no right to complain if the court does not apply the strict rules of evidence which are applicable in ordinary cases, and admits to a certain extent the presumption to which the conduct of the interest party himself naturally gives rise. It is was the opinion of the court that the judgment of the Court of First Instance should be affirmed, and it was so ordered, with costs of appeal taxed against the appellant. INTERPRETATION OF CONTRACTS; LOAN; DEPOSIT.—An instrument acknowledging receipt of a sum of money as a deposit returnable two months after notice with interest is evidence of a contract of loan and not of deposit. EVIDENCE; LOAN; PAYMENT.—Where plaintiff's receipt for a sum of money, paid by defendant in satisfaction of an unidentified balance, is introduced to prove payment of an obligation sued upon, it will be regarded after a lapse of thirty years a satisfaction of the obligation in question in the absence of showing of other obligations between the parties. —Laches in the commencement of an action causing a possible failure of proof will prevent court from applying strict rules of evidence. Baron v David FACTS PABLO RUNS A RICE MILL, PLAINTIFF PLACES RICE IN MILL, FIRE GUTS MILL, PALAY GONE Defendant Pablo David has been running a rice mill in Pampanga. One day a fire occurred that destroyed the mill and its contents. Silvestra Baron, the plaintiff in the first action, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill. During the same period Guillermo Baron also placed palay in the mill. PLAINTIFFS CLAIM PALAY WAS SOLD, DEFENDANT ARGUES IT WAS DEPOSIT AND THAT THE FIRE RELIEVED HIM OF LIABILITY

Both plaintiffs claim that the palay delivered by them to defendant was sold to defendant; while defendant claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire, already mentioned. ISSUE: WON the palay was a deposit or a sale (SALE) WON defendants are liable to plaintiffs (YES) HELD PALAY WAS SOLD, LIABILITY NOT EXTINGUISHED BY FIRE. PLAINTIFF BOUND TO ACCOUNT FOR IT In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921.

DEPOSIT; USE OF THING DEPOSITED; LIABILITY OF DEPOSITARY.—The owner of a rice mill who, in conformity with custom prevailing in the trade, receives palay and converts it into rice, selling the product for his own benefit, must account for the palay to the owner at the price prevailing at the time demand is made. DESTRUCTION OF RICE MILL BY FIRE.—The destruction of a rice mill, with its contents, by fire after palay thus deposited has been milled and marketed does not affect the liability of the miller. ATTACHMENT; DAMAGES RESULTING FROM WRONGFUL ATTACHMENT.—A plaintiff who, by means of a false affidavit, procures an attachment to be issued and levied upon a rice mill belonging to his debtor is liable in damages for the loss of profits resulting from the closure of the mill, as well as for compensation for the loss occasioned to the good-will of the business in driving away customers. DEPOSITION ; READING OF DEPOSITION IN COURT.— When a deposition as presented at the trial and admitted by the court, it is competent evidence for the party in whose behalf it was taken, although it may not have been actually read when introduced in evidence. Obejera v Iga Sy

Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurrence of the fire. EVEN IF DEPOSIT, USE OF THE THING BINDS DEFENDANT TO ACCOUNT FOR ITS VALUE Even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value Under art 1768 of the Civil Code when the depository has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or a commodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In this connection we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely.

Facts: On December 13, 1941, plaintiffs and defendant sought refuge in the house of Leon Villena, on account of the Japanese invasion of the Philippines. News having spread that the Japanese were committing barbarous acts, plaintiffs and defendant decided to hide their things and valuables in a dugout belonging to Villena. On February 18, 1942, it was discovered that their money and things had been lost. The defendant reported the loss of her valuables causing the arrest and investigation of Villena, two others and the plaintiff Engracio Obejera, who were released shortly after, except Engracio Obejera who was released only on April 19, 1912 after he, with his wife, had consented to execute a transfer agreement with the defendant which was annulled by the Court of First Instance in Batangas on the ground of force and intimidation. Issue: Whether or not Obejera is civilly liable to the assets that were lost by Sy? Held: NO. Decision AFFIRMED Ratio Decidendi: The Supreme Court ruled that the alleged deposit cannot be believed and is contrary to the ordinary course of nature and the ordinary habits of life. Even if it was considered, any obligation or liability arising therefrom was extinguished

upon the loss. The evidence of record shows that the plaintiffs were not in any way responsible for the loss of the defendant's money and jewelry. It necessarily follows that the deed of transfer whereby the plaintiffs promised to transfer their property cannot be held liable, is null and void for lack of cause or consideration and lack of free consent.

that the checks be cancelled and the funds taken out be returned because the check was stolen before. Central Bank did not heed such call. Citytrust filed a complaint to collect the sum of money with damages against Central Bank to the Regional Trial Court (RTC). RTC found both parties negligent and held them equally liable for the loss. Court of Appeals affirmed the decision.

DEPOSIT; EVIDENCE; DISPUTABLE PRESUMPTION; ORDINARY COURSE OF NATURE AND ORDINARY HABITS OF LIFE; CASE AT BAR.—After a careful consideration of the nine assignments of error and examination of the evidence of this case, the contention of the defendant and appellant cannot be sustained. The alleged deposit cannot be believed and is contrary to the ordinary course of nature and the ordinary habits of life.

ISSUE: Whether or not Citytrust can collect sum of money as damages from the Central Bank.

LOSS OF THING DEPOSITED; EXTINCTION OF LIABILITY.—Even if the defendant's theory of deposit were sustained, any obligation arising" therefrom was extinguished upon the loss, without the fault of the depositee and under circumstances which at the time were inevitable. CONTRACTS; NULLITY; LACK OF CAUSE OR CONSIDERATION.—The deed of transfer dated April 19, 1942 (Exhibit Y), whereby the plaintiffs paid P500 to the defendant and further promised to transfer their property under Transfer Certificate of Title No. 666 in case they failed to return on December 31, 1942 the balance of the loss for which they cannot be held liable, is null and void for lack of cause or consideration (article 1275, Civil Code). DURESS AND INTIMIDATION.—Under the facts stated in the opinion, it was held that there had been employed in this case irresistible force and intimidation to coerce the plaintiffs into executing the document in question, rendering it, therefore, null and void for lack of free consent (articles 1265, 1267, 1268, Civil Code). Central Bank of the Philippines vs. Citytrust Banking Corporation Facts: If the plaintiff’s negligence was only contributory, the immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. The Citytrust Banking Corporation (Citytrust) gave Central Bank of the Philippines a list of signatures of five of its officers authorized to sign checks and serve as drawers and indorsers for its account, and also the list of the roving tellers authorized to perform other transactions on its behalf, one of whom was Rounceval Flores (Flores). Flores presented two checks to the Central Bank’s Senior Teller Iluminada dela Cruz (Dela Cruz) and was subsequently approved. Dela Cruz prepared the cash transfer slip where Flores should sign but instead he sign as one Rosauro C. Cayabyab. This fact was missed by Dela Cruz. It was given to Cash Department and the signatures were examined and later on paid Flores for the checks. After one year and nine months, the Citytrust demanded

HELD: The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (R.A. 8791), which took effect on 13 June 2000, declares that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Section 2 of R.A. 8791 prescribes the statutory diligence required from banks – that banks must observe “high standards of integrity and performance” in servicing their depositors. Citytrust’s failure to timely examine its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioner’s liability, in accordance with Article 2179 of the Civil Code which provides that if the plaintiff’s negligence was only contributory, the immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. Banks and Banking; Fiduciary Nature of Banking; 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; The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family.—The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (“RA 8791”), which took effect on 13 June 2000, declares that the State recognizes the “fiduciary nature of banking that requires high standards of integrity and performance.” This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that “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.” This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its

depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Petitioner’s liability to Citytrust mitigated on a 60-40- ratio.—Citytrust’s failure to timely examine its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioner’s liability, in accordance with Article 2179 of the Civil Code which provides that if the plaintiff’s negligence was only contributory, the immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. For had Citytrust timely discovered the loss/theft and/or subsequent encashment, their proceeds or part thereof could have been recovered. In line with the ruling in Consolidated Bank and Trust Corporation v. Court of Appeals, 410 SCRA 562 (2003), the Court deems it proper to allocate the loss between petitioner and Citytrust on a 60-40 ratio. VICENTE DELGADO vs. PEDRO BONNEVIE FACTS: DELGADO vs. BONNEVIE and ARANDEZ 23 PHIL 308 FACTS: Appellant Bonnevie and Arandez formed a regular general partnership in Nueva Caceres, Ambos, Camarines Sur which engaged in the business of threshing paddy/palay. Vicente Delgado undertook to deliver to the appellants, 2003 and a half paddy. The palays are to be cleaned and returned to him as rice with the agreement of payment of 10 centimos for each cavan and to have it returned in the rice, onehalf the amount received as palay. Delgado appeared in CFI on February 6, 1909, demanding the return of the 2003 and a half cavanes of palay. Prior to the pendency of the trial, the partnership was already dissolved. ISSUES: 1. W/N the nature of the obligation contracted by the appellants (Bonnevie & Arandez) is a deposit or a hire of service. 2. W/N the right to demand the return of the things has prescription. HELD: 1. The obligation of the appellants arose primarily out of deposit. While the deposit was later converted into a contract of hire services, even after the hire of service had been fulfilled, the object (rice) in every way remained as a deposit in the possession of the appellants, for them to return to the depositor at any time they might be required to do so and nothing has released them of this obligation. Moreover, neither the dissolution of the partnership that united them, nor the revolutionary movement of a political character that seems to have occurred in 1898, nor the fact that they may at some time have lost possession of the rice has released them from the obligation to return it. 2. Under the title of deposit or hire of services, the possession of the appellants can in no way amount to prescription, for the thing received on deposit or for hire of service could not prescribe, since for every prescription of ownership, the possession

must be in the capacity of an owner, public, peaceful and uninterrupted (Civil Code 1941). The appellants could not possess the rice in the capacity of owners, taking for granted that the depositor or lessor never could have believed that he had transferred to them ownership of the thing deposited or leased, but merely the care of the thing on deposit and the use or profit thereof; which is expressed in legal terms by saying that the possession of the depositary or of the lessee is not adverse to that of the depositor or lessor, who continues to be the owner of the thing which is merely held in trust by the depositary or lessee. COMPANIA AGRICOLA VS. NEPOMUCENO FACTS: The registered partnerships, Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the creditors, declared insolvent by the Court of First Instance of Manila. Compania Agricola de Ultramar filed a claim against one of the insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the agreed interest thereon at the rate of 6 per cent per annum from April 5, 1918, until its full payment was a deposit with said Mariano Velasco & Co. and asked the court to declare it a preferred claim. The court rendered a decision declaring that the alleged deposit was a preferred claim for the sum mentioned, with interest at 6 per cent per annum from April 5, 1918, until paid. From this decision the assignee appealed. The evidence presented by the claimant Compania Agricola de Ultramar consisted of a receipt in writing, and the testimony of Jose Velasco who was manager of Mariano Velasco & Co. at the time the note was executed. Received from the "Compania Agricola de Ultramar" the sum of ten thousand Philippine pesos as a deposit at the interest of six per cent annually, for the term of three months from date. ISSUE: Whether the claim of the appellee should be considered a deposit and a preferred claim. RULING: NO. The transaction involved was a loan and not a deposit. Although in the document in question a deposit is spoken of, nevertheless from an examination of the entire document it clearly appears that the contract was a loan and that such was the intention of the parties. It is unnecessary to recur to the cannons of interpretation to arrive at this conclusion. The obligation of the depository to pay interest at the rate of 6 per cent to the depositor suffices to cause the obligation to be considered as a loan and makes it likewise evident that it was the intention of the parties that the depository should have the right to make use of the amount deposited, since it was stipulated that the amount could be collected after notice of two months in advance. Such being the case, the contract lost the character of a deposit and acquired that of a loan. (Art. 1768, Civil Code.) [Gavieres vs. De Tavera] Article 1767 of the Civil Code provides that —

"The depository cannot make use of the thing deposited without the express permission of the depositor." "Otherwise he shall be liable for losses and damages." Article 1768 also provides that — "When the depository has permission to make use of the thing deposited, the contract loses the character of a deposit and becomes a loan or bailment." "The permission not be presumed, and its existence must be proven." Moreover, it may be inferred that there was no renewal of the contract of deposit which converted into a loan, because, as has already been stated, the defendants received said amount by virtue of a real loan contract under the name of a deposit, since the so-called bailees were forthwith authorized to dispose of the amount deposited. This they have done, as has been clearly shown. The ten thousand pesos delivered by the appellee to Mariano Velasco & Co. cannot be regarded as a technical deposit. But the appellee argues that it is at least an "irregular deposit." This argument is, we think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319). There this court said: . . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that there are three points of difference between a loan and an irregular deposit. The first difference which he points out consists in the fact that in an irregular deposit the only benefit is that which accrues to the depositor, while in a loan the essential cause for the transaction is the necessity of the borrower. Nor does the contract in question fulfill the third requisite indicated by Manresa, which is, that in an irregular deposit, the depositor can demand the return of the article at any time, while a lender is bound by the provisions of the contract and cannot seek restitution until the time for payment, as provided in the contract, has arisen. It is apparent from the terms of this documents that the plaintiff could not demand his money at any time. He was bound to give notice of his desire for its return and then to wait for six months before he could insist upon payment. In the present case the transaction in question was clearly not for the sole benefit of the Compania Agricola de Ultramar; it was evidently for the benefit of both parties. Neither could the alleged depositor demand payment until the expiration of the term of three months. For the reasons stated, the appealed judgment is reversed, and we hold that the transaction in question must be regarded as a loan, without preference. BPI VS CA, 232 SCRA 302 (1994) BANK OF THE PHILIPPINE ISLANDS (successor-in- interest of COMMERCIAL AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD CORP. and BENIGNO D. LIM, respondents. FACTS: Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), held one joint bank account with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands

(BPI). Sometime in March 1975, a joint checking account with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Velasco died. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim one-half of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. Thereafter, Eastern obtained a loan of P73,000.00 from CBTC as "Additional Working Capital,". Eastern issued a negotiable promissory note for P73,000.00 payable on demand to the order of CBTC with interest at 14% per annum. The note was signed by Lim. The loan is wholly/partly secured by the Hold-Out on a 1:1 on C/A No. 2310-001-42, which refers to the joint account of Velasco and Lim with a balance of P331,261.44. In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," On the other hand, a case for the settlement of Velasco's estate was filed. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of Velasco and Lim was being claimed as part of Velasco's estate. The intestate court granted motion of the heirs of Velasco to withdraw the balance and authorized the heirs to divide among themselves the amount withdrawn. CBTC was merged with BPI. BPI filed a complaint against Lim and Eastern demanding payment of the promissory note for P73,000.00. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note. RTC dismissed the complaint and CA affirmed the decision. PETITIONER’s CONTENTION: BPI alleged that the Holdout Agreement in question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall become a security for respondent Lim's promissory note only if respondents' Lim and Eastern Plywood Corporation's interests to that amount are established as a result of a final and definitive judicial action or a settlement between and among the contesting parties thereto." Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's decision dismissing the complaint on the ground that it was the duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00 covered by the promissory note. PRIV. RESPONDENT’s CONTENTION: Eastern and Lim dispute the "suspensive condition" argument of the petitioner that they are rightful owners of the money in question, the suspensive condition does not find any application in this case and the bank had the duty to set off this deposit with the loan.

ISSUES: 1. WON BPI can demand payment of the loan of P73,000.00 despite the existence of the Holdout Agreement? YES 2. WON BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco? YES HELD: ISSUE 1: It is clear in paragraph 02 of the “Holdout Agreement” that CBTC, or BPI as its successor-in-interest, had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make the application. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. Its suit for the enforcement of the note was then in order and it was error for the trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The "suspensive condition" theory of the petitioner is, therefore, untenable. ISSUE 2: The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the Philippines, we held that bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit; hence, it was payable on demand of the depositor. The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the

account. Moreover, the order of the court merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. Because the ownership of the deposit remained undetermined, BPI, as the debtor, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. The payment then by BPI to the heirs of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern. POLICY: Bank deposits are in the nature of irregular deposits; they are really loans because they earn interest. The relationship then between a depositor and a bank is one of creditor and debtor. Durban Apartments Corporation vs. Pioneer Insurance and Surety Corporation FACTS: July 22, 2003, Pioneer Insurance and Surety Corp, by right of subrogation, filed with the RTC of Makati a Complaint for Recovery of Damages against Durban Apartments Corp. (or City Garden Hotel) and defendant before the RTC, Vicente Justimbaste. Respondent averred that it is the insurer for loss and damage of Jeffrey S. See’s 2001 Suzuki Grand Vitara in the amount of P1,175,000.00. On April 30, 2002, See arrived and checked in at the City Garden Hotel before midnight, and its parking attendant, Justimbaste got the key to said Vitara from See to park it. On May 1, 2002, at about 1:00 am, See received a phone call where the Hotel Chief Security Officer informed him that his Vitara was carnapped while it was parked unattended at the parking area of Equitable PCI Bank See went to see the Security Officer, thereafter reported the incident to the Operations Division of the Makati City Police Anti-Carnapping Unit, and a flash alarm was issued. The police investigated Hotel Security Officer, Ernesto T. Horlador, Jr. and Justimbaste. See gave his Sinumpaang Salaysay to the police investigator, and filed a Complaint Sheet with the PNP Traffic Management Group in Camp Crame. it paid the P1,163,250.00 money claim of See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for the loss of the Vitara. The Vitara was lost due to the negligence of Durban Apartments and Justimbaste because it was discovered during the investigation that this was the second time that a similar incident of carnapping happened in the valet parking service and no necessary precautions were taken to prevent its repetition. Durban Apartments was wanting in due diligence in the selection and

supervision of its employees particularly defendant Justimbaste. Both failed and refused to pay its valid, just, and lawful claim despite written demands. ISSUE: Is petitioner liable for the loss of See’s vehicle? RULING: Yes. Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary deposit made by persons in hotels or inns: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects. Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for safekeeping with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected from See’s delivery, when he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of See’s vehicle. Contract of Deposit; Hotels and Inns; The contract of deposit was perfected when the hotel guest handed over to the hotel’s parking attendant the keys to his vehicle, which the latter received with the obligation of safely keeping and returning it.—Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit and a necessary deposit made by persons in hotels or inns: Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. Art. 1998. The deposit of effects made by travelers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotelkeepers or their substitutes advised relative to the care and vigilance of their effects. Plainly, from the facts found by the lower courts, the insured See deposited his vehicle for safekeeping with petitioner, through the latter’s employee, Justimbaste. In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected from See’s delivery,

when he handed over to Justimbaste the keys to his vehicle, which Justimbaste received with the obligation of safely keeping and returning it. Ultimately, petitioner is liable for the loss of See’s vehicle.

Makati Shangri-La Hotel and Resort, Inc. vs. Harper DOCTRINE:

unrestricted access to all hotel rooms on the pretense of being visitors of the guests which is absurd.

Negligence – Article 2176 0f the New Civil Code provides “Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.”

Note: The decision of the CA was reproduced in the decision to which the SC concurred. The CA discussed the test of negligence as:

The hotel business is imbued with public interest. Hotelkeepers are bound to provide not only lodging for their guests but also security to their persons and belongings to their guest. The twin duty constitutes the essence of the business (Arts 2000-2001 New Civil Code). Hotel owner is liable for civil damages to surviving heirs of hotel guest whom strangers murder inside his hotel room. FACTS: Christian Harper was a Norweigian who came to Manila on a business trip. He stayed at Makati Shangri-la Hotel, but he was murdered in his hotel room [Specifically Room 1428. His ghost can be found there]. It was found that the muderer, a Caucasian male, was able to trespass into the hotel room of the victim and was then able to murder and rob the victim. The heirs of the victim blame the hotel's gross negligence in providing the most basic security system of its guests. The RTC held in favor of the heirs and ordered Shangri-la to pay damages. CA affirmed. ISSUE: WON Shangri-la Hotel is liable for damages. HELD: Yes. Shangri-la is liable due to its own negligence. The testimony revealed that the management practice of the hotel prior to the death of the victim was to deploy only one security or roving guard for every three or four floors of the hotel, which is inadequate because the hotel is Lshaped that rendered hallways not visible end to end. That there was a recommendation to increase security to one guard per floor but this was not followed. This omission is critical. The hotel business is imbued with public interest. Hotelkeepers are bound to provide not only lodging for their guests but also security to their persons and belongings to their guest. The twin duty constitutes the essence of the business. Therefore, the hotel has a greater degree of care and responsibility for its guests , otherwise the hotelkeepers would just stand idly by while strangers have

“The test of negligence is objective. WE measure the act or omission of the tortfeasor with a perspective as that of an ordinary reasonable person who is similarly situated. The test, as applied to the extant case, is whether or not [Shangri-la Hotel], under the attendant circumstances, used that reasonable care and caution which an ordinary person would have used in the same situation.” Hotelkeepers; The hotel business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for their guests but also security to the persons and belongings of their guests. The twin duty constitutes the essence of the business.―The hotel business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for their guests but also security to the persons and belongings of their guests. The twin duty constitutes the essence of the business. Applying by analogy Article 2000, Article 2001 and Article 2002 of the Civil Code (all of which concerned the hotelkeepers’ degree of care and responsibility as to the personal effects of their guests), we hold that there is much greater reason to apply the same if not greater degree of care and responsibility when the lives and personal safety of their guests are involved. Otherwise, the hotelkeepers would simply stand idly by as strangers have unrestricted access to all the hotel rooms on the pretense of being visitors of the guests, without being held liable should anything untoward befall the unwary guests. That would be absurd, something that no good law would ever envision.

YHT Realty Corporation vs. Court of Appeals Facts: Respondent McLoughlin would always stay at Tropicana Hotel every time he is here in thePhilippines and would rent a safety deposit box. The safety deposit box could only be openedthrough the use of 2 keys, one of which is given to the registered guest, and the other remaining in the possession of the management of the hotel. McLoughlin allegedly placed the following in his safety deposit box – 2 envelopes containing US Dollars, one envelope containing Australian Dollars, Letters, credit cards, bankbooks and acheckbook.On 12 December 1987, before leaving for a brief trip, McLoughlin took some items from the safety box which includes the ff: envelope containing Five Thousand US Dollars (US$5,000.00), the other envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his passports and his credit cards. The other items were left in the deposit box. Upon arrival, he found out that a fewd ollars were missing and the jewelry he bought was likewise missing. Eventually, he confronted Lainez and Paiyam who admitted that Tan opened the safety deposit box with the key assigned to him. McLoughlin went up to his room where Tan was staying and confronted her. Tan admitted that she had stolen McLouglin’s key and was able to open the safety deposit box with the assistance of Lopez, Paiyam and Lainez. Lopez also told McLoughlin that Tan stole the key assigned to McLouglin while the latter was asleep. McLoughlin insisted that it must be the hotel who must assume responsibility for the loss he suffered. Lopez refused to accept responsibility relying on the conditions for renting the safety deposit box entitled “Undertaking For the Use of Safety Deposit Box” ISSUE WON the “Undertaking for the Use of Safety Deposit Box” admittedly executed by private respondent is null and void. HELD YES Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier’s business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in socalled “undertakings” that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature. In an early case (De Los Santos v. Tan Khey), CA ruled that to hold hotelkeepers or innkeeper liable for the effects of

their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn. With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest’s knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Paragraphs (2) and (4) of the “undertaking” manifestly contravene Article 2003, CC for they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the safety deposit box for any cause whatsoever. Evidently, the undertaking was intended to bar any claim against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any force majeure. Hotels and Inns; Deposits; Safety Deposit Boxes; Mere close companionship and intimacy are not enough to warrant the conclusion that a hotel guest and his companion are husband and wife—it is no excuse for the hotel to have allowed the latter to open the safety deposit box of the former.—The management contends, however, that McLoughlin, by his act, made its employees believe that Tan was his spouse for she was always with him most of the time. The evidence on record, however, is bereft of any showing that McLoughlin introduced Tan to the management as his wife. Such an inference from the act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing that he made the management believe that Tan was his wife or was duly authorized to have access to the safety deposit box. Mere close companionship and intimacy are not enough to warrant such conclusion considering that what is involved in the instant case is the very safety of McLoughlin’s deposit. If only petitioners exercised due diligence in taking care of McLoughlin’s safety deposit box, they should have confronted him as to his relationship with Tan considering that the latter had been observed opening McLoughlin’s safety deposit box a number of times at the early hours of the morning. Tan’s acts should have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would have exercised due diligence required of them. Failure to do so warrants the conclusion that the management had been remiss in complying with the obligations imposed upon hotel-keepers under the law. Quasi-Delicts; Torts; Where the loss of a hotel guest’s money was consummated through the negligence of the hotel employee in allowing the companion of said guest to open the safety deposit box without the guest’s consent, both the

assisting employees and the hotel owner and operator are solidarily liable.— Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Article 2180, paragraph (4) of the same Code provides that the owners and managers of an establishment or enterprise are likewise responsible for damages caused by their employees in the service of the branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or supervising him for it is hard for the victim to prove the negligence of such employer. Thus, given the fact that the loss of McLoughlin’s money was consummated through the negligence of Tropicana’s employees in allowing Tan to open the safety deposit box without the guest’s consent, both the assisting employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held solidarily liable pursuant to Article 2193. Catering to the public, hotel-keepers are bound to provide not only lodging for hotel guests but also security to their persons and belongings—a twin duty which the law does not allow to be negated or diluted by any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.—The issue of whether the “Undertaking For The Use of Safety Deposit Box” executed by McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial court and the appellate court found the same to be null and void. We find no reason to reverse their common conclusion. Article 2003 is controlling, thus: Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier’s business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.

With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest’s knowledge and consent from a safety deposit box provided by the hotel itself.—In an early case, the Court of Appeals through its then Presiding Justice (later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn. With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest’s knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Article 2002 of the Civil Code which exempts the hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss—a depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss.— Petitioners likewise anchor their defense on Article 2002 which exempts the hotel-keeper from liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the provision would lead us to reject petitioners’ contention. The justification they raise would render nugatory the public interest sought to be protected by the provision. What if the negligence of the employer or its employees facilitated the consummation of a crime committed by the registered guest’s relatives or visitor? Should the law exculpate the hotel from liability since the loss was due to the act of the visitor of the registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss. The hotel was guilty of concurrent negligence in allowing the hotel guest’s companion, who was not the registered guest, to open the safety deposit box of the guest, even assuming that the latter was also guilty of negligence in allowing another person to use his key—to rule otherwise would result in undermining the safety of the safety deposit boxes in hotels for the management will be given imprimatur to allow any person, under the pretense of being a family member or a visitor of the guest, to have access to the safety deposit box without fear of any liability that will attach thereafter in case such person turns out to be a complete stranger.—In the case at bar, the responsibility of securing the safety deposit box was shared not only by the guest himself but

also by the management since two keys are necessary to open the safety deposit box. Without the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty of concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit box of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person to use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels for the management will be given imprimatur to allow any person, under the pretense of being a family member or a visitor of the guest, to have access to the safety deposit box without fear of any liability that will attach thereafter in case such person turns out to be a complete stranger. This will allow the hotel to evade responsibility for any liability incurred by its employees in conspiracy with the guest’s relatives and visitors. A tort liability can exist even if there are already contractual relations—the act that breaks the contract may also be tort.—Petitioners contend that McLoughlin’s case was mounted on the theory of contract, but the trial court and the appellate court upheld the grant of the claims of the latter on the basis of tort. There is nothing anomalous in how the lower courts decided the controversy for this Court has pronounced a jurisprudential rule that tort liability can exist even if there are already contractual relations. The act that breaks the contract may also be tort.

Chapter V: Warehouse Receipts Law ROMAN V. ASIA BANKING CORPORATION FACTS: U. de Poli, for value received, issued a quedan convering the 576 bultos of tobacco to the Asia Banking Corporation (claimant & appellant). It was executed as a security for a loan. The aforesaid 576 butlos are part and parcel of the 2, 766 bultos purchased by U. de Poli from Felisa Roman (claimant & appellee). The quedan was marked as Exhibit D which is a warehouse receipt issued by the warehouse of U. de Poli for 576 bultos of tobacco. In the left margin of the face of the receipt, U. de Poli certifies that he is the sole owner of the merchandise therein described. The receipt is endorsed in blank; it is not marked”nonnegotiable” or “not negotiable”. Since a sale was consummated between Roman and U. de Poli, Roman’s claim is a vendor’s lien. The lower court ruled in favor of Roman on the theory that since the transfer to Asia Banking Corp. (ASIA) was neither a pledge nor a mortgage, but a security for a loan, the vendor’s lien of Roman should be accorded preference over it. However, if the warehouse receipt issued was non-negotiable, the vendor’s lien of Roman cannot prevail against the rights of ASIA as indorsee of the receipt. ISSUE: WON the quedan issued by U. de Poli in favor of ASIA. is negotiable, despite failure to mark it as not negotiable? HELD: YES. The warehouse receipt in question is negotiable. It recited that certain merchandise deposited in the ware house “por orden” of the depositor instead of “a la orden”, there was no other direct statement showing whether the goods received are to be delivered to the bearer, to a specified person, or to a specified order or his order. However, the use of “por orden” was merely a clerical or grammatical error and that the receipt was negotiable. As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as “non-negotiable”, a holder of the receipt who purchase if for value supposing it to be negotiable may, at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable. This appears to have given any warehouse receipt not marked “non-negotiable” practically the same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt acquired it

for value supposing it to be negotiable, circumstances which admittedly exist in the present case. Hence, the rights of the indorsee, ASIA, are superior to the vendor’s lien. WAREHOUSE RECEIPT; VENDOR'S LIEN.—A vendor's lien upon goods stored in a public warehouse cannot prevail against the rights of a purchaser, mortgagee, or pledgee, for value and in good faith to whom the negotiable warehouse receipt for such goods has been indorsed. INTERPRETATION.—A warehouse receipt like any other document must be interpreted according to its evident intent. .—A warehouse receipt recited that certain merchandise was deposited in the warehouse "por orden" of the depositor instead of "a la orden." It was not marked "non-negotiable" or "not negotiable" as required by statute for nonnegotiable warehouse receipts. Held: That the use of "por orden" was merely a clerical or grammatical error and that the receipt was negotiable. Bank of P.I. v. Herridge FACTS: The insolvent Umberto de Poli was for several years engaged on an extensive scale in the exportation of Manila hemp, maguey and other products of the country. He was also a licensed public warehouseman, though most of the goods stored in his warehouses appear to have been merchandise purchased by him for exportation and deposited there by he himself. In order to finance his commercial operations De Poli established credits with some of the leading banking institutions doing business in Manila at that time, among them the Hongkong & Shanghai Banking Corporation, the Bank of the Philippine Islands, the Asia Banking Corporation, the Chartered Bank of India, Australia and China, and the American Foreign Banking Corporation. De Poli opened a current account credit with the bank against which he drew his checks in payment of the products bought by him for exportation. Upon the purchase, the products were stored in one of his warehouses and warehouse receipts issued therefor which were endorsed by him to the bank as security for the payment of his credit in the account current.

When the goods stored by the warehouse receipts were sold and shipped, the warehouse receipt was exchanged for shipping papers, a draft was drawn in favor of the bank and against the foreign purchaser, with bill of landing attached, and the entire proceeds of the export sale were received by the bank and credited to the current account of De Poli. De Poli was declared insolvent by the Court of First Instance of Manila with liabilities to the amount of several million pesos over and above his assets. An assignee was elected by the creditors and the election was confirmed by the court. Among the property taken over the assignee was the merchandise stored in the various warehouses of the insolvent. This merchandise consisted principally of hemp, maguey and tobacco. The various banks holding warehouse receipts issued by De Poli claim ownership of this merchandise under their respective receipts, whereas the other creditors of the insolvent maintain that the warehouse receipts are not negotiable, that their endorsement to the present holders conveyed no title to the property, that they cannot be regarded as pledges of the merchandise inasmuch as they are not public documents and the possession of the merchandise was not delivered to the claimants and that the claims of the holders of the receipts have no preference over those of the ordinary unsecured creditors.law lib ISSSUE: Whether or not the warehouse receipts issued are negotiable? HELD: Yes, a warehouseman who deposited merchandise in his own warehouse, issued a warehouse receipts therefore and thereafter negotiated the receipts by endorsement. The receipt recites that the goods were deposited “por orden” of the depositor, the warehouseman, but contained no statement that the goods were to be delivered to the bearer of the receipts or to a specified person. It is in the form of a warehouse receipts and was not mark “nonnegotiable”. Therefore the receipts was negotiable warehouse receipts and the words “por orden” must be construed to mean “to the order”.

WRITTEN INSTRUMENTS; CONSTRUCTION.—Whenever possible, writings must be so construed as to give effect to their general intent and so as to avoid absurdities. WAREHOUSE RECEIPTS; CONSTRUCTION.—As instruments of credit, warehouse receipts play an important role in modern commerce and the present day tendency of the courts is towards a liberal construction of the law in favor of bona fide holders of such receipts. —A warehouseman deposited merchandise in his own warehouse, issued a warehouse receipt therefor and thereafter negotiated the receipt by endorsement. The receipt recites that the goods were deposited "por orden" of the depositor, the warehouseman, but contained no statement that the goods were to be delivered to the bearer of the receipt or to a specified person. It was in the form of a negotiable warehouse receipt and was not marked "nonnegotiable" or "not negotiable." Held: That, the receipt was a negotiable warehouse receipt and that the words "por orden" must be construed to mean "to the order." CHATTEL MORTGAGE; NOVATION.—A chattel mortgage was taken by a bank upon the goods previously transferred to the same bank by warehouse receipt. Held: That, under the circumstances of the case, the chattel mortgage did not work a novation of the warehouse contract between the parties and that the bank might still insist on the rights acquired by it under the warehouse receipt. National Bank vs. Producers' Warehouse Association Facts: In May 1916 PWA and PFPC entered into a written contract, wherein PFPC would act as the general manager of the business of PWA, and that PFPC would exercise a general and complete supervision over the management of the business of PWA, subject to the control of PWA’s board of directors. It is further agreed that PWA has an annual salary of P7,500 for its services as general manager, and that its local agents will also be paid P300 per month for their services. The agreement also provides that it shall remain in force and effect ten years from date, with the right of the Produce Company to renew it for a further period of one to ten years at its option. On November and December 1918, PWA issued seven (7) negotiable quedans to PFPC for 15,699.34 piculs of Copra, in and by which, subject to the terms and conditions therein stated, it agreed to deliver that amount of copra to the Produce Company or its order.
Said terms and conditions also includes the following: That PWA will deliver the packages noted therein upon the surrender of the warrant to PWA
> No transfer of interest/ownership will be recognized unless registered in the books of PWA

The words “negotiable warrant” were printed in red ink in the quedan, viz: "This warrant is of no value unless signed by an officer of the association," and were signed “PWA by Mr. Wicks, Treasurer, and by R. Torres, Warehouseman." Each receipt was also numbered, and stated the number of the warehouse and where situated and recited that storage charges were at the rate of P0.04 per picul per month, and that the insurance rate was 1/3% per month of the declared value. PFPC then arranged for overdraft with PNB (bank) for P1M and to secure it, the subject quedans were endorsed in blank and delivered by PFPC to PNB as a collateral security. The latter then became the owner and holder thereof. Without making a tender of any charges, PNB REQUESTED THE DELIVERY OF THE COPRA DESCRIBED IN THE QUEDANS, and, for its failure to do so, commenced an action to recover its value alleged to be P240k+, with interest at the rate of 6 % per annum. In good faith, PNB purchased these quedans, as such PNB requested the defendant to register the quedans in the name of PNB, and to deliver to it the 14,587.19 piculs of copra, and, upon that date, that it had offered to satisfy any lien that defendant might have, to surrender the receipts with such indorsement that it might require, and the receipt therefor, when the goods were delivered, if such signature is requested by the defendant. However, PWA refused to comply despite repeated requests of PNB, stating that it could not be delivered since the goods mentioned are not in the warehouse. PWF further stated that the quedans were invalid and wrongfully issued. ISSUE: Whether the quedans were validly negotiated to PNB? HELD: The Court ruled in the affirmative racitionating that the quedans have legal force and effect as they were duly EXECUTED by Wicks, as TREASURER and Torres as WAREHOUSEMAN, for and in behalf of the defendant.
 That it were POSSESSION WAS DELIVERED to PNBas  COLLATERAL SECURITY for the overdraft of PFPC and ENDORSED IN BLANK and PHYSICAL POSSESSION WAS DELIVERED to PNB as  COLLATERAL SECURITY for the overdraft of PFPC and that the quedans were in NEGOTIABLE FORM. Consequently, PWA was estopped to claim or assert that PNB did not comply with any condition precedent. In this kind of action, a person has no legal right to deny the existence of Quedans on which it is based, and then claim that the plaintiff has not complied with the provisions of the instrument. Estoppel, to assert.—In an action to recover the value of the property, the defendant, having alleged that the quedans were invalid and wrongfully issued, and that the copra therein described was not in its warehouse, is estopped to claim or assert that the plaintiff did not comply with conditions precedent.

Cannot deny existence of Quedans and Plead their provisions.—In an action to recover the value of the property de scribed in quedans which were duly issued, the defendant has no legal right to deny the existence of the quedans, and then claim that the plaintiff has not complied with their provisions." In an action to recover personal property or its value, tender of charges and liens is not necessary where defendant claims that the property is not in existence or in its possession.—Where by the provisions of the quedans the property was to be delivered upon the payment of certain charges, it is not necessary to tender such charges where the other party denies liability, is not willing to perform its part, or to deliver the property. Consolidated Terminals, Inc. vs. Artex Dev. Co., Inc. Facts: Consolidated Terminals Inc (CTI) operated a customs warehouse in Manila. It received 193 bales of high density compressed raw cotton worth P99k. It was understood that CTI would keep the cotton on behalf of Luzon Brokerage until the consignee Paramount Textile had opened the corresponding letter of credit in favor of Adolph Hanslik Cotton. By virtue of forged permits, Artex was able to obtain the bales of cotton and paid P15k. Issue: W/N CTI as warehouseman was entitled to the possession of the bales of cotton? Ruling: No. CTI had no cause of action. It was not the owner of the cotton. It was not a real party of interest in the case. CTI was not sued for damages by the real party in interest. Warehouse Receipts law; A warehouseman has no cause of action for repossession and damages against a person to whom it delivered deposited articles on the basis of an alleged falsified delivery permit where the real parties interested in the questioned articles have not yet sued the warehouseman for damages on account of said wrong delivery.—CTI in this appeal contends that, as warehouseman, it was entitled to the possession (should be repossession) of the bales of cotton; that Artex acted wrongfully in depriving CTI of the possession of the merchandise because Artex presented a falsified delivery permit, and that Artex should pay damages to CTI. The only statutory rule cited by CTI is section 10 of the Warehouse Receipts Law which provides that “where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all having a right of property or possession in the goods x x x”. We hold that CTI’s appeal has no merit. Its amended complaint does not clearly show that, as warehouseman, it has a cause of action for damages against Artex. The real parties interested in the bales of cotton were Luzon Brokerage

Corporation as depositor, Paramount Textile Mills, Inc. as consignee, Adolph Hanslik Cotton as shipper and the Commissioners of Customs and Internal Revenue with respect to the duties and taxes. These parties have not sued CTI for damages or for recovery of the bales of cotton or the corresponding taxes and duties. LUA KIAN v. MANILA RAILROAD COMPANY and MANILA PORT SERVICEG.R. No. L-23033 January 5, 1967 FACTS Manila Port Service as a subsidiary of defendant Manila Railroad Company operated the arrastre service at the Port of Manila under and pursuant to the Management Contract entered into by and between the Bureau of Customs and defendant Manila Port Service. Lua Kian imported 2,000 cases of Carnation Milk from the Carnation Company of San Francisco, California, and shipped on Board SS "GOLDEN BEAR" per Bill of Lading No. 17.Out of the aforesaid shipment of 2,000 cases of Carnation Milk per Bill of Lading No. 17, only 1,829 cases marked `LUA KIAN 1458' were discharged from the vessel SS `GOLDEN BEAR' and received by Manila Port Service per pertinent tally sheets issued by the said carrying vessel. Discharged from the same vessel on the same date unto the custody of Manila Port Service were 3,171 cases of Carnation Milk marked "CEBU UNITED 4860PH-MANILA" consigned to Cebu United Enterprises, per Bill of Lading No. 18. Manila Port Service delivered to the plaintiff thru its broker, Ildefonso Tionloc, Inc. 1,913 cases of Carnation Milk marked "LUA KIAN 1458" per pertinent gate passes and broker's delivery receipts. Lua Kian as consignee thereof filed a claim for short-delivery against Manila Port Service, and Manila Port Service paid Lua Kian plaintiff herein, P750.00 in settlement of its claim. CFI: ruled that 1,829 cases marked Lua Kian (171 cases less than the 2,000 cases indicated in the bill of lading and 3,171 cases marked "Cebu United" (171 cases over the 3,000 cases in the bill of lading were discharged to the Manila Port Service.on Considering that Lua Kian and Cebu United Enterprises were the only consignees of the shipment of 5,000 cases of "Carnation" milk, it found that of the 3,171 cases marked "Cebu United", 171 should have been delivered to Lua Kian. Inasmuch as the defendant Manila Port Service actually delivered 1,913 cases to plaintiff, which is only 87 cases short of 2,000 cases as per bill of lading the former was ordered to pay Lua Kian the sum of P1,183.11 representing such shortage of 87 cases, with legal interest from the date of the suit, plus P500 as attorney's fees. Defendants appealed to the Supreme Court and contend that they should not be made to answer for the undelivered cases of milk, insisting that

Manila Port Service was bound to deliver only 1,829 cases to Lua Kian and that it had there before in fact over-delivered to the latter. ISSUE: Whether defendant Manila Port Service is liable for the undelivered cases of “Carnation” milk to petitioner due to improper marking. Yes. RATIO: The bill of lading in favor of Cebu United Enterprises indicated that only 3,000 cases were due to said consignee, although 3,171 cases were marked in its favor. Lua Kianwhose bill of lading on the other hand indicated that it should receive 171 cases more.•The legal relationship between an arrastre operator and the consignee is akin to that of a depositor and warehouseman. As custodian of the goods discharged from the vessel, it was defendant arrastre operator's duty, like that of any ordinary depositary, to take good care of the goods and to turn them over to the party entitled to their possession.oThe said defendant should have withheld delivery because of the discrepancy between the bill of lading and the markings and conducted its own investigation, not unlike that under Section 18 of the Warehouse Receipts Law, or called upon the parties, to interplead, such as in a case under Section 17 of the same law, in order to determine the rightful owner of the goods.oIt is true that Section 12 of the Management Contract exempts the arrastre operator from responsibility for misdelivery or nondelivery due to improper or insufficient marking.•It cannot however excuse the defendant from liability in this case because the bill of lading showed that only 3,000 cases were consigned to Cebu United Enterprises. The fact that the excess of 171 cases were marked for Cebu United Enterprises and that the consignment to Lua Kian was 171 cases less than the 2,000 in the bill of lading, should have been sufficient reason for the defendant Manila Port Service to withhold the goods pending determination of their rightful ownership.•With respect to the attorney's fees awarded below, this Court notices that the same is about 50% of the litigated amount of P1,183.11. Attorney’s fees was decreased to P300.00. Arrastre service; Nature of relationship of arrastre operator and consignee.—The legal relationship between an arrastre operator and the consignee is akin to that of a depositor and warehouseman (Northern Motors, Inc. vs. Prince Line, L13884, February 29, 1960). As custodian of the goods discharged from the vessel, it is the duty of the arrastre operator to take good care of the goods and turn them over to the party entitled to their possession (Macondray & Co., Inc. vs. Delgado Brothers, Inc., L-13118, April 28, 1960), Duty of arrastre operator to follow procedure in Warehouse Receipts Law in case there is a, conflict between markings on goods and the bills of lading.—Where the arrastre operator received into its custody a shipment of 5,000 cases of milk, of which 3,171 cases were marked for Cebu United Enterprises, as consignee, and 1,829 cases were marked for “1. Lua Kian, but, according to the bills of lading in its possession, Cebu United Enterprises was entitled only to 3,000 cases and Lua Kian was entitled to 2,000 cases, the arrastre operator should have withheld delivery because of this discrepancy between the markings and the

bill of lading conducted its own investigation, similar to that required under Section 18 of the Warehouse Receipts Law, or called upon the two consignees to interplead, as in the case under Section 17 of the same law, in order to determine the rightful owner of the milk. In delivering to Lua Kian only 1,913 cases or 87 cases short, the arrastre operator became liable for the shortage of 87 cases, but without prejudice to its action for recovery of the excess cases delivered to Cebu United Enterprises. Felisa Roman, appellee v. Asia Banking Corporation, appellant GR. No. 17825 June 26, 1922 Facts: Subject 576 tobacco leaf bales were part of the 2,777 bales purchased by Umberto de Poli from appellee, Roman. Months after, involuntary insolvency proceeding against U. De Poli was instituted. Poli issued a quedan to Asia Banking Corporation (ABC) covering said 576 bultos for value. Roman notified ABC of her contention for her vendor’s lien in proceedings. CFI found for Roman. CFI Basis: Transfer to ABC was for security of a loan hence vendor’s lien has better right. Issues: 1. Whether or not warehouse receipt negotiable. 2. Whether or not vendor’s lien superior over mortgagee. Held: YES, warehouse receipt is negotiable. Although it contained no direct statement showing whether goods received to be delivered to bearer/specified person/specified person or his order, nevertheless it is negotiable because: 1. It is evident that deposit, as evidenced by receipt here, was intended to be made subject to the ORDER of depositor and Poli was the authorized person to indorse it; 2. Indorsement in blank and delivery to ABC was made on the same date as issuance of Warehouse receipt; and, 3. Warehouse receipt not marked “Nonnegotiable” or “Not negotiable” General Rule: If warehouseman fails to indicate “Non-negotiable” on face of warehouse receipt, holder in good faith and for value, at his election, treat it as negotiable imposing upon warehouseman same liabilities as if it were one. Exception: When marked “non-negotiable” on its face by warehouseman issuing it. Doctrine: A warehouse receipt like any other document must be interpreted according to its evident intent. NO, Doctrine: A vendor's lien upon goods stored in a public warehouse cannot prevail against the rights of a purchaser, mortgagee, or pledgee, for value and in good faith to whom the negotiable warehouse receipt for such goods has been indorsed. Here, CFI failed to consider Section 49 of Act No. 2137: “Where a negotiable receipt has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid' seller unless the receipt is first surrendered for cancellation.” Art. 58, same Act: “Purchase” includes Mortgagee and Pledgee. Hence, CFI order reversed.

Siy Cong Bieng & Co. vs. Hongkong & Shanghai Bank

HELD

Facts: Plaintiff is a corporation engaged in business generally, and that the Defendant HSBC is a foreign bank authorized to engage in the banking business in the Philippines.

YES. SC ruled in favour of Defendant HSBC.

On June 25, 1926, Otto Ranft called the office of the Plaintiff to purchase hemp (abaca), and he was offered the bales of hemp as described in the contested negotiable quedans. The parties agreed to the aforesaid price, and on the same date the quedans, together with the covering invoice, were sent to Ranft by the Plaintiff, without having been paid for the hemp, but the Plaintiff's understanding was that the payment would be made against the same quedans, and it appear that in previous transaction of the same kind between the bank and the Plaintiff, quedans were paid one or two days after their delivery to them. Immediately these Quedans were pledged by Otto Ranft to the Defendant HSBC to secure the payment of his preexisting debts to the latter. The baled hemp covered by these warehouse receipts was worth P31,635; 6 receipts were endorsed in blank by the Plaintiff and Otto Ranft, and 2 were endorsed in blank, by Otto Ranft alone On the evening of the said delivery date, Otto Ranft died suddenly at his house in the City of Manila. When the Plaintiff found out, it immediately demanded the return of the quedans, or the payment of the value, but was told that the quedans had been sent to the herein Defendant as soon as they were received by Ranft. Shortly thereafter the Plaintiff filed a claim for the aforesaid sum of P31,645 in the intestate proceedings of the estate of the deceased Otto Ranft, which on an appeal from the decision of the committee on claims, was allowed by the CFI Manila. In the meantime, demand had been made by the Plaintiff on the Defendant bank for the return of the quedans, or their value, which demand was refused by the bank on the ground that it was a holder of the quedans in due course. ISSUE Whether or not the Quedans endorsed in blank gave the HSBC rightful and valid title to the goods?

It may be noted, first, that the quedans in question were negotiable in form; second, that they were pledged by Otto Ranft to the Defendant bank to secure the payment of his preexisting debts to said bank; third, that such of the quedans as were issued in the name of the Plaintiff were duly endorsed in blank by the Plaintiff and by Otto Ranft; and fourth, that the two remaining quedans which were duly endorsed in blank by him. The bank had a perfect right to act as it did, and its action is in accordance with sections 47, 38, and 40 of the Warehouse Receipts Act However, the pertinent provision regarding the rights the Defendant bank acquired over the aforesaid quedans after indorsement and delivery to it by Ranft, is found in section 41 of the Warehouse Receipts Act (Act No. 2137): SEC. 41. Rights of person to whom a receipt has been negotiated. — A person to whom a negotiable receipt has been duly negotiated acquires thereby: Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor of person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value, and. . . . Therefore, the bank is not responsible for the loss; the negotiable quedans were duly negotiated to the bank and as far as the record shows, there has been no fraud on the part of the Defendant. Moreover, Plaintiff is estopped to deny that the bank had a valid title to the quedans for the reason that the Plaintiff had voluntarily clothed Ranft with all the attributes of ownership and upon which the Defendant bank relied. Subsequently, Plaintiff in this case has suffered the loss of the quedans, but as far as the court sees it, there is now no remedy available to the Plaintiff equitable estoppel place the loss upon him whose misplaced confidence has made the wrong possible as ruled in National Safe Deposit vs. Hibbs (a US case) NEGOTIABLE WAREHOUSE RECEIPTS; ENDORSED IN BLANK.—Plaintiff sold certain quantity of hemp to one by the name of Otto Ranft by quedans and sent the quedans, together with the covering invoice, to Ranft, without having been paid for, but plaintiff's understanding was that the payment would be made against the quedans. Ranft on the same day turned over the quedans to the defendant bank to secure payment of his preexisting debts. Ranft died on the

evening of the day the quedans were delivered to the bank. Plaintiff brought this action to recover the quedans or their values. Held: Taking into consideration that thequedans were negotiable in form and duly endorsed in blank by the plaintiff and by Otto Ranft, it follows that on delivery of the quedans to the bank, they were no longer the property of the indorser unless he liquidated his debts with the bank. AUTHORITY TO NEGOTIATE.—The bank had a perfect right to accept the quedans in security of preexisting debts without investigation of the authority of the person negotiating them. (Sections 47, 38 and 40 of the Warehouse Receipts Act No. 2137.) ESTOPPEL TO DENY VALID TITLE.— Since plaintiff had voluntarily clothed the person who negotiated the quedans with all the attributes of ownership and upon which the bank relied, it is estopped to deny that the bank had a valid title to the quedans.