Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry three bulls: a
Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8
May 1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the
bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one year. However,
the Secretary of Agriculture and Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to
7 May 1950 and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry
that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction
of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal Industry advised him that
the book value of the three bulls could not be reduced and that they either be returned or their book value paid not later than 31
October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them. So, on 20 December 1950 in the
Court of First Instance of Manila the Republic of the Philippines commenced an action against him praying that he be ordered to
return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum
of P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad peace and order
situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he had taken to the Secretary of
Agriculture and Natural Resources and the President of the Philippines from the refusal by the Director of Animal Industry to deduct
from the book value of the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the breeding fees
in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and issued on 11
November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the appointment of a
special sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas,
the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified.
On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau
Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a
Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be
issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6
February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at the beginning
of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi and Bhagnari bulls
to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a
memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to
quash the writ of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the estate of
defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and received
by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953 upon the
surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such death was due
to force majeure she is relieved from the duty of returning the bull or paying its value to the appellee. The contention is without merit.
The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of one year from
8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was subject to the payment by the borrower of
breeding fee of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for that
reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract
ofcommodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would be a lease of
the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith, because
she had continued possession of the bull after the expiry of the contract. And even if the contract be commodatum, still the appellant
is liable, because article 1942 of the Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another period of one
year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when during a Huk raid it was killed by
stray bullets. Furthermore, when lent and delivered to the deceased husband of the appellant the bulls had each an appraised book
value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of
loss of the bull due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of its value being a
money claim should be presented or filed in the intestate proceedings of the defendant who died on 23 October 1951, is not
altogether without merit. However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction over the
case against him, is untenable, because section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal
representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or
within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly of such
death . . . and to give the name and residence of the executory administrator, guardian, or other legal representative of the
deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue letters of
administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly against the deceased Jose V.
Bagtas, arising from contract express or implied, whether the same be due, not due, or contingent, for funeral expenses and
expenses of the last sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this
Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving
a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not
a notice to the court and the appellee who were to be notified of the defendant's death in accordance with the above-quoted rule,
and there was no reason for such failure to notify, because the attorney who appeared for the defendant was the same who
represented the administratrix in the special proceedings instituted for the administration and settlement of his estate. The appellee
or its attorney or representative could not be expected to know of the death of the defendant or of the administration proceedings of
his estate instituted in another court that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such
death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable for the sum of
P859.63, the value of the bull which has not been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed on 7
January 1959 by the appellant for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having been instituted in the
Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be enforced by means of a
writ of execution but must be presented to the probate court for payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.

Footnotes
1

Article 1933 of the Civil Code.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE DEPARTMENT OF
COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.-G.R. No. 52253-R
dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First Instance of Agusan, which dismissed
the petition of respondent Sulpicio M. Tolentino for injunction, specific performance or rescission, and damages with preliminary
injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan application for
P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real estate mortgage over his 100hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said
title the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual installments for a
period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino shall use the loan proceeds solely as an
additional capital to develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M. Tolentino and
his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable within 3 years from the date of
execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan
covering a 6-month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the Bank that there was no fund yet
available for the release of the P63,000.00 balance (p. 47, rec.). The Bank, thru its vice-president and treasurer, promised
repeatedly the release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering liquidity problems,
issued Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the Board, by
unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in government securities]
excluding extensions or renewals of already approved loans, provided that such extensions or renewals shall be
subject to review by the Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to restore its
solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the Philippines and instructed the
Acting Superintendent of Banks to take charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory note, filed an
application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and
the sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction, specific
performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to deliver the
P63,000.00 with interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate
mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order enjoining the
Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M.
Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 6576, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the petition of Sulpicio M.
Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due thereon, and
lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First Instance decision by
affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled that Island Savings Bank can neither
foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31. rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be foreclosed
to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965, they undertook
reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the consideration for that of the other
(Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is
ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform
incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of
Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965,
he signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the
P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted for a period of 3
years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island
Savings Bank from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the
P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for the protection of the
public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in complying with its
obligation of releasing the P63,000.00 balance because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract, nor does it constitute
any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact
of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract
by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4,800.00 for the
supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63,000.00 balance.
The act of Island Savings Bank, in asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper
considering that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a 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.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from complying with its
reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank officials and employees are
expected to exercise caution and prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan application of their customers,
they must investigate the existence and evaluation of the properties being offered as a loan security. The recent rush of events
where collaterals for bank loans turn out to be non-existent or grossly over-valued underscore the importance of this responsibility.
The mere reliance by bank officials and employees on their customer's representation regarding the loan collateral being offered as
loan security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the representation
of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turn out to be 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.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio M. Tolentino, under
Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case. But since
Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant specific
performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance of the
P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt that the bank failed

to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory
note to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory
note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan when it falls due. His failure to pay the
overdue amortizations under the promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the
Civil Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If
Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be entitled to ask for
rescission of the entire loan because he cannot possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island Savings Bank failed to
comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations, the liability
of the first infractor shall be equitably tempered by the courts. WE rule that the liability of Island Savings Bank for damages in not
furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for
not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be
included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it
is just that he should account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his P 17,000.00
debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs.
Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence, as there was
no debt yet because Island Savings Bank had not made any release on the loan, does not make the real estate mortgage void for
lack of consideration. It is not necessary that any consideration should pass at the time of the execution of the contract of real
mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay
(Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure
of consideration, the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited
in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named
in the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol.
19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage of Sulpicio M.
Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a
security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this
case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of
the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of
the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor
which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17.000.00,
PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST
22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25 HECTARES SHALL BE
FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS
HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-20240

December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Isabelo P. Samson for defendant-appellant.
ZALDIVAR, J.:
In the year 1943 appellant Jose Grijaldo obtained five 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 of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3,
1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without due dates,
but because 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, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with the Enemy Act,
as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States. Pursuant
to the Philippine Property Act of 1946 of the United States, these assets, including the loans in question, were subsequently
transferred to the Republic of the Philippines by the Government of the United States under Transfer Agreement dated July 20,
1954. These assets were among the properties that were placed under the administration of the Board of Liquidators created under
Executive Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the Board of Liquidators, made a
written extrajudicial demand upon the appellant for the payment of the account in question. The record shows that the appellant had
actually received the written demand for payment, but he failed to pay.
The aggregate amount due as principal of the five loans in question, computed under the Ballantyne scale of values as of the time
that the loans were incurred in 1943, was P889.64; and the interest due thereon at the rate of 6% per annum compounded quarterly,
computed as of December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros Occidental, to collect
from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the
ground that the action had prescribed. The appellee appealed to the Court of First Instance of Negros Occidental and on March 26,
1962 the court a quo rendered a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of December 31,
1959, plus interest at the rate of 6% per annum compounded quarterly from the date of the filing of the complaint until full payment
was made. The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's fees and costs.
The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose Grijaldo died. Upon motion by
the Solicitor General this Court, in a resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and
Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of
Rule 3 of the Rules of Court.
In the present appeal the appellant contends: (1) that the appellee has no cause of action against the appellant; (2) that if the
appellee has a cause of action at all, that action had prescribed; and (3) that the lower court erred in ordering the appellant to pay
the amount of P2,377.23.
In discussing the first point of contention, the appellant maintains that the appellee has no privity of contract with the appellant. It is
claimed that the transaction between the Taiwan Bank, Ltd. and the appellant, so that the appellee, Republic of the Philippines,
could not legally bring action against the appellant for the enforcement of the obligation involved in said transaction. This contention
has no merit. 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 loan. 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.,
an entity which was declared to be under the jurisdiction of the enemy country (Japan), were vested in 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 transfer 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 interest in said loans, thereby creating a privity of contract between
the appellee and the appellant. In defining the word "privy" this Court, in a case, said:
The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated to it, etc. will be
privies; in short, he who by succession is placed in the position of one of those who contracted the judicial relation and
executed the private document and appears to be substituting him in the personal rights and obligation is a privy (Alpurto
vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of Taiwan, Ltd. which belonged
to an enemy country. The confiscation of the assets of the Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by
international law, the United States succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the assets of said bank.
As successor in interest in, and transferee of, the property rights of the United States of America over the loans in question, the
Republic of the Philippines had thereby become a privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the
appellant. It follows, therefore, that the Republic of the Philippines has a legal right to bring the present action against the appellant
Jose Grijaldo.
The appellant likewise 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 a land owned by him and these crops were lost or destroyed through
enemy action his obligation to pay the loans was thereby extinguished. This argument is untenable. The terms of the promissory
notes and the chattel mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant.
The obligation of the appellant 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 transaction between the appellant and
the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan, one of the
parties delivers to another ... money or other consumable thing upon the condition that the same amount of the same kind and
quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notes evidencing the loans
in questions is to pay the value thereof; that is, to deliver a sum of money a clear case of an obligation to deliver, a generic thing.
Article 1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the
obligation.
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.
In his second point of contention, the appellant maintains that the action of the appellee had prescribed. The appellant points out
that the loans became due on June 1, 1944; and when the complaint was filed on January 17,1961 a period of more than 16 years
had already elapsed far beyond the period of ten years when an action based on a written contract should be brought to court.
This contention of the appellant has no merit. Firstly, it should be considered that 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 over a public property. Under paragraph 4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does
not run against the State. 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).Secondly, 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 No. 25, dated November 18, 1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342,
approved on July 26, 1948). The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive Order No. 25, which
became effective on November 18, 1944, providing for the suspension of payments of debts incurred after December 31, 1941. The
period of prescription was, therefore, suspended beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25
and 32, are unconstitutional; but in that case this Court ruled that the moratorium laws had suspended the prescriptive period until
May 18, 1953. This ruling was categorically reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16,
1956. It follows, therefore, that the prescriptive period in the case now before US was suspended from November 18,1944, when
Executive Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the prescriptive period was
suspended for 8 years and 6 months. By the appellant's own admission, the cause of action on the five promissory notes in question
arose on June 1, 1944. The complaint in the present case was filed on January 17, 1961, or after a period of 16 years, 6 months
and 16 days when the cause of action arose. If the prescriptive period was not interrupted by the moratorium laws, the action would
have prescribed already; but, as We have stated, the prescriptive period was suspended by the moratorium laws for a period of 8
years and 6 months. If we deduct the period of suspension (8 years and 6 months) from the period that elapsed from the time the
cause of action arose to the time when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years
and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained a period of one year, 11
months and 14 days of the prescriptive period when the complaint was filed.
In his third point of contention the appellant maintains that the lower court erred in ordering him to pay the amount of P2,377.23. It is
claimed by the appellant that it was error on the part of the lower court to apply the Ballantyne Scale of values in evaluating the
Japanese war notes as of June 1943 when the loans were incurred, because what should be done is to evaluate the loans on the
basis of the Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of the appellant is
also without merit.
The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31, 1959, plus interest rate of
6% per annum compounded quarterly from the date of the filing of the complaint. The sum total of the five loans obtained by the
appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as
of June 1943, this sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine Philippine currency
which was considered the aggregate amount due as principal of the five loans, and the amount of P2,377.23 as of December 31,
1959 was arrived at after computing the interest on the principal sum of P889.64 compounded quarterly from the time the
obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the obligation was incurred, and
that was in June 1943. This stand of the appellee was upheld by the lower court; and the decision of the lower court is supported by
the ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts 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. ... . (italics supplied)
IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant. Inasmuch as the appellant
Jose Grijaldo died during the pendency of this appeal, his estate must answer in the execution of the judgment in the present case.
Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal and Bengzon, J.P., JJ.,concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 154878

March 16, 2007

CAROLYN M. GARCIA, Petitioner,

vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and August 20, 2002 resolution3of the Court of
Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997 decision of the Regional Trial Court (RTC) of Makati
City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a crossed check 4 dated
February 24, 1995 in the amount of US$100,000 payable to the order of a certain Marilou Santiago. 5 Thereafter, petitioner received
from respondent every month (specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of
US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check9 dated June 29, 1995 in the amount ofP500,000, also
payable to the order of Marilou Santiago.10 Consequently, petitioner received from respondent the amount of P20,000 every month
on August 5, September 5, October 5 and November 5, 1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and P500,000) when they fell due.
Thus, on February 22, 1996, petitioner filed a complaint for sum of money and damages in the RTC of Makati City, Branch 58
against respondent, seeking to collect the sums of US$100,000, with interest thereon at 3% a month from October 26, 1995
and P500,000, with interest thereon at 4% a month from November 5, 1995, plus attorneys fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000 with interest thereon at the
rate of 3% per month, which loan would mature on October 26, 1995.13 The amount of this loan was covered by the first check. On
June 29, 1995, respondent again borrowed the amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which
was on November 5, 1995.14 The amount of this loan was covered by the second check. For both loans, no promissory note was
executed since petitioner and respondent were close friends at the time.15 Respondent paid the stipulated monthly interest for both
loans but on their maturity dates, she failed to pay the principal amounts despite repeated demands. 161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou Santiago to whom petitioner
lent the money. She claimed she was merely asked by petitioner to give the crossed checks to Santiago. 17 She issued the checks
for P76,000 and P20,000 not as payment of interest but to accommodate petitioners request that respondent use her own checks
instead of Santiagos.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that respondent borrowed from petitioner the
amounts of US$100,000 with monthly interest of 3% and P500,000 at a monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby rendered in favor of
[petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.

For lack of merit, [respondents] counterclaim is perforce dismissed.

With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that [respondent] indeed borrowed money
from her. There is nothing in the record that shows that [respondent] received money from [petitioner]. What is evident is the
fact that [respondent] received a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the
order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00, again payable to the
order of Marilou Santiago, both of which were issued by [petitioner]. The checks received by [respondent], being crossed, may
not be encashed but only deposited in the bank by the payee thereof, that is, by Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may not be encashed but only deposited in the bank;
(b) the check may be negotiated only onceto one who has an account with the bank; (c) and the act of crossing the check serves
as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the payee in contemplation of
law since the latter is not the person who could take the checks as a holder, i.e., as a payee or indorsee thereof, with intent to
transfer title thereto. Neither could she be deemed as an agent of Marilou Santiago with respect to the checks because she was
merely facilitating the transactions between the former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that existed between the
parties. x x x (emphasis supplied)22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. However, this
case falls under one of the exceptions, i.e., when the factual findings of the CA (which held that there were no contracts of loan
between petitioner and respondent) and the RTC (which held that there werecontracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of the contract. 25 This is
evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum
or simple loan itself shall not be perfected until the delivery of the object of the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the debtor when the checks were encashed)
the debtor acquires ownership of such money or loan proceeds and is bound to pay the creditor an equal amount. 26
It is undisputed that the checks were delivered to respondent. However, these checks were crossed and payable not to the order of
respondent but to the order of a certain Marilou Santiago. Thus the main question to be answered is: who borrowed money from
petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made payable to Santiago. 27She maintains that it
was also upon respondents instruction that both checks were delivered to her (respondent) so that she could, in turn, deliver the
same to Santiago.28 Furthermore, she argues that once respondent received the checks, the latter had possession and control of
them such that she had the choice to either forward them to Santiago (who was already her debtor), to retain them or to return them
to petitioner.29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the actual or constructive
possession or control of another.30 Although respondent did not physically receive the proceeds of the checks, these instruments
were placed in her control and possession under an arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago.31 It was highly improbable that petitioner would grant two
loans to a complete stranger without requiring as much as promissory notes or any written acknowledgment of the debt considering
that the amounts involved were quite big. Respondent, on the other hand, already had transactions with Santiago at that time. 32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both parties list of witnesses)
testified that respondents plan was for petitioner to lend her money at a monthly interest rate of 3%, after which respondent would
lend the same amount to Santiago at a higher rate of 5% and realize a profit of 2%. 33 This explained why respondent instructed
petitioner to make the checks payable to Santiago. Respondent has not shown any reason why Ruiz testimony should not be
believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of P76,000 each (peso equivalent of
US$3,000) for eight months to cover the monthly interest. For the P500,000 loan, she also issued her own checks in the amount
of P20,000 each for four months.34 According to respondent, she merely accommodated petitioners request for her to issue her own
checks to cover the interest payments since petitioner was not personally acquainted with Santiago.35 She claimed, however, that
Santiago would replace the checks with cash.36 Her explanation is simply incredible. It is difficult to believe that respondent would
put herself in a position where she would be compelled to pay interest, from her own funds, for loans she allegedly did not contract.
We declared in one case that:

In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be believed, it must not only
proceed from the mouth of a credible witness, but must be credible in itself such as the common experience of mankind can
approve as probable under the circumstances. We have no test of the truth of human testimony except its conformity to our
knowledge, observation, and experience. Whatever is repugnant to these belongs to the miraculous, and is outside of juridical
cognizance.37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner, who was listed as one of her
(Santiagos) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.39 The presumption is that "evidence
willfully suppressed would be adverse if produced."40 Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the amounts of US$100,000
and P500,000 from petitioner. We instead agree with the ruling of the RTC making respondent liable for the principal amounts of the
loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the US$100,000 andP500,000 loans
respectively. There was no written proof of the interest payable except for the verbal agreement that the loans would earn 3% and
4% interest per month. Article 1956 of the Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated
in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to Article 2209 of the Civil Code. It is
well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 41
Hence, respondent is liable for the payment of legal interest per annum to be computed from November 21, 1995, the date when
she received petitioners demand letter.42 From the finality of the decision until it is fully paid, the amount due shall earn interest at
12% per annum, the interim period being deemed equivalent to a forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted since the RTC decision did not
explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002 resolution of the Court of
Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February 28, 1997 decision of the Regional Trial Court in
Civil Case No. 96-266 is AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The total amount
due as of the date of finality will earn interest of 12% per annum until fully paid. The award of actual damages and attorneys fees is
deleted.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

ADOLFO S. AZCUNA
Asscociate Justice

CANCIO C. GARCIA
Associate Justice
C E R TI F I CATI O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts Division.
REYNATO S. PUNO
Chief Justice

THIRD DIVISION
SEBASTIAN SIGA-AN,
Petitioner,

G.R. No. 173227

Present:
YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.

-versus

Promulgated:
ALICIA VILLANUEVA,
Respondent.

January 20, 2009

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition [1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision,
[2]

dated 16 December 2005, and Resolution, [3] dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which

affirmed in toto the Decision,[4] dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP98-0068.

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint [5] for sum of money against petitioner Sebastian Siga-an
before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that
she was a businesswoman engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at
Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the amount
of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan.[6]

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On 31
October 1993, she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining balance of the
loan. Petitioner told her that since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the excess amount
of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to
pay additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would not comply with his
demand. As all her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that
petitioner might block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional
amounts in cash and checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it
was not necessary as there was mutual trust and confidence between them. According to her computation, the total amount she
paid to petitioner for the loan and interest accumulated to P1,200,000.00.[7]

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence of
agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for
the P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand
letter to petitioner asking for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the demand letter,
ignored her claim for reimbursement.[8]

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal
interest from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an amount
equivalent to 25% of P660,000.00 as attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992,
respondent approached and asked him if he could grant her a loan, as she needed money to finance her business venture with the
PNO. At first, he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However,
since respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous loan in
full, he agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan because she could
not give full payment on the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the
payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would
acknowledge her obligation to him, inclusive of interest, and that she would issue several postdated checks to guarantee the
payment of her obligation. Upon his approval of respondents request for restructuring of the loan, respondent executed a promissory
note dated 12 September 1994 wherein she admitted having borrowed an amount of P1,240,000.00, inclusive of interest, from
petitioner and that she would pay said amount in March 1995. Respondent also issued to him six postdated checks amounting
to P1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he presented the six checks for encashment but
only one check was honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he filed
criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned
to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC).[12]

Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that her
monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest, because she was given several times to settle her
obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was given
interest-free. Based on the foregoing averments, he asked the RTC to dismiss respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her loan
obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that respondents obligation
was only to pay the loaned amount of P540,000.00, and that the alleged interests due should not be included in the computation of
respondents total monetary debt because there was no agreement between them regarding payment of interest.It concluded that
since respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake, petitioner should return the
said amount to respondent pursuant to the principle of solutio indebiti.[13]

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings experienced
by respondent. Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus
attorneys fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as
follows:
(1)
Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12%
per annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys
fees; and
(5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision
affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied. [16] Hence, petitioner
lodged the instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO
PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17]

Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary
interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory
interest.[18] The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan
on which interest is demanded.[19]

Article 1956 of the Civil Code, which refers to monetary interest, [20] specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary interest is
allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest
was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest.Thus, we have held
that collection of interest without any stipulation therefor in writing is prohibited by law.[21]

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there
convincing proof of written agreement between the two regarding the payment of interest. Respondent testified that although she
accepted petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay
interest on the loan.[22]

Petitioner presented a handwritten promissory note dated 12 September 1994 [23] wherein respondent purportedly admitted
owing petitioner capital and interest. Respondent, however, explained that it was petitioner who made a promissory note and she
was told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that
being unaware of the law on interest and fearing that petitioner would make good of his threats if she would not obey his instruction
to copy the promissory note, she copied the promissory note in her own handwriting; and that such was the same promissory note
presented by petitioner as alleged proof of their written agreement on interest. [24] Petitioner did not rebut the foregoing testimony. It is
evident that respondent did not really consent to the payment of interest for the loan and that she was merely tricked and coerced by
petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an express stipulation of interest or
written agreement of interest on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed on the
payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in her testimony in
the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC and
the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on interest was
not reduced in writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the
application of such provision should be made when the borrower admits that a specific rate of interest was agreed upon as in the
present case; and that it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted
in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.[25]

We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner and
respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of
interest thereon.[26] While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner and
respondent agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule
is that factual findings of the trial court deserve great weight and respect especially when affirmed by the appellate court. [27] We
found no compelling reason to disturb the ruling of both courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed on the
payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that after paying
the total amount of loan, petitioner ordered her to pay interest. [28] Respondent did not categorically declare in the same case that she
and respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed,
monetary interest is due only if there was an express stipulation in writing for the payment of interest.

There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or written,
regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money,
and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the
payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to monetary interest. [29] The case at bar involves petitioners claim for
monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that respondent
defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as
regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the instant
case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest.[30]

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the principle
of solutio indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasicontract whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the
person who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks
back to the ancient principle that no one shall enrich himself unjustly at the expense of another.[31] The principle of solutio
indebiti applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and
the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other
cause.[32] We have held that the principle of solutio indebiti applies in case of erroneous payment of undue interest.[33]

It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such payment
because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent
as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no
right to demand it, he has an obligation to return it.

We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of
Appeals.

Records show that respondent received a loan amounting to P540,000.00 from petitioner.[34] Respondent issued two
checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan. [35] These checks were subsequently encashed
by petitioner.[36] Obviously, there was an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess
of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also
paid cash in the total amount of P175,000.00 to petitioner as interest.[37] Although no receipts reflecting the same were presented
because petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit [38] in the Batas
Pambansa Blg. 22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two checks. Section 26
Rule 130 of the Rules of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against
him. Aside from the amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle
of solutio indebiti applies to the instant case, petitioner should return to respondent the excess amount of P160,000.00

and P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the
Court of Appeals should be reduced from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against respondent. In the
said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner.
Nonetheless, respondents conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this
case, totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan, were not among the five
checks found to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to petitioner.[39]

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury.
Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount
of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the
Civil Code instructs that assessment of damages is left to the discretion of the court according to the circumstances of each
case. This discretion is limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was
the result of prejudice or corruption on the part of the trial court. [40] To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be
imposed if the defendant acted in an oppressive manner. Petitioner acted oppressively when he pestered respondent to pay interest
and threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay interest despite
lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from committing similar and other
serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable justification
for awarding the same.[42] In the case under consideration, the RTC stated in its Decision that the award of attorneys fees equivalent
to 25% of the amount paid as interest by respondent to petitioner is reasonable and moderate considering the extent of work
rendered by respondents lawyer in the instant case and the fact that it dragged on for several years. [43] Further, respondent testified
that she agreed to compensate her lawyer handling the instant case such amount. [44] The award, therefore, of attorneys fees and its
amount equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to respondent
computed from 3 March 1998 until its full payment. This is erroneous.

We held in Eastern Shipping Lines, Inc. v. Court of Appeals, [45] that when an obligation, not constituting a loan or
forbearance of money is breached, an interest on the amount of damages awarded may be imposed at the rate of 6% per
annum.We further declared that when the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not from a loan or
forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on the
damages awarded and on the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March 1998, [46] up to
the finality of this Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up to its
satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is
hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of interest is reduced
to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorneys fees to be computed from the time of the extra-judicial demand on
3 March 1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality of this
Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the
Courts Division.
REYNATO S. PUNO
Chief Justice