Credit Transactions v.1

Republic of the Philippines
SUPREME COURT
Manila
Spouses Eduardo and Lydia Silos (petitioners) have been in

business for about two decades of operating a department store
and buying and selling of ready-to-wear apparel. Respondent
Philippine National Bank (PNB) is a banking corporation
organized and existing under Philippine laws.
SECOND DIVISION
G.R. No. 181045
July 2, 2014
SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
DEL CASTILLO, J.:
In 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.
This Petition for Review on Certiorari 1 questions the May 8, 2007
Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 79650,
which affirmed with modifications the February 28, 2003
Decision3 and the June 4, 2003 Order4 of the Regional Trial Court
(RTC), Branch 6 of Kalibo, Aklan in Civil Case No. 5975.
Factual Antecedents
To secure a one-year revolving credit line of P150,000.00

obtained from PNB, petitioners constituted in August 1987 a
Real Estate Mortgage5 over a 370-square meter lot in Kalibo,
Aklan covered by Transfer Certificate of Title No. (TCT) T-14250.
In July 1988,the credit line was increased to P1.8 million and the
mortgage was correspondingly increased to P1.8 million.6
And in July 1989, a Supplement to the Existing Real Estate
Mortgage7 was executed to cover the same credit line, which
was increased to P2.5 million, and additional security was given
in the form of a 134-square meter lot covered by TCT T-16208.
In addition, petitioners issued eight Promissory Notes 8 and
signed a Credit Agreement.9This July 1989 Credit Agreement
contained a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the
rate of 19.5% per annum. Interest shall be payable in advance
every one hundred twenty days at the rate prevailing at the
time of the renewal.
(b) The Borrower agrees 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. Where the Bank has imposed on the Loan
interest at a rate per annum, which is equal to the Banks
spread over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating
interest rate at any time depending on whatever policy it may
adopt in the future.10 (Emphases supplied)
The eight Promissory Notes, on the other hand, contained a

stipulation granting PNB the right to increase or reduce interest
rates "within the limits allowed by law or by the Monetary
Board."11
The Real Estate Mortgage agreement provided the same right
to increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future."12
plus applicable spread in effect as of the date of each

Availment.15 (Emphases supplied)
Under this Amendment to Credit Agreement, petitioners issued
in favor of PNB the following 18 Promissory Notes, which
petitioners settled except the last (the note covering the
principal) at the following interest rates:
1. 9th Promissory Note dated November 8, 1991 26%;
Petitioners religiously paid interest on the notes at the following

rates:
2. 10th Promissory Note dated March 19, 1992 25%;
1. 1st Promissory Note dated July 24, 1989 19.5%;
3. 11th Promissory Note dated July 11, 1992 23%;
2. 2nd Promissory Note dated November 22, 1989

23%;
4. 12th Promissory Note dated November 10, 1992

21%;
3. 3rd Promissory Note dated March 21, 1990 22%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
5. 5th Promissory Note dated December 17, 1990 28%;

21%;
6. 6th Promissory Note dated February 14, 1991 32%;

7. 7th Promissory Note dated March 1, 1991 30%; and

8. 8th Promissory Note dated July 11, 1991 24%.13

In August 1991, an Amendment to Credit Agreement14 was
executed by the parties, with the following stipulation regarding
interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to
pay interest on each Availment from date of each Availment up
to but not including the date of full payment thereof at the rate
per annum which is determined by the Bank to be prime rate

16%;
11. 19th Promissory Note dated April 10, 1995 21%;
12. 20th Promissory Note dated July 19, 1995 18.5%;
13. 21st Promissory Note dated December 18, 1995
18.75%;
14. 22nd Promissory Note dated April 22, 1996 18.5%;

15. 23rd Promissory Note dated July 22, 1996 18.5%;
due 120 days later or on October 28, 1997 became past due,
and despite repeated demands, petitioners failed to make good
on the note.

18%;
Incidentally, PN 9707237 provided for the penalty equivalent to

24% per annum in case of default, as follows:
17. 25th Promissory Note dated May 30, 1997 17.5%;

and
Without need for notice or demand, failure to pay this note or

any installment thereon, when due, shall constitute default and
in such cases or in case of garnishment, receivership or
bankruptcy or suit of any kind filed against me/us by the Bank,
the outstanding principal of this note, at the option of the Bank
and without prior notice of demand, shall immediately become
due and payable and shall be subject to a penalty charge of
twenty four percent (24%) per annum based on the defaulted
principal amount. x x x19 (Emphasis supplied)
18. 26th Promissory Note (PN 9707237) dated July 30,

1997 25%.16
The 9th up to the 17th promissory notes provide for the
payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law x x x." 17
On the other hand, the 18th up to the 26th promissory notes
including PN 9707237, which is the 26th promissory note
carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein
stipulated may be increased or decreased for the subsequent
Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Banks
overall cost of funds. I/We hereby agree that in the event I/we
are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option top repay the loan or credit
facility without penalty within ten (10) calendar days from the
Interest Setting Date.18 (Emphasis supplied)
Respondent regularly renewed the line from 1990 up to 1997,
and petitioners made good on the promissory notes, religiously
paying the interests without objection or fail. But in 1997,
petitioners faltered when the interest rates soared due to the
Asian financial crisis. Petitioners sole outstanding promissory
note for P2.5 million PN 9707237 executed in July 1997 and
PNB prepared a Statement of Account20 as of October 12, 1998,

detailing the amount due and demandable from petitioners in
the total amount of P3,620,541.60, broken down as follows:
Principal
P 2,500,000.00
Interest
538,874.94
Penalties
581,666.66
Total
P 3,620,541.60
Despite demand, petitioners failed to pay the foregoing amount.

Thus, PNB foreclosed on the mortgage, and on January 14,
1999, TCTs T-14250 and T-16208 were sold to it at auction for
the amount of P4,324,172.96.21 The sheriffs certificate of sale
was registered on March 11, 1999.
More than a year later, or on March 24, 2000, petitioners filed
Civil Case No. 5975, seeking annulment of the foreclosure sale
and an accounting of the PNB credit. Petitioners theorized that
after the first promissory note where they agreed to pay 19.5%
interest, the succeeding stipulations for the payment of interest
in their loan agreements with PNB which allegedly left to the
latter the sole will to determine the interest rate became null
and void. Petitioners added that because the interest rates were
fixed by respondent without their prior consent or agreement,
these rates are void, and as a result, petitioners should only be
made liable for interest at the legal rate of 12%. They claimed
further that they overpaid interests on the credit, and
concluded that due to this overpayment of steep interest
charges, their debt should now be deemed paid, and the
foreclosure and sale of TCTs T-14250 and T-16208 became
unnecessary and wrongful. As for the imposed penalty
of P581,666.66, petitioners alleged that since the Real Estate
Mortgage and the Supplement thereto did not include penalties
as part of the secured amount, the same should be excluded
from the foreclosure amount or bid price, even if such penalties
are provided for in the final Promissory Note, or PN 9707237.22
In addition, petitioners sought to be reimbursed an alleged
overpayment of P848,285.00 made during the period August
21, 1991 to March 5, 1998,resulting from respondents
imposition of the alleged illegal and steep interest rates. They
also prayed to be awarded P200,000.00 by way of attorneys
fees.23
In its Answer,24 PNB denied that it unilaterally imposed or fixed
interest rates; that petitioners agreed that without prior notice,
PNB may modify interest rates depending on future policy
adopted by it; and that the imposition of penalties was agreed
upon in the Credit Agreement. It added that the imposition of
penalties is supported by the all-inclusive clause in the Real
Estate Mortgage agreement which provides that the mortgage
shall stand as security for any and all other obligations of
whatever kind and nature owing to respondent, which thus
includes penalties imposed upon default or non-payment of the
principal and interest on due date.
On pre-trial, the parties mutually agreed to the following

material facts, among others:
a) That since 1991 up to 1998, petitioners had paid PNB
the total amount of P3,484,287.00;25 and
b) That PNB sent, and petitioners received, a March 10,
2000 demand letter.26
During trial, petitioner Lydia Silos (Lydia) testified that the Credit
Agreement, the Amendment to Credit Agreement, Real Estate
Mortgage and the Supplement thereto were all prepared by
respondent PNB and were presented to her and her husband
Eduardo only for signature; that she was told by PNB that the
latter alone would determine the interest rate; that as to the
Amendment to Credit Agreement, she was told that PNB would
fill up the interest rate portion thereof; that at the time the
parties executed the said Credit Agreement, she was not
informed about the applicable spread that PNB would impose on
her account; that the interest rate portion of all Promissory
Notes she and Eduardo issued were always left in blank when
they executed them, with respondents mere assurance that it
would be the one to enter or indicate thereon the prevailing
interest rate at the time of availment; and that they agreed to
such arrangement. She further testified that the two Real Estate
Mortgage agreements she signed did not stipulate the payment
of penalties; that she and Eduardo consulted with a lawyer, and
were told that PNBs actions were improper, and so on March
20, 2000, they wrote to the latter seeking a recomputation of
their outstanding obligation; and when PNB did not oblige, they
instituted Civil Case No. 5975.27
On cross-examination, Lydia testified that she has been in
business for 20 years; that she also borrowed from other
individuals and another bank; that it was only with banks that
she was asked to sign loan documents with no indicated
interest rate; that she did not bother to read the terms of the
loan documents which she signed; and that she received
several PNB statements of account detailing their outstanding
obligations, but she did not complain; that she assumed instead
that what was written therein is correct.28
on prevailing rates upon which to peg such variable

interest rates;33
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr.
(Aspa), the sole witness for respondent, stated on crossexamination that as a practice, the determination of the prime
rates of interest was the responsibility solely of PNBs Treasury
Department which is based in Manila; that these prime rates
were simply communicated to all PNB branches for
implementation; that there are a multitude of considerations
which determine the interest rate, such as the cost of money,
foreign currency values, PNBs spread, bank administrative
costs, profitability, and the practice in the banking industry;
that in every repricing of each loan availment, the borrower has
the right to question the rates, but that this was not done by
the petitioners; and that anything that is not found in the
Promissory Note may be supplemented by the Credit
Agreement.29
3. The Promissory Note, as the principal contract

evidencing petitioners loan, prevails over the Credit
Agreement and the Real Estate Mortgage.
Ruling of the Regional Trial Court
6. By the admission of petitioners during pre-trial, all

payments made to PNB were properly applied to the
principal, interest and penalties.37
On February 28, 2003, the trial court rendered judgment

dismissing Civil Case No. 5975.30
It ruled that:
1. While the Credit Agreement allows PNB to unilaterally
increase its spread over the floating interest rate at any
time depending on whatever policy it may adopt in the
future, it likewise allows for the decrease at any time of
the same. Thus, such stipulation authorizing both the
increase and decrease of interest rates as may be
applicable is valid,31 as was held in Consolidated Bank
and Trust Corporation (SOLIDBANK) v. Court of Appeals;32
2. Banks are allowed to stipulate that interest rates on
loans need not be fixed and instead be made dependent
As such, the rate of interest, penalties and attorneys

fees stipulated in the Promissory Note prevail over those
mentioned in the Credit Agreement and the Real Estate
Mortgage agreements;34
4. Roughly, PNBs computation of the total amount of
petitioners obligation is correct; 35
5. Because the loan was admittedly due
demandable, the foreclosure was regularly made;36
and
The dispositive portion of the trial courts Decision reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in
favor of the respondent and against the petitioners by
DISMISSING the latters petition.
Costs against the petitioners.
SO ORDERED.38
Petitioners moved for reconsideration. In an Order 39 dated June
4, 2003, the trial court granted only a modification in the award
of attorneys fees, reducing the same from 10% to 1%. Thus,
PNB was ordered to refund to petitioner the excess in attorneys
fees in the amount of P356,589.90, viz:
WHEREFORE, judgment is hereby rendered upholding the

validity of the interest rate charged by the respondent as well
as the extra-judicial foreclosure proceedings and the Certificate
of Sale. However, respondent is directed to refund to the
petitioner the amount of P356,589.90 representing the excess
interest charged against the latter.
No pronouncement as to costs.
fees. It simply raised the issue in its appellees brief in the CA,
and included a prayer for the reversal of said Order.
In effect, the CA limited petitioners appeal to the following
issues:
1) Whether x x x the interest rates on petitioners
outstanding obligation were unilaterally and arbitrarily
imposed by PNB;
SO ORDERED.40
Ruling of the Court of Appeals
2) Whether x x x the penalty charges were secured by

the real estate mortgage; and
Petitioners appealed to the CA, which issued the questioned

Decision with the following decretal portion:
3) Whether x x x the extrajudicial foreclosure and sale

are valid.42
WHEREFORE, in view of the foregoing, the instant appeal is

PARTLY GRANTED. The modified Decision of the Regional Trial
Court per Order dated June 4, 2003 is hereby AFFIRMED with
MODIFICATIONS, to wit:
The CA noted that, based on receipts presented by petitioners

during trial, the latter dutifully paid a total ofP3,027,324.60 in
interest for the period August 7, 1991 to August 6, 1997, over
and above the P2.5 million principal obligation. And this is
exclusive of payments for insurance premiums, documentary
stamp taxes, and penalty. All the while, petitioners did not
complain nor object to the imposition of interest; they in fact
paid the same religiously and without fail for seven years. The
appellate court ruled that petitioners are thus estopped from
questioning the same.
1. [T]hat the interest rate to be applied after the

expiration of the first 30-day interest period for PN. No.
9707237 should be 12% per annum;
2. [T]hat the attorneys fees of10% is valid and binding;
and
3. [T]hat [PNB] is hereby ordered to reimburse
[petitioners] the excess in the bid price of P377,505.99
which is the difference between the total amount due
[PNB] and the amount of its bid price.
SO ORDERED.
41
On the other hand, respondent did not appeal the June 4,2003
Order of the trial court which reduced its award of attorneys
The CA nevertheless noted that for the period July 30, 1997 to
August 14, 1997, PNB wrongly applied an interest rate of
25.72% instead of the agreed 25%; thus it overcharged
petitioners, and the latter paid, an excess ofP736.56 in interest.
On the issue of penalties, the CA ruled that the express tenor of
the Real Estate Mortgage agreements contemplated the
inclusion of the PN 9707237-stipulated 24% penalty in the
amount to be secured by the mortgaged property, thus
For and in consideration of certain loans, overdrafts and other

credit accommodations obtained from the MORTGAGEE and to
secure the payment of the same and those others that the
MORTGAGEE may extend to the MORTGAGOR, including interest
and expenses, and other obligations owing by the MORTGAGOR
to the MORTGAGEE, whether direct or indirect, principal or
secondary, as appearing in the accounts, books and records of
the MORTGAGEE, the MORTGAGOR does hereby transfer and
convey by way of mortgage unto the MORTGAGEE x x
x43 (Emphasis supplied)
A. THE COURT OF APPEALS AS WELL AS THE

LOWER COURT ERRED IN NOT NULLIFYING THE
INTEREST RATE PROVISION IN THE CREDIT
AGREEMENT DATED JULY 24, 1989 X X X AND IN
THE AMENDMENT TO CREDIT AGREEMENT
DATEDAUGUST 21, 1991 X X X WHICH LEFT TO
THE SOLE UNILATERAL DETERMINATION OF THE
RESPONDENT PNB THE ORIGINAL FIXING OF
INTEREST RATE AND ITS INCREASE, WHICH
AGREEMENT IS CONTRARY TO LAW, ART. 1308 OF
THE [NEW CIVIL CODE], AS ENUNCIATED IN
PONCIANO ALMEIDA V. COURT OF APPEALS,G.R.
[NO.] 113412, APRIL 17, 1996, AND CONTRARY
TO PUBLIC POLICY AND PUBLIC INTEREST, AND IN
APPLYING THE PRINCIPLE OF ESTOPPEL ARISING
FROM THE ALLEGED DELAYED COMPLAINT OF
PETITIONER[S], AND [THEIR] PAYMENT OF THE
INTEREST CHARGED.
The CA believes that the 24% penalty is covered by the phrase

"and other obligations owing by the mortgagor to the
mortgagee" and should thus be added to the amount secured
by the mortgages.44
The CA then proceeded to declare valid the foreclosure and sale
of properties covered by TCTs T-14250 and T-16208, which came
as a necessary result of petitioners failure to pay the
outstanding obligation upon demand.45The CA saw fit to
increase the trial courts award of 1% to 10%, finding the latter
rate to be reasonable and citing the Real Estate Mortgage
agreement which authorized the collection of the higher rate. 46
B. CONSEQUENTLY, THE COURT OF APPEALS AND

THE LOWER COURT ERRED IN NOT DECLARING
THAT PNB IS NOT AT ALL ENTITLED TO ANY
INTEREST EXCEPT THE LEGAL RATE FROM DATE
OF DEMAND, AND IN NOT APPLYING THE EXCESS
OVER THE LEGAL RATE OF THE ADMITTED
PAYMENTS MADE BY PETITIONER[S] FROM 19911998 IN THE ADMITTED TOTAL AMOUNT
OF P3,484,287.00,
TO
PAYMENT
OF
THE
PRINCIPAL
OFP2,500,000.[00]
LEAVING
AN
OVERPAYMENT OFP984,287.00 REFUNDABLE BY
RESPONDENT TO PETITIONER[S] WITH INTEREST
OF 12% PER ANNUM.
Finally, the CA ruled that petitioners are entitled to P377,505.09

surplus, which is the difference between PNBs bid price
of P4,324,172.96 and petitioners total computed obligation as
of January 14, 1999, or the date of the auction sale, in the
amount of P3,946,667.87.47
Hence, the present Petition.
Issues
II
The following issues are raised in this Petition:
THE COURT OF APPEALS AND THE LOWER COURT ERRED IN

HOLDING THAT PENALTIES ARE INCLUDEDIN THE SECURED
AMOUNT, SUBJECT TO FORECLOSURE, WHEN NO PENALTIES ARE
MENTIONED [NOR] PROVIDED FOR IN THE REAL ESTATE
MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE

AMOUNT OF PENALTIES SHOULDHAVE BEEN EXCLUDED FROM
[THE] FORECLOSURE AMOUNT.
III
THE COURT OF APPEALS ERRED IN REVERSING THE RULING OF
THE LOWER COURT, WHICH REDUCED THE ATTORNEYS FEES
OF 10% OF THE TOTAL INDEBTEDNESS CHARGED IN THE X X X
EXTRAJUDICIAL FORECLOSURE TOONLY 1%, AND [AWARDING]
10% ATTORNEYS FEES.48
Petitioners Arguments
Petitioners insist that the interest rate provision in the Credit
Agreement and the Amendment to Credit Agreement should be
declared null and void, for they relegated to PNB the sole power
to fix interest rates based on arbitrary criteria or factors such as
bank policy, profitability, cost of money, foreign currency
values, and bank administrative costs; spaces for interest rates
in the two Credit Agreements and the promissory notes were
left blank for PNB to unilaterally fill, and their consent or
agreement to the interest rates imposed thereafter was not
obtained; the interest rate, which consists of the prime rate plus
the bank spread, is determined not by agreement of the parties
but by PNBs Treasury Department in Manila. Petitioners
conclude that by this method of fixing the interest rates, the
principle of mutuality of contracts is violated, and public policy
as well as Circular 90549 of the then Central Bank had been
breached.
Petitioners question the CAs application of the principle of
estoppel, saying that no estoppel can proceed from an illegal
act. Though they failed to timely question the imposition of the
alleged illegal interest rates and continued to pay the loan on
the basis of these rates, they cannot be deemed to have
acquiesced, and hence could recover what they erroneously
paid.50
Petitioners argue that if the interest rates were nullified, then

their obligation to PNB is deemed extinguished as of July 1997;
moreover, it would appear that they even made an over
payment to the bank in the amount ofP984,287.00.
Next, petitioners suggest that since the Real Estate Mortgage
agreements did not include nor specify, as part of the secured
amount, the penalty of 24% authorized in PN 9707237, such
amount of P581,666.66 could not be made answerable by or
collected from the mortgages covering TCTs T-14250 and T16208.
Claiming
support
from
Philippine
Bank
of
Communications [PBCom] v. Court of Appeals, 51 petitioners
insist that the phrase "and other obligations owing by the
mortgagor to the mortgagee"52 in the mortgage agreements
cannot embrace theP581,666.66 penalty, because, as held in
the PBCom case, "[a] penalty charge does not belong to the
species of obligations enumerated in the mortgage, hence, the
said contract cannot be understood to secure the
penalty";53while the mortgages are the accessory contracts,
what items are secured may only be determined from the
provisions of the mortgage contracts, and not from the Credit
Agreement or the promissory notes.
Finally, petitioners submit that the trial courts award of 1%
attorneys fees should be maintained, given that in foreclosures,
a lawyers work consists merely in the preparation and filing of
the petition, and involves minimal study. 54 To allow the
imposition of a staggering P396,211.00 for such work would be
contrary to equity. Petitioners state that the purpose of
attorneys fees in cases of this nature "is not to give respondent
a larger compensation for the loan than the law already allows,
but to protect it against any future loss or damage by being
compelled to retain counsel x x x to institute judicial
proceedings for the collection of its credit." 55 And because the
instant case involves a simple extrajudicial foreclosure,
attorneys fees may be equitably tempered.
Respondents Arguments
For its part, respondent disputes petitioners claim that interest

rates were unilaterally fixed by it, taking relief in the CA
pronouncement that petitioners are deemed estopped by their
failure to question the imposed rates and their continued
payment thereof without opposition. It adds that because the
Credit Agreement and promissory notes contained both an
escalation clause and a de-escalation clause, it may not be said
that the bank violated the principle of mutuality. Besides, the
increase or decrease in interest rates have been mutually
agreed upon by the parties, as shown by petitioners continuous
payment without protest. Respondent adds that the alleged
unilateral imposition of interest rates is not a proper subject for
review by the Court because the issue was never raised in the
lower court.
As for petitioners claim that interest rates imposed by it are
null and void for the reasons that 1) the Credit Agreements and
the promissory notes were signed in blank; 2) interest rates
were at short periods; 3) no interest rates could be charged
where no agreement on interest rates was made in writing; 4)
PNB fixed interest rates on the basis of arbitrary policies and
standards left to its choosing; and 5) interest rates based on
prime rate plus applicable spread are indeterminate and
arbitrary PNB counters:
a. That Credit Agreements and promissory notes were
signed by petitioner[s] in blank Respondent claims that
this issue was never raised in the lower court. Besides,
documentary evidence prevails over testimonial
evidence; Lydia Silos testimony in this regard is selfserving, unsupported and uncorroborated, and for being
the lone evidence on this issue. The fact remains that
these documents are in proper form, presumed regular,
and endure, against arbitrary claims by Silos who is an
experienced business person that she signed
questionable loan documents whose provisions for
interest rates were left blank, and yet she continued to
pay the interests without protest for a number of years. 56
b. That interest rates were at short periods Respondent

argues that the law which governs and prohibits changes
in interest rates made more than once every twelve
months has been removed57 with the issuance of
Presidential Decree No. 858.58
c. That no interest rates could be charged where no
agreement on interest rates was made in writing in
violation of Article 1956 of the Civil Code, which provides
that no interest shall be due unless it has been expressly
stipulated in writing Respondent insists that the
stipulated 25% per annum as embodied in PN 9707237
should be imposed during the interim, or the period after
the loan became due and while it remains unpaid, and
not the legal interest of 12% as claimed by petitioners.59
d. That PNB fixed interest rates on the basis of arbitrary
policies and standards left to its choosing According to
respondent, interest rates were fixed taking into
consideration increases or decreases as provided by law
or by the Monetary Board, the banks overall costs of
funds, and upon agreement of the parties.60
e. That interest rates based on prime rate plus
applicable spread are indeterminate and arbitrary On
this score, respondent submits there are various factors
that influence interest rates, from political events to
economic developments, etc.; the cost of money,
profitability and foreign currency transactions may not
be discounted.61
On the issue of penalties, respondent reiterates the trial courts
finding that during pre-trial, petitioners admitted that the
Statement of Account as of October 12, 1998 which detailed
and included penalty charges as part of the total outstanding
obligation owing to the bank was correct. Respondent justifies
the imposition and collection of a penalty as a normal banking
practice, and the standard rate per annum for all commercial
banks, at the time, was 24%.
Respondent adds that the purpose of the penalty or a penal

clause for that matter is to ensure the performance of the
obligation and substitute for damages and the payment of
interest in the event of non-compliance. 62 And the promissory
note being the principal agreement as opposed to the
mortgage, which is a mere accessory should prevail. This
being the case, its inclusion as part of the secured amount in
the mortgage agreements is valid and necessary.
Regarding the foreclosure of the mortgages, respondent
accuses petitioners of pre-empting consolidation of its
ownership over TCTs T-14250 and T-16208; that petitioners filed
Civil Case No. 5975 ostensibly to question the foreclosure and
sale of properties covered by TCTs T-14250 and T-16208 in a
desperate move to retain ownership over these properties,
because they failed to timely redeem them.
Respondent directs the attention of the Court to its petition in
G.R. No. 181046,63 where the propriety of the CAs ruling on the
following issues is squarely raised:
1. That the interest rate to be applied after the
expiration of the first 30-day interest period for PN
9707237 should be 12% per annum; and
2. That PNB should reimburse petitioners the excess in
the bid price of P377,505.99 which is the difference
between the total amount due to PNB and the amount of
its bid price.
Our Ruling
The Court grants the Petition.
Before anything else, it must be said that it is not the function
of the Court to re-examine or re-evaluate evidence adduced by
the parties in the proceedings below. The rule admits of certain
well-recognized exceptions, though, as when the lower courts
findings are not supported by the evidence on record or are

based on a misapprehension of facts, or when certain relevant
and undisputed facts were manifestly overlooked that, if
properly considered, would justify a different conclusion. This
case falls within such exceptions.
The Court notes that on March 5, 2008, a Resolution was issued
by the Courts First Division denying respondents petition in
G.R. No. 181046, due to late filing, failure to attach the required
affidavit of service of the petition on the trial court and the
petitioners, and submission of a defective verification and
certification of non-forum shopping. On June 25, 2008, the Court
issued another Resolution denying with finality respondents
motion for reconsideration of the March 5, 2008 Resolution. And
on August 15, 2008, entry of judgment was made. This thus
settles the issues, as above-stated, covering a) the interest rate
or 12% per annum that applies upon expiration of the first 30
days interest period provided under PN 9707237, and b)the
CAs decree that PNB should reimburse petitioner the excess in
the bid price of P377,505.09.
It appears that respondents practice, more than once
proscribed by the Court, has been carried over once more to the
petitioners. In a number of decided cases, the Court struck
down provisions in credit documents issued by PNB to, or
required of, its borrowers which allow the bank to increase or
decrease interest rates "within the limits allowed by law at any
time depending on whatever policy it may adopt in the future."
Thus, in Philippine National Bank v. Court of Appeals, 64 such
stipulation and similar ones were declared in violation of Article
130865 of the Civil Code. In a second case, Philippine National
Bank v. Court of Appeals,66 the very same stipulations found in
the credit agreement and the promissory notes prepared and
issued by the respondent were again invalidated. The Court
therein said:
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate
within the limits allowed by law at any time depending on
whatever policy it may adopt in the future; Provided, that the
interest rate on this accommodation shall be correspondingly
decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on
the effectivity date of the increase or decrease in the maximum
interest rate.
the effectivity date of the increase or decrease in maximum

interest rate.
The Promissory Note, in turn, 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."
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 bylaw 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.
The Real Estate Mortgage contract likewise provided that

(k) INCREASE OF INTEREST RATE: The rate of interest charged
on the obligation secured by this mortgage as well as the
interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be
subject during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.
xxxx
In making the unilateral increases in interest rates, petitioner
bank relied on the escalation clause contained in their credit
agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within
the limits allowed by law at any time depending on whatever
policy it may adopt in the future and provided, that, the interest
rate on this accommodation shall be correspondingly decreased
in the event that the applicable maximum interest rate is
This clause is authorized by Section 2 of Presidential Decree

(P.D.) No. 1684 which further amended Act No. 2655 ("The
Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new
section after Section 7, to read as follows:
Section 1 of P.D. No. 1684 also empowered the Central Banks

Monetary Board to prescribe the maximum rates of interest for
loans and certain forbearances. Pursuant to such authority, the
Monetary Board issued Central Bank (C.B.) Circular No. 905,
series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks
and Other Financial Intermediaries) is hereby amended to read
as follows:
Sec. 1303. Interest and Other Charges.
The rate of interest, including commissions, premiums, fees
and other charges, on any loan, or forbearance of any money,
goods or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under

or pursuant to the Usury Law, as amended.
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
others consent.
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.
We cannot countenance petitioner banks 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
x x x The unilateral action of the PNB in increasing the interest

rate on the private respondents loan violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
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 partys (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.67 (Emphases
supplied)
Then again, in a third case, Spouses Almeda v. Court of
Appeals,68 the Court invalidated the very same provisions in the
respondents prepared Credit Agreement, declaring thus:
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any
obligation arising from contract has the force of law between
the parties; and (2) that there must be mutuality between the
parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so
as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left
solely to the will of one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the

case that respondent bank unilaterally altered the terms of its
contract with petitioners by increasing the interest rates on the
loan without the prior assent of the latter. In fact, the manner of
agreement is itself explicitly stipulated by the Civil Code when it
provides, in Article 1956 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.
Indeed, the interest rate which appears to have been agreed
upon by the parties to the contract in this case was the 21%
rate stipulated in the interest provision. Any doubt about this is
in fact readily resolved by a careful reading of the credit
agreement because the same plainly uses the phrase "interest
rate agreed upon," in reference to the original 21% interest
rate. x x x
xxxx
Petitioners never agreed in writing to pay the increased interest
rates demanded by respondent bank in contravention to the
tenor of their credit agreement. That an increase in interest
rates from 18% to as much as 68% is excessive and
unconscionable is indisputable. Between 1981 and 1984,
petitioners had paid an amount equivalent to virtually half of
the entire principal (P7,735,004.66) which was applied to
interest alone. By the time the spouses tendered the amount
of P40,142,518.00 in settlement of their obligations; respondent
bank was demanding P58,377,487.00 over and above those
amounts already previously paid by the spouses.
Escalation clauses are not basically wrong or legally
objectionable so long as they are not solely potestative but
based on reasonable and valid grounds. Here, as clearly
demonstrated above, not only [are] the increases of the interest

rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid
and reasonable standards upon which the increases are
anchored.
xxxx
In the face of the unequivocal interest rate provisions in the
credit agreement and in the law requiring the parties to agree
to changes in the interest rate in writing, we hold that the
unilateral and progressive increases imposed by respondent
PNB were null and void. Their effect was to increase the total
obligation on an eighteen million peso loan to an amount way
over three times that which was originally granted to the
borrowers. That these increases, occasioned by crafty
manipulations in the interest rates is unconscionable and
neutralizes the salutary policies of extending loans to spur
business cannot be disputed.69 (Emphases supplied)
Still, in a fourth case, Philippine National Bank v. Court of
Appeals,70 the above doctrine was reiterated:
The promissory note contained the following stipulation:
For value received, I/we, [private respondents] jointly and
severally promise to pay to the ORDER of the PHILIPPINE
NATIONAL BANK, at its office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY (P15,000.00), Philippine
Currency, together with interest thereon at the rate of 12% per
annum until paid, which interest rate the Bank may at any time
without notice, raise within the limits allowed by law, and I/we
also agree to pay jointly and severally ____% per annum penalty
charge, by way of liquidated damages should this note be
unpaid or is not renewed on due dated.
Payment of this note shall be as follows:
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE

On the reverse side of the note the following condition was
stamped:
All short-term loans to be granted starting January 1, 1978 shall
be made subject to the condition that any and/or all extensions
hereof that will leave any portion of the amount still unpaid
after 730 days shall automatically convert the outstanding
balance into a medium or long-term obligation as the case may
be and give the Bank the right to charge the interest rates
prescribed under its policies from the date the account was
originally granted.
To secure payment of the loan the parties executed a real
estate mortgage contract which provided:
(k) INCREASE OF INTEREST RATE:
The rate of interest charged on the obligation secured by this
mortgage as well as the interest on the amount which may
have been advanced by the MORTGAGEE, in accordance with
the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as
the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
xxxx
To begin with, PNBs argument rests on a misapprehension of
the import of the appellate courts ruling. The Court of Appeals
nullified the interest rate increases not because the promissory
note did not comply with P.D. No. 1684 by providing for a deescalation, but because the absence of such provision made the
clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with our decision in Banco
Filipino Savings & Mortgage Bank v. Navarro that although P.D.
No. 1684 is not to be retroactively applied to loans granted

before its effectivity, there must nevertheless be a deescalation clause to mitigate the one-sidedness of the
escalation clause. Indeed because of concern for the unequal
status of borrowers vis--vis the banks, our cases after Banco
Filipino have fashioned the rule that any increase in the rate of
interest made pursuant to an escalation clause must be the
result of agreement between the parties.
Thus in Philippine National Bank v. Court of Appeals, two
promissory notes authorized PNB to increase the stipulated
interest per annum" within the limits allowed by law at any time
depending on whatever policy [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." The real estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this
mortgage as well as the interest on the amount which may
have been advanced by the MORTGAGEE, in accordance with
the provisions hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as
the Board of Directors of the MORTGAGEE may prescribe for its
debtors.
Pursuant to these clauses, PNB successively increased the
interest from 18% to 32%, then to 41% and then to 48%. This
Court declared the increases unilaterally imposed by [PNB] to
be in violation of the principle of mutuality as embodied in
Art.1308 of the Civil Code, which provides that "[t]he contract
must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them." As the Court
explained:
In order that obligations arising from contracts may have the
force of law between the parties, there must be mutuality
between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting

parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan agreement
between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the
interest rate at will during the term of the loan, that license
would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have
invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the
weaker partys (the debtor) participation being reduced to the
alternative "to take it or leave it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract is a veritable trap
for the weaker party whom the courts of justice must protect
against abuse and imposition.
A similar ruling was made in Philippine National Bank v. Court of
Appeals. The credit agreement in that case provided:
The BANK reserves the right to increase the interest rate within
policy it may adopt in the future: Provided, that the interest rate
on this accommodation shall be correspondingly decreased in
the event that the applicable maximum interest is reduced by
law or by the Monetary Board. . . .
As in the first case, PNB successively increased the stipulated
interest so that what was originally 12% per annum became,
after only two years, 42%. In declaring the increases invalid, we
held:
We cannot countenance petitioner banks 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.
Only recently we invalidated another round of interest increases

decreed by PNB pursuant to a similar agreement it had with
other borrowers:
[W]hile the Usury Law ceiling on interest rates was lifted by C.B.
Circular 905, nothing in the said circular could possibly be read
as granting respondent bank carte blanche authority to raise
interest rates to levels which would either enslave its borrowers
or lead to a hemorrhaging of their assets.
In this case no attempt was made by PNB to secure the
conformity of private respondents to the successive increases in
the interest rate. Private respondents assent to the increases
can not be implied from their lack of response to the letters sent
by PNB, informing them of the increases. For as stated in one
case, no one receiving a proposal to change a contract is
obliged to answer the proposal.71 (Emphasis supplied)
We made the same pronouncement in a fifth case, New
Sampaguita Builders Construction, Inc. v. Philippine National
Bank,72 thus
Courts have the authority to strike down or to modify provisions
in promissory notes that grant the lenders unrestrained power
to increase interest rates, penalties and other charges at the
latters sole discretion and without giving prior notice to and
securing the consent of the borrowers. This unilateral authority
is anathema to the mutuality of contracts and enable lenders to
take undue advantage of borrowers. Although the Usury Law
has been effectively repealed, courts may still reduce iniquitous
or unconscionable rates charged for the use of money.
Furthermore, excessive interests, penalties and other charges
not revealed in disclosure statements issued by banks, even if
stipulated in the promissory notes, cannot be given effect under
the Truth in Lending Act.73 (Emphasis supplied)
Yet again, in a sixth disposition, Philippine National Bank v.
Spouses
Rocamora,74 the
above
pronouncements
were
reiterated to debunk PNBs repeated reliance on its invalidated

contract stipulations:
We repeated this rule in the 1994 case of PNB v. CA and Jayme
Fernandez and the 1996 case of PNB v. CA and Spouses Basco.
Taking no heed of these rulings, the escalation clause PNB used
in the present case to justify the increased interest rates is no
different from the escalation clause assailed in the 1996 PNB
case; in both, the interest rates were increased from the agreed
12% per annum rate to 42%. x x x
xxxx
On the strength of this ruling, PNBs argument that the
spouses Rocamoras failure to contest the increased interest
rates that were purportedly reflected in the statements of
account and the demand letters sent by the bank amounted to
their implied acceptance of the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras
consent to the increased interest rates prompted the lower
courts to declare excessive and illegal the interest rates
imposed. Togo around this lower court finding, PNB alleges that
the P206,297.47 deficiency claim was computed using only the
original 12% per annum interest rate. We find this unlikely. Our
examination of PNBs own ledgers, included in the records of
the case, clearly indicates that PNB imposed interest rates
higher than the agreed 12% per annum rate. This confirmatory
finding, albeit based solely on ledgers found in the records,
reinforces the application in this case of the rule that findings of
the RTC, when affirmed by the CA, are binding upon this
Court.75 (Emphases supplied)
Verily, all these cases, including the present one, involve
identical or similar provisions found in respondents credit
agreements and promissory notes. Thus, the July 1989 Credit
Agreement executed by petitioners and respondent contained
the following stipulation on interest:
1.03. Interest. (a) The Loan shall be subject to interest at the

rate of 19.5% [per annum]. Interest shall be payable in advance
every one hundred twenty days at the rate prevailing at the
time of the renewal.
rate in the Loan depending on whatever policy the Bank may
interest at a rate per annum which is equal to the Banks spread
over the current floating interest rate, the Borrower hereby
agrees that the Bank may, without need of notice to the
while the eight promissory notes issued pursuant thereto
granted PNB the right to increase or reduce interest rates
"within the limits allowed by law or the Monetary Board" 77 and
the Real Estate Mortgage agreement included the same right to
increase or reduce interest rates "at any time depending on
whatever policy PNB may adopt in the future."78
On the basis of the Credit Agreement, petitioners issued
promissory notes which they signed in blank, and respondent
later on entered their corresponding interest rates, as follows:
1st Promissory Note dated July 24, 1989 19.5%;
2nd Promissory Note dated November 22, 1989 23%;
3rd Promissory Note dated March 21, 1990 22%;
4th Promissory Note dated July 19, 1990 24%;
5th Promissory Note dated December 17, 1990 28%;
6th Promissory Note dated February 14, 1991 32%;
7th Promissory Note dated March 1, 1991 30%; and
18th Promissory Note dated November 16, 1994 16%;
8th Promissory Note dated July 11, 1991 24%.79
19th Promissory Note dated April 10, 1995 21%;
On the other hand, the August 1991 Amendment to Credit

Agreement contains the following stipulation regarding interest:
20th Promissory Note dated July 19, 1995 18.5%;

Availment.80 (Emphases supplied)
and under this Amendment to Credit Agreement, petitioners
again executed and signed the following promissory notes in
blank, for the respondent to later on enter the corresponding
interest rates, which it did, as follows:
10th Promissory Note dated March 19, 1992 25%;
14th Promissory Note dated July 12, 1993 17.5%;
21st Promissory Note dated December 18, 1995

18.75%;
22nd Promissory Note dated April 22, 1996 18.5%;
23rd Promissory Note dated July 22, 1996 18.5%;
25th Promissory Note dated May 30, 1997 17.5%; and
26th Promissory Note (PN 9707237) dated July 30, 1997
25%.81
The 9th up to the 17th promissory notes provide for the
payment of interest at the "rate the Bank may at any time
without notice, raise within the limits allowed by law x x x." 82 On
the other hand, the 18th up to the 26th promissory notes
which includes PN 9707237 carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein
stipulated may be increased or decreased for the subsequent
Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary
Board of the Central Bank of the Philippines, or in the Banks
overall cost of funds. I/We hereby agree that in the event I/we
are not agreeable to the interest rate fixed for any Interest
Period, I/we shall have the option to prepay the loan or credit
facility without penalty within ten (10) calendar days from the
Interest Setting Date.83 (Emphasis supplied)
These stipulations must be once more invalidated, as was done
in previous cases. The common denominator in these cases is
the lack of agreement of the parties to the imposed interest
rates. For this case, this lack of consent by the petitioners has
been made obvious by the fact that they signed the promissory
notes in blank for the respondent to fill. We find credible the
testimony of Lydia in this respect. Respondent failed to discredit
her; in fact, its witness PNB Kalibo Branch Manager Aspa
admitted that interest rates were fixed solely by its Treasury
Department in Manila, which were then simply communicated
to all PNB branches for implementation. If this were the case,
then this would explain why petitioners had to sign the
promissory notes in blank, since the imposable interest rates
have yet to be determined and fixed by respondents Treasury
Department in Manila.
Moreover, in Aspas enumeration of the factors that determine
the interest rates PNB fixes such as cost of money, foreign
currency values, bank administrative costs, profitability, and
considerations which affect the banking industry it can be
seen that considerations which affect PNBs borrowers are
ignored. A borrowers current financial state, his feedback or
opinions, the nature and purpose of his borrowings, the effect of
foreign currency values or fluctuations on his business or
borrowing, etc. these are not factors which influence the fixing
of interest rates to be imposed on him. Clearly, respondents
method of fixing interest rates based on one-sided,
indeterminate, and subjective criteria such as profitability, cost
of money, bank costs, etc. is arbitrary for there is no fixed
standard or margin above or below these considerations.
The stipulation in the promissory notes subjecting the interest
rate to review does not render the imposition by UCPB of
interest rates on the obligations of the spouses Beluso valid.
According to said stipulation:
The interest rate shall be subject to review and may be

increased or decreased by the LENDER considering among
others the prevailing financial and monetary conditions; or the
rate of interest and charges which other banks or financial
institutions
charge
or
offer
to
charge
for
similar
accommodations; and/or the resulting profitability to the
LENDER after due consideration of all dealings with the
BORROWER.
It should be pointed out that the authority to review the interest
rate was given [to] UCPB alone as the lender. Moreover, UCPB
may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as
much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary
condition;(2) the rate of interest and charges which other banks
or financial institutions charge or offer to charge for similar
accommodations; and/or(3) the resulting profitability to the
LENDER (UCPB) after due consideration of all dealings with the
BORROWER (the spouses Beluso). Again, as in the case of the
interest rate provision, there is no fixed margin above or below
these considerations.
In view of the foregoing, the Separability Clause cannot save
either of the two options of UCPB as to the interest to be
imposed, as both options violate the principle of mutuality of
contracts.84 (Emphases supplied)
To repeat what has been said in the above-cited cases, any
modification in the contract, such as the interest rates, must be
made with the consent of the contracting parties.1wphi1 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 agreements, 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.
What is even more glaring in the present case is that, the

stipulations in question no longer provide that the parties shall
agree upon the interest rate to be fixed; -instead, they are
worded in such a way that the borrower shall agree to whatever
interest rate respondent fixes. In credit agreements covered by
the above-cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within
policy it may adopt in the future: Provided, that, the interest
rate on this accommodation shall be correspondingly decreased
in the event that the applicable maximum interest rate is
the effectivity date of the increase or decrease in maximum
interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is
stated that:
IN THE JULY 1989 CREDIT AGREEMENT
rate on the Loan depending on whatever policy the Bank may
interest at a rate per annum, which is equal to the Banks
spread over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of notice to the
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
Availment.87 (Emphasis supplied)
Plainly, with the present credit agreement, the element of
consent or agreement by the borrower is now completely
lacking, which makes respondents unlawful act all the more
reprehensible.
Accordingly, petitioners are correct in arguing that estoppel
should not apply to them, for "[e]stoppel cannot be predicated
on an illegal act. As between the parties to a contract, validity
cannot be given to it by estoppel if it is prohibited by law or is
against public policy."88
It appears that by its acts, respondent violated the Truth in
Lending Act, or Republic Act No. 3765, which was enacted "to
protect x x x citizens from a lack of awareness of the true cost
of credit to the user by using a full disclosure of such cost with a
view of preventing the uninformed use of credit to the
detriment of the national economy."89 The law "gives a detailed
enumeration of the specific information required to be
disclosed, among which are the interest and other charges
incident to the extension of credit." 90 Section 4 thereof provides
that a disclosure statement must be furnished prior to the
consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit
is extended, prior to the consummation of the transaction, a
clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the
Board, the following information:
(1) the cash price or delivered price of the property or
service to be acquired;
(2) the amounts, if any, to be credited as down payment

and/or trade-in;
execution, then they were duly notified of the terms thereof, in

substantial compliance with the Truth in Lending Act.
(3) the difference between the amounts set forth under

clauses (1) and (2);
Once more, we disagree. Section 4 of the Truth in Lending Act

clearly provides that the disclosure statement must be
furnished prior to the consummation of the transaction:
(4) the charges, individually itemized, which are paid or

to be paid by such person in connection with the
transaction but which are not incident to the extension
of credit;
(5) the total amount to be financed;
SEC. 4. Any creditor shall furnish to each person to whom credit

is extended, prior to the consummation of the transaction, a
clear statement in writing setting forth, to the extent applicable
and in accordance with rules and regulations prescribed by the
Board, the following information:
(6) the finance charge expressed in terms of pesos and

centavos; and
(1) the cash price or delivered price of the property or

service to be acquired;
(7) the percentage that the finance bears to the total

amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the obligation.
(2) the amounts, if any, to be credited as down payment

and/or trade-in;
Under Section 4(6), "finance charge" represents the amount to

be paid by the debtor incident to the extension of credit such as
interest or discounts, collection fees, credit investigation fees,
attorneys fees, and other service charges. The total finance
charge represents the difference between (1) the aggregate
consideration (down payment plus installments) on the part of
the debtor, and (2) the sum of the cash price and non-finance
charges.91
By requiring the petitioners to sign the credit documents and
the promissory notes in blank, and then unilaterally filling them
up later on, respondent violated the Truth in Lending Act, and
was remiss in its disclosure obligations. In one case, which the
Court finds applicable here, it was held:
UCPB further argues that since the spouses Beluso were duly
given copies of the subject promissory notes after their
(3) the difference between the amounts set forth under

clauses (1) and (2);
(4) the charges, individually itemized, which are paid or
to be paid by such person in connection with the
transaction but which are not incident to the extension
of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and
centavos; and
(7) the percentage that the finance bears to the total
amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a
lack of awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost by

hidden charges, uncertainty of interest rates, deduction of
interests from the loaned amount, and the like. The law thereby
seeks to protect debtors by permitting them to fully appreciate
the true cost of their loan, to enable them to give full consent to
the contract, and to properly evaluate their options in arriving
at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending
Act. The belated discovery of the true cost of credit will too
often not be able to reverse the ill effects of an already
consummated business decision.
In addition, the promissory notes, the copies of which were
presented to the spouses Beluso after execution, are not
sufficient notification from UCPB. As earlier discussed, the
interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered
by said promissory notes.92(Emphases supplied)
However, the one-year period within which an action for
violation of the Truth in Lending Act may be filed evidently
prescribed long ago, or sometime in 2001, one year after
petitioners received the March 2000 demand letter which
contained the illegal charges.
The fact that petitioners later received several statements of
account detailing its outstanding obligations does not cure
respondents breach. To repeat, the belated discovery of the
true cost of credit does not reverse the ill effects of an already
consummated business decision.93
Neither may the statements be considered proposals sent to
secure the petitioners conformity; they were sent after the
imposition and application of the interest rate, and not before.
And even if it were to be presumed that these are proposals or
offers, there was no acceptance by petitioners. "No one
receiving a proposal to modify a loan contract, especially
regarding interest, is obliged to answer the proposal."94
Loan and credit arrangements may be made enticing by, or

"sweetened" with, offers of low initial interest rates, but actually
accompanied by provisions written in fine print that allow
lenders to later on increase or decrease interest rates
unilaterally, without the consent of the borrower, and
depending on complex and subjective factors. Because they
have been lured into these contracts by initially low interest
rates, borrowers get caught and stuck in the web of subsequent
steep rates and penalties, surcharges and the like. Being
ordinary individuals or entities, they naturally dread legal
complications and cannot afford court litigation; they succumb
to whatever charges the lenders impose. At the very least,
borrowers should be charged rightly; but then again this is not
possible in a one-sided credit system where the temptation to
abuse is strong and the willingness to rectify is made weak by
the eternal desire for profit.
Given the above supposition, the Court cannot subscribe to
respondents argument that in every repricing of petitioners
loan availment, they are given the right to question the interest
rates imposed. The import of respondents line of reasoning
cannot be other than that if one out of every hundred borrowers
questions respondents practice of unilaterally fixing interest
rates, then only the loan arrangement with that lone
complaining borrower will enjoy the benefit of review or renegotiation; as to the 99 others, the questionable practice will
continue unchecked, and respondent will continue to reap the
profits from such unscrupulous practice. The Court can no more
condone a view so perverse. This is exactly what the Court
meant in the immediately preceding cited case when it said
that "the belated discovery of the true cost of credit does not
reverse the ill effects of an already consummated business
decision;"95 as to the 99 borrowers who did not or could not
complain, the illegal act shall have become a fait accompli to
their detriment, they have already suffered the oppressive
rates.
Besides, that petitioners are given the right to question the
interest rates imposed is, under the circumstances, irrelevant;
we have a situation where the petitioners do not stand on equal

footing with the respondent. It is doubtful that any borrower
who finds himself in petitioners position would dare question
respondents power to arbitrarily modify interest rates at any
time. In the second place, on what basis could any borrower
question such power, when the criteria or standards which are
really one-sided, arbitrary and subjective for the exercise of
such power are precisely lost on him?
For the same reasons, the Court cannot validly consider that, as
stipulated in the 18th up to the 26th promissory notes,
petitioners are granted the option to prepay the loan or credit
facility without penalty within 10 calendar days from the
Interest Setting Date if they are not agreeable to the interest
rate fixed. It has been shown that the promissory notes are
executed and signed in blank, meaning that by the time
petitioners learn of the interest rate, they are already bound to
pay it because they have already pre-signed the note where the
rate is subsequently entered.
Besides, 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.
Thus said, respondents arguments relative to the credit
documents that documentary evidence prevails over
testimonial evidence; that the credit documents are in proper
form, presumed regular, and endure, against arbitrary claims by
petitioners, experienced business persons that they are, they
signed questionable loan documents whose provisions for
interest rates were left blank, and yet they continued to pay the
interests without protest for a number of years deserve no
consideration.
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 the rate of 12%

per annum. This is the uniform ruling adopted in previous cases,
including those cited here.96 The interests paid by petitioners
should be applied first to the payment of the stipulated or legal
and unpaid interest, as the case may be, and later, to the
capital or principal.97 Respondent should then refund the excess
amount of interest that it has illegally imposed upon petitioners;
"[t]he amount to be refunded refers to that paid by petitioners
when they had no obligation to do so." 98 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 July1,
2013, the prevailing rate of interest shall be 6% per annum
pursuant to our ruling in Nacar v. Gallery Frames 99 and Bangko
Sentral ng Pilipinas-Monetary Board Circular No. 799.
Now to the issue of penalty. PN 9707237 provides that failure to
pay it or any installment thereon, when due, shall constitute
default, and a penalty charge of 24% per annum based on the
defaulted principal amount shall be imposed. Petitioners claim
that this penalty should be excluded from the foreclosure
amount or bid price because the Real Estate Mortgage and the
Supplement thereto did not specifically include it as part of the
secured amount. Respondent justifies its inclusion in the
secured amount, saying that the purpose of the penalty or a
penal clause is to ensure the performance of the obligation and
substitute for damages and the payment of interest in the event
of non-compliance.100 Respondent adds that the imposition and
collection of a penalty is a normal banking practice, and the
standard rate per annum for all commercial banks, at the time,
was 24%. Its inclusion as part of the secured amount in the
mortgage agreements is thus valid and necessary.
The Court sustains petitioners view that the penalty may not be
included as part of the secured amount. Having found the credit
agreements and promissory notes to be tainted, we must
accord the same treatment to the mortgages. After all, "[a]
mortgage and a note secured by it are deemed parts of one
transaction and are construed together." 101 Being so tainted and
having the attributes of a contract of adhesion as the principal
credit documents, we must construe the mortgage contracts
strictly, and against the party who drafted it. An examination of
the mortgage agreements reveals that nowhere is it stated that
penalties are to be included in the secured amount. Construing
this silence strictly against the respondent, the Court can only
conclude that the parties did not intend to include the penalty
allowed under PN 9707237 as part of the secured amount.
Given its resources, respondent could have if it truly wanted to
conveniently prepared and executed an amended mortgage
agreement with the petitioners, thereby including penalties in
the amount to be secured by the encumbered properties. Yet it
did not.
necessary for him to have excepted to and appealed from the

judgment.102
With regard to attorneys fees, it was plain error for the CA to

have passed upon the issue since it was not raised by the
petitioners in their appeal; it was the respondent that
improperly brought it up in its appellees brief, when it should
have interposed an appeal, since the trial courts Decision on
this issue is adverse to it. It is an elementary principle in the
subject of appeals that an appellee who does not himself appeal
cannot obtain from the appellate court any affirmative relief
other than those granted in the decision of the court below.
2. All subsequent promissory notes (from the 2nd to the

26th promissory notes) shall carry an interest rate of
only 12% per annum.104 Thus, interest payment made in
excess of 12% on the 2nd promissory note shall
immediately be applied to the principal, and the
principal shall be accordingly reduced. The reduced
principal shall then be subjected to the 12% 105 interest
on the 3rd promissory note, and the excess over 12%
interest payment on the 3rd promissory note shall again
be applied to the principal, which shall again be reduced
accordingly. The reduced principal shall then be
subjected to the 12% interest on the 4th promissory
note, and the excess over12% interest payment on the
4th promissory note shall again be applied to the
principal, which shall again be reduced accordingly. And
so on and so forth;
x x x [A]n appellee, who is at the same time not an appellant,

may on appeal be permitted to make counter assignments of
error in ordinary actions, when the purpose is merely to defend
himself against an appeal in which errors are alleged to have
been committed by the trial court both in the appreciation of
facts and in the interpretation of the law, in order to sustain the
judgment in his favor but not when his purpose is to seek
modification or reversal of the judgment, in which case it is
Since petitioners did not raise the issue of reduction of

attorneys fees, the CA possessed no authority to pass upon it
at the instance of respondent. The ruling of the trial court in this
respect should remain undisturbed.
For the fixing of the proper amounts due and owing to the
parties to the respondent as creditor and to the petitioners
who are entitled to a refund as a consequence of overpayment
considering that they paid more by way of interest charges than
the 12% per annum103 herein allowed the case should be
remanded to the lower court for proper accounting and
computation, applying the following procedure:
1. The 1st Promissory Note with the 19.5% interest rate
is deemed proper and paid;
3. After the above procedure is carried out, the trial court

shall be able to conclude if petitioners a) still have an
OUTSTANDING BALANCE/OBLIGATION or b) MADE
PAYMENTS OVER AND ABOVE THEIR TOTAL OBLIGATION

(principal and interest);
balance/obligation precisely because petitioners have

paid beyond the amount of the principal and interest;
4. Such outstanding balance/obligation, if there be any,

shall then be subjected to a 12% per annum interest
from October 28, 1997 until January 14, 1999, which is
the date of the auction sale;
11. If the overpayment exceeds the sum total of the

interest (4.), penalties (5.), and award of 1% attorneys
fees (6.), the excess shall be RETURNED to the
petitioners, with legal interest, under the principle of
solutio indebiti;107
5. Such outstanding balance/obligation shall also be

charged a 24% per annum penalty from August 14, 1997
until January 14, 1999. But from this total penalty, the
petitioners previous payment of penalties in the amount
of P202,000.00made on January 27, 1998 106 shall be
DEDUCTED;
6. To this outstanding balance (3.), the interest (4.),
penalties (5.), and the final and executory award of 1%
attorneys fees shall be ADDED;
7. The sum total of the outstanding balance (3.), interest
(4.) and 1% attorneys fees (6.) shall be DEDUCTED from
the bid price of P4,324,172.96. The penalties (5.) are not
included because they are not included in the secured
amount;
8. The difference in (7.) [P4,324,172.96 LESS sum total
of the outstanding balance (3.), interest (4.), and 1%
attorneys fees (6.)] shall be DELIVERED TO THE
PETITIONERS;
9. Respondent may then proceed to consolidate its title
to TCTs T-14250 and T-16208;
10. ON THE OTHER HAND, if after performing the
procedure in (2.), it turns out that petitioners made an
OVERPAYMENT, the interest (4.), penalties (5.), and the
award of 1% attorneys fees (6.) shall be DEDUCTED
from the overpayment. There is no outstanding
12. Likewise, if the overpayment exceeds the total

amount of interest (4.) and award of 1% attorneys fees
(6.), the trial court shall INVALIDATE THE EXTRAJUDICIAL
FORECLOSURE AND SALE;
13. HOWEVER, if the total amount of interest (4.) and
award of 1% attorneys fees (6.) exceed petitioners
overpayment, then the excess shall be DEDUCTED from
the bid price of P4,324,172.96;
14. The difference in (13.) [P4,324,172.96 LESS sum
total of the interest (4.) and 1% attorneys fees (6.)] shall
be DELIVERED TO THE PETITIONERS;
15. Respondent may then proceed to consolidate its title
to TCTs T-14250 and T-16208. The outstanding penalties,
if any, shall be collected by other means.
From the above, it will be seen that if, after proper
accounting, it turns out that the petitioners made
payments exceeding what they actually owe by way of
principal, interest, and attorneys fees, then the
mortgaged properties need not answer for any
outstanding secured amount, because there is not any;
quite the contrary, respondent must refund the excess to
petitioners.1wphi1 In such case, the extrajudicial
foreclosure and sale of the properties shall be declared
null and void for obvious lack of basis, the case being
one of solutio indebiti instead. If, on the other hand, it
turns out that petitioners overpayments in interests do

not exceed their total obligation, then the respondent
may consolidate its ownership over the properties, since
the period for redemption has expired. Its only obligation
will be to return the difference between its bid price
(P4,324,172.96) and petitioners total obligation
outstanding except penalties after applying the
latters overpayments.
WHEREFORE, premises considered, the Petition is GRANTED.
The May 8, 2007 Decision of the Court of Appeals in CA-G.R. CV
No. 79650 is ANNULLED and SET ASIDE. Judgment is hereby
rendered as follows:
1. The interest rates imposed and indicated in the 2nd
up to the 26th Promissory Notes are DECLARED NULL
AND VOID, and such notes shall instead be subject to
interest at the rate of twelve percent (12%) per annum
up to June 30, 2013, and starting July 1, 2013, six
percent (6%) per annum until full satisfaction;
2. The penalty charge imposed in Promissory Note No.
9707237 shall be EXCLUDED from the amounts secured
by the real estate mortgages;
3. The trial courts award of one per cent (1%) attorneys
fees is REINSTATED;
4. The case is ordered REMANDED to the Regional Trial
Court, Branch 6 of Kalibo, Aklan for the computation of
overpayments made by petitioners spouses Eduardo and
Lydia Silos to respondent Philippine National Bank,
taking into consideration the foregoing dispositions, and
applying the procedure hereinabove set forth;
5. Thereafter, the trial court is ORDERED to make a
determination as to the validity of the extrajudicial
foreclosure and sale, declaring the same null and void in
case of overpayment and ordering the release and

return of Transfer Certificates of Title Nos. T-14250 and
TCT T-16208 to petitioners, or ordering the delivery to
the petitioners of the difference between the bid price
and the total remaining obligation of petitioners, if any;
6. In the meantime, the respondent Philippine National
Bank is ENJOINED from consolidating title to Transfer
Certificates of Title Nos. T-14250 and T-16208 until all
the steps in the procedure above set forth have been
taken and applied;
7. The reimbursement of the excess in the bid price
of P377,505.99, which respondent Philippine National
Bank is ordered to reimburse petitioners, should be HELD
IN ABEYANCE until the true amount owing to or owed by
the parties as against each other is determined;
8. Considering that this case has been pending for such
a long time and that further proceedings, albeit
uncomplicated, are required, the trial court is ORDERED
to proceed with dispatch.
SO ORDERED.
PARAS, J.:
Petition for certiorari to review and set aside the Decision dated
June 27, 1983 of respondent Court of Tax Appeals in its C.T.A.
Case No. 3204, entitled "Burroughs Limited vs. Commissioner of
Internal Revenue" which ordered petitioner Commissioner of
Internal Revenue to grant in favor of private respondent
Burroughs Limited, tax credit in the sum of P172,058.90,
representing erroneously overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage
in trade or business in the Philippines through a branch office
located at De la Rosa corner Esteban Streets, Legaspi Village,
Makati, Metro Manila.

SUPREME COURT
Manila
Sometime in March 1979, said branch office applied with the

Central Bank for authority to remit to its parent company
abroad, branch profit amounting to P7,647,058.00. Thus, on
March 14, 1979, it paid the 15% branch profit remittance tax,
pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office
the amount of P6,499,999.30 computed as follows:
SECOND DIVISION
G.R. No. L-66653 June 19, 1986
Amount
applied
for
remittance................................ P7,647,058.00
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BURROUGHS LIMITED AND THE COURT OF TAX
APPEALS, respondents.
Deduct: 15% branch profit
Sycip, Salazar, Feliciano & Hernandez Law Office for private

respondent.
Net
amount
actually
remitted.................................. P6,499,999.30
remittance
tax ..............................................1,147,058.70
Claiming that the 15% profit remittance tax should have been
computed on the basis of the amount actually remitted
(P6,499,999.30) and not on the amount before profit remittance
tax (P7,647,058.00), private respondent filed on December 24,
1980, a written claim for the refund or tax credit of the amount
of P172,058.90 representing alleged overpaid branch profit
remittance tax, computed as follows:
On February 24, 1981, private respondent filed with respondent

court, a petition for review, docketed as C.T.A. Case No. 3204
for the recovery of the above-mentioned amount of
P172,058.81.
Profits
actually
remitted .........................................P6,499,999.30
ACCORDINGLY, respondent Commission of Internal Revenue is

hereby ordered to grant a tax credit in favor of petitioner
Burroughs Limited the amount of P 172,058.90. Without
pronouncement as to costs.
Remittance
rate .......................................................15%
tax
On June 27, 1983, respondent court rendered its Decision, the

dispositive portion of which reads
SO ORDERED.
Branch profit remittance taxdue thereon ......................................................P
974,999.89
Branch profit remittance
tax
paid
.............................................................Pl,147,058.
70
Unable to obtain a reconsideration from the aforesaid decision,

petitioner filed the instant petition before this Court with the
prayers as herein earlier stated upon the sole issue of whether
the tax base upon which the 15% branch profit remittance tax
shall be imposed under the provisions of section 24(b) of the
Tax Code, as amended, is the amount applied for remittance on
the profit actually remitted after deducting the 15% profit
remittance tax. Stated differently is private respondent
Burroughs Limited legally entitled to a refund of the
aforementioned amount of P172,058.90.
Less: Branch profit remittance

tax
as
above
computed................................................. 974,999
.89
Total
refundable...........................................
P172,058.81
amount
We rule in the affirmative. The pertinent provision of the

National Revenue Code is Sec. 24 (b) (2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any

profit remitted abroad by a branch to its head
office shall be subject to a tax of fifteen per cent
(15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980
by then Acting Commissioner of Internal Revenue Hon. Efren I.
Plana the aforequoted provision had been interpreted to mean
that "the tax base upon which the 15% branch profit remittance
tax ... shall be imposed...(is) the profit actually remitted abroad
and not on the total branch profits out of which the remittance
is to be made. " The said ruling is hereinbelow quoted as
follows:
In reply to your letter of November 3, 1978,
relative to your query as to the tax base upon
which the 15% branch profits remittance tax
provided for under Section 24 (b) (2) of the 1977
Tax Code shall be imposed, please be advised
that the 15% branch profit tax shall be imposed
on the branch profits actually remitted abroad
and not on the total branch profits out of which
the remittance is to be made.
Remittance
tax
rate.............................................................. 15%
Remittance
tax
due................................................... P974,999.89
is well-taken. As correctly held by respondent
Court in its assailed decisionRespondent concedes at least that in his ruling
dated January 21, 1980 he held that under
Section 24 (b) (2) of the Tax Code the 15% branch
profit remittance tax shall be imposed on the
profit actually remitted abroad and not on the
total branch profit out of which the remittance is
to be made. Based on such ruling petitioner
should have paid only the amount of P974,999.89
in remittance tax computed by taking the 15% of
the profits of P6,499,999.89 in remittance tax
actually remitted to its head office in the United
States, instead of Pl,147,058.70, on its net profits
of P7,647,058.00. Undoubtedly, petitioner has
overpaid its branch profit remittance tax in the
amount of P172,058.90.
Please be guided accordingly.

Applying, therefore, the aforequoted ruling, the claim of private
respondent that it made an overpayment in the amount of
P172,058.90 which is the difference between the remittance tax
actually paid of Pl,147,058.70 and the remittance tax that
should have been paid of P974,999,89, computed as follows
Profits actually remitted.........................................
P6,499,999.30
Petitioner contends that respondent is no longer entitled to a

refund because Memorandum Circular No. 8-82 dated March 17,
1982 had revoked and/or repealed the BIR ruling of January 21,
1980. The said memorandum circular states
Considering that the 15% branch profit
remittance tax is imposed and collected at
source, necessarily the tax base should be the
amount actually applied for by the branch with
the Central Bank of the Philippines as profit to be

remitted abroad.
enumerated exceptions are concerned, admittedly, Burroughs

Limited does not fall under any of them.
Petitioner's aforesaid contention is without merit. What is

applicable in the case at bar is still the Revenue Ruling of
January 21, 1980 because private respondent Burroughs
Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular No. 8-82 dated March
17, 1982 cannot be given retroactive effect in the light of
Section 327 of the National Internal Revenue Code which
provides-
WHEREFORE, the assailed decision of respondent Court of Tax

Appeals is hereby AFFIRMED. No pronouncement as to costs.
Sec. 327. Non-retroactivity of rulings. Any

revocation, modification, or reversal of any of the
rules and regulations promulgated in accordance
with the preceding section or any of the rulings or
circulars promulgated by the Commissioner shag
not be given retroactive application if the
revocation, modification, or reversal will be
prejudicial to the taxpayer except in the following
cases (a) where the taxpayer deliberately
misstates or omits material facts from his return
or in any document required of him by the Bureau
of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on
which the ruling is based, or (c) where the
taxpayer
acted
in
bad
faith.
(ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs
Limited by a retroactive application of Memorandum Circular
No. 8-82 is beyond question for it would be deprived of the
substantial amount of P172,058.90. And, insofar as the
SO ORDERED.

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.
Alberto C. Lerma collaborating counsel for private respondents
In 1961, herein private respondents spouses Nemencio R.

Medina and Josefina G. Medina (Medinas for short) applied with
the herein petitioner Government Service Insurance System
(GSIS for short) for a loan of P600,000.00. The GSIS Board of
Trustees, in its Resolution of December 20, 1961, approved
under Resolution No. 5041 only the amount of P350,000.00,
subject to the following conditions: that the rate of interest shall
be 9% per annum compounded monthly; repayable in ten (10)
years at a monthly amortization of P4,433.65 including principal
and interest, and that any installment or amortization that
remains due and unpaid shall bear interest at the rate of
9%/12% per month. The Office of the Economic Coordinator, in
a 2nd Indorsement dated March 26, 1962, further reduced the
approved amount to P295,000.00. On April 4, 1962, the
Medinas accepting the reduced amount, executed a promissory
note and a real estate mortgage in favor of GSIS. On May 29,
1962, the GSIS, and on June 6, 1962, the Office of the Economic
Coordinator, upon request of the Medinas, both approved the
restoration of the amount of P350,000.00 (P295,000.00 +
P55,000.00) originally approved by the GSIS. This P350,000.00
loan was denominated by the GSIS as Account No. 31055.
PARAS, J.:
On July 6, 1962, the Medinas executed in favor of the GSIS an

Amendment of Real Estate Mortgage, the pertinent portion of
which reads:

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52478 October 30, 1986
THE GOVERNMENT SERVICE INSURANCE
SYSTEM, petitioner-appellant,
vs.
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA
and JOSEFINA G. MEDINA, respondents-appellants.
Coronel Law Office for private respondents.
This is a petition for review on certiorari of the decision of the

Court of Appeals in CA-G.R. No. 62541-R (Nemencio R. Medina
and Josefina G. Medina, Plaintiffs-Appellants vs. The
Government Service Insurance System, Defendant-Appellant)
affirming the January 21, 1977 Decision of the trial court, and at
the same time ordering the GSIS to reimburse the amount of
P9,580.00 as over-payment and to pay the spouses Nemencio
R. Medina and Josefina G. Medina P3,000.00 and P1,000.00 as
attorney's fees and litigation expenses.
WHEREAS, on the 4th day of April, 1962, the

Mortgagor executed signed and delivered a real
estate mortgage to and in favor of the Mortgagee
on real estate properties located in the City of
Manila, ... to secure payment to the mortgages of
a loan of Two Hundred Ninety Five Thousand
Pesos (P295,000.00) Philippine Currency, granted
by the mortgagee to the Mortgagors, ...;
WHEREAS, the parties herein have agreed as they

hereby agree to increase the aforementioned
loan from Two Hundred Ninety Five Thousand
Pesos (P295,000.00) to Three Hundred Fifty
Thousand
Pesos
(P350,000.00),
Philippine
Currency;
an additional loan of P230,000.00 in favor of the Medinas on the

security of the same mortgaged properties and the additional
properties covered by TCT Nos. 49234, 49235 and 49236, to
bear interest at 9% per annum compounded monthly and
repayable in ten years. This additional loan of P230,000.00 was
denominated by the GSIS as Account No. 31442.
NOW, THEREFORE, for and in consideration of the

foregoing premises, the aforementioned parties
have amended and by these presents do hereby
amend the said mortgage dated April 4, 1962,
mentioned in the second paragraph hereof by
increasing the loan from Two Hundred Ninety Five
Thousand Pesos (P295,000.00) to Three Hundred
Fifty Thousand Pesos (P350,000.00) subject to
this additional condition.
On March 18, 1963, the Economic Coordinator thru the Auditor

General interposed no objection thereto, subject to the
conditions of Resolution No. 121 as amended by Resolution No.
348 of the GSIS.
(1) That the mortgagor shall pay to the system

P4,433.65 monthly including principal and
interest.
It is hereby expressly understood that with the
foregoing amendment, all other terms and
conditions of the said real estate mortgage dated
April 4, 1962 insofar as they are not inconsistent
herewith, are hereby confirmed, ratified and
continued in full force and effect and that the
parties thereto agree that this amendment be an
integral part of said real estate mortgage. (Rollo,
p. 153-154).
Upon application by the Medinas, the GSIS Board of Trustees
adopted Resolution No. 121 on January 18, 1963, as amended
by Resolution No. 348 dated February 25, 1963, approving
Beginning 1965, the Medinas having defaulted in the payment

of the monthly amortization on their loan, the GSIS imposed
9%/12% interest on an installments due and unpaid. In 1967,
the Medinas began defaulting in the payment of fire insurance
premiums.
On May 3, 1974, the GSIS notified the Medinas that they had
arrearages in the aggregate amount of P575,652.42 as of April
18, 1974 (Exhibit 9, p. 149, Joint Record on Appeal, Rollo, p. 79),
and demanded payment within seven (7) days from notice
thereof, otherwise, it would foreclose the mortgage.
On April 21, 1975, the GSIS filed an Application for Foreclosure
of Mortgage with the Sheriff of the City of Manila (Exhibit "22,"
pp. 63 and 149; Rollo, p. 79). On June 30, 1975, the Medinas
filed with the Court of First Instance of Manila a complaint,
praying, among other things, that a restraining order or writ of
preliminary injunction be issued to prevent the GSIS and the
Sheriff of the City of Manila from proceeding with the extrajudicial foreclosure of their mortgaged properties (CFI Decision,
p. 121; Rollo, p. 79). However, in view of Section 2 of
Presidential Decree No. 385, no restraining order or writ of
preliminary injunction was issued by the trial court (CFI

Decision, p. 212; Rollo, p. 79). On April 25, 1975, the Medinas
made a last partial payment in the amount of P209,662.80.
Under a Notice of Sale on Extra-Judicial Foreclosure dated June
18, 1975, the real properties of the Medinas covered by Transfer
Certificates of Title Nos. 32231, 43527, 51394, 58626, 60534,
63304, 67550, 67551 and 67552 of the Registry of Property of
the City of Manila were sold at public auction to the GSIS as the
highest bidder for the total amount of P440,080.00 on January
12, 1976, and the corresponding Certificate of Sale was
executed by the Sheriff of Manila on January 27, 1976 (CFI
Decision, pp. 212-213; Rollo, p. 79).
On January 30, 1976, the Medinas filed an Amended Complaint
with the trial court, praying for (a) the declaration of nullity of
their two real estate mortgage contracts with the GSIS as well
as of the extra-judicial foreclosure proceedings; and (b) the
refund of excess payments, plus damages and attorney's fees
(CFI Decision, p. 213; Rollo, p. 79).
On March 19, 1976, the GSIS filed its Amended Answer (Joint
Record on Appeal, pp. 99-105; Rollo, p. 79). After trial, the trial
court rendered a Decision dated January 21, 1977 (Joint Record
on Appeal, pp. 210-232), the pertinent dispositive portion of
which reads:
WHEREFORE, judgment is hereby rendered
declaring the extra-judicial foreclosure conducted
by the Sheriff of Manila of real estate mortgage
contracts executed by plaintiffs on April 4, 1962,
as amended on July 6, 1962, and February 17,
1963, null and void and the Sheriff's Certificate of
Sale dated January 27, 1976, in favor of the GSIS
of no legal force and effect; and directing

plaintiffs to pay the GSIS the sum of P1,611.12 in
full payment of their obligation to the latter with
interest of 9% per annum from December 11,
1975, until fully paid.
Dissatisfied with the said judgment, both parties appealed with
the Court of Appeals.
The Court of Appeals, in a Decision promulgated on January 18,
1980 (Record, pp. 72-77), ruled in favor of the Medinas
WHEREFORE, the defendant GSIS is ordered to
reimburse
the amount of P9,580.00 as
overpayment and to pay plaintiffs P3,000.00 and
Pl,000.00 as attorney's fees and litigation
expenses, respectively. With these modifications,
the judgment appealed from is AFFIRMED in all
other respects, with costs against defendant
GSIS."
Hence this petition.
The Second Division of this Court, in a Resolution dated April 25,
1980 (Rollo, p.. 88), resolved to deny the petition for lack of
merit.
Petitioner filed on June 26, 1980 a Motion for Reconsideration
dated June 17, 1980 (Rollo, pp. 95-103), of the above-stated
Resolution and respondents in a Resolution dated July 9, 1980
(Rollo, p. 105), were required to comment thereon which
comment they filed on August 6, 1980. (Rollo, pp. 106-116).
The petition was given due course in the Resolution dated July
6, 1981 (Rollo, p. 128). Petitioner filed its brief on November 26,
1981 (Rollo, pp. 147-177); while private respondents filed their
brief on January 27, 1982 (Rollo, pp. 181-224), and the case was
considered submitted for decision in the Resolution of July 19,
1982 (Rollo, p. 229).
The issues in this case are:
1. WHETHER OR NOT THE COURT OF APPEALS
ERRED IN HOLDING THAT THE AMENDMENT OF
REAL ESTATE MORTGAGE DATED JULY 6, 1962
SUPERSEDED THE MORTGAGE CONTRACT DATED
APRIL 4, 1962, PARTICULARLY WITH RESPECT TO
COMPOUNDING OF INTEREST;
ERRED IN SUSTAINING THE RESPONDENTAPPELLEE
SPOUSES
MEDINA'S
CLAIM
OR
OVERPAYMENT,
BY
CREDITING
THE
FIRE
INSURANCE PROCEEDS IN THE SUM OF
P11,152.02 TO THE TOTAL PAYMENT MADE BY
SAID SPOUSES AS OF DECEMBER 11, 1975;
ERRED IN HOLDING THAT THE INTEREST RATES
ON THE LOAN ACCOUNTS OF RESPONDENTAPPELLEE SPOUSES ARE USURIOUS;
ERRED IN AFFIRMING THE ANNULMENT OF THE
SUBJECT EXTRAJUDICIAL FORECLOSURE AND
SHERIFF'S CERTIFICATE OF SALE; AND

ERRED IN HOLDING THE GSIS LIABLE FOR
ATTORNEY'S FEES, EXPENSES OF LITIGATION AND
COSTS.
The petition is impressed with merit.
There is no dispute as to the facts of the case. By agreement of
the parties the issues in this case are limited to the loan of
P350,000.00 denominated as Account No. 31055 (Rollo, p. 79;
Joint Record on Appeal, p. 129) subject of the Amendment of
Real Mortgage dated July 6, 1962, the interpretation of which is
the major issue in this case.
GSIS claims that the amendment of the real estate mortgage
did not supersede the original mortgage contract dated April 4,
1962 which was being amended only with respect to the
amount secured thereby, and the amount of monthly
amortizations. All other provisions of aforesaid mortgage
contract including that on compounding of interest were
deemed rewritten and thus binding on and enforceable against
the respondent spouses. (Rollo, pp. 162-166).
Accordingly, payments made by the Medinas in the total
amount of P991,845.53 was applied as follows: the amount of
P600,495.51 to Account No. 31055, P466,965.31 of which to
interest and P133,530.20 to principal and P390,845.66 to
Account No. 31442, P230,774.29 to interest and P159,971.37 to
principal. (Joint Record on Appeal, p. 216; Rollo, p. 79).
On the other hand the Medinas maintain that there is no
express stipulation on compounded interest in the amendment
of mortgage contract of July 6, 1962 so that the compounded
interest stipulation in the original mortgage contract of April 4,
1962 which has been superseded cannot be enforced in the

later mortgage. (Rollo, p. 185).
Hence the Medinas claim an overpayment in Account No.
31055. The application of their total payment in the amount of
P991,845.53 as computed by the trial court and by the Court of
Appeals is as follows:
... It appearing and so the parties admit in their
own exhibits that as of December 11, 1975,
plaintiffs had paid a total of P991,241.17
excluding fire insurance, P532,038.00 of said
amount should have been applied to the full
payment of Acct. No. 31055 and the balance of
P459,203.17 applied to the payment of Acct. No.
31442.
According to the computation of the GSIS (Exhibit
C, also Exhibit 38) the total amounts, collected on
Acct. No. 31442 as of December 11, 1975 total
P390,745.66 thus leaving an unpaid balance of
P70,028.63. The total amount plaintiffs should
pay on said account should therefore be
P460,774.29.
Deduct
this
amount
from
P459,163.17 which has been shown to be the
difference between the total payments made by
plaintiffs to the G.S.I.S. as of December 11, 1975
and the amount said plaintiffs should pay under
their Acct. No. 31055, there remains an
outstanding balance of P1,611.12. This amount
represents the balance of the obligation of the
plaintiffs to the G.S.I.S. on Acct. No. 31442 as of
December 11, 1975." (Decision, Civil Case No.
98390; Joint Record on Appeal, pp. 227-228;
Rollo, p. 79).
To recapitulate, the difference in the computation lies in the

inclusion of the compounded interest as demanded by the GSIS
on the one hand and the exclusion thereof, as insisted by the
Medinas on the other.
It is a basic and fundamental rule in the interpretation of
contract that if the terms thereof are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning
of the stipulations shall control but when the words appear
contrary to the evident intention of the parties, the latter shall
prevail over, the former. In order to judge the intention of the
parties, their contemporaneous and subsequent acts shall be
principally considered. (Sy v. Court of Appeals, 131 SCRA 116;
July 31, 1984).
There appears no ambiguity whatsoever in the terms and
conditions of the amendment of the mortgage contract herein
quoted earlier. On the contrary, an opposite conclusion cannot
be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162166), a
careful perusal of the title, preamble and body of the
Amendment of Real Estate Mortgage dated July 6, 1962, taking
into account the prior, contemporaneous, and subsequent acts
of the parties, ineluctably shows that said Amendment was
never intended to completely supersede the mortgage contract
dated April 4, 1962.
First, the title "Amendment of Real Estate Mortgage" recognizes
the existence and effectivity of the previous mortgage contract.
Second, nowhere in the aforesaid Amendment did the parties
manifest their intention to supersede the original contract. On
the contrary in the WHEREAS clauses, the existence of the
previous mortgage contract was fully recognized and the fact
that the same was just being amended as to amount and

amortization is fully established as to obviate any doubt. Third,
the Amendment of Real Estate Mortgage dated July 6, 1962
does not embody the act of conveyancing the subject
properties by way of mortgage. In fact the intention of the
parties to be bound by the unaffected provisions of the
mortgage contract of April 4, 1962 expressed in unmistakable
language is clearly evident in the last provision of the
Amendment of Real Estate Mortgage dated July 6, 1962 which
reads:
It is hereby expressly understood that with the
foregoing amendment, all other terms and
conditions of the said real estate mortgage dated
April 4, 1962, insofar as they are not inconsistent
herewith, are hereby confirmed, ratified and
continued to be in full force and effect, and that
the parties hereto agree that the amendment be
an
integral
part
of
said
real
estate
mortgage. (Emphasis supplied).
A review of prior, contemporaneous, and subsequent acts
supports the conclusion that both contracts are fully subsisting
insofar as the latter is not inconsistent with the former. The fact
is the GSIS, as a matter of policy, imposes uniform terms and
conditions for all its real estate loans, particularly with respect
to compounding of interest. As shown in the case at bar, the
original mortgage contract embodies the same terms and
conditions as in the additional loan denominated as Account No.
31442 while the amendment carries the provision that it shall
be subject to the same terms and conditions as the real estate
mortgage of April 4, 1962 except as to amount and
amortization.
Furthermore, it would be contrary to human experience and to

ordinary practice for the mortgagee to impose less onerous
conditions on an increased loan by the deletion of compound
interest exacted on a lesser loan.
II
There is an obvious error in the ruling of the Court of Appeals in
its Decision dated January 18, 1980, which reads:
... We agree that plaintiff should be credited with
P11,152.02 of the fire insurance proceeds as the
same is admitted in paragraph (4) of its Answer
and should be added to their payments. (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
That they (GSIS) specifically deny the allegations
in Paragraph 11, the truth being that plaintiffs are
not entitled to a credit of P19,381.07 as fire
insurance proceeds since they were only entitled
to, and were credited with, the amount of
P11,152.02 as proceeds of their fire insurance
policy. (par. 4, Amended Answer).
As can be gleaned from the foregoing, petitioner-appellant GSIS
had already credited the amount of P11,152.02. Thus, when the
Court of Appeals made the aforequoted ruling, it was actually
doubly crediting the amount of P11,152.02 which had
been previously credited by petitioner-appellant GSIS (Rollo, pp.
170-171).
III.
As to whether or not the interest rates on the loan accounts of

the Medinas are usurious, it has already been settled that the
Usury Law applies only to interest by way of compensation for
the use or forbearance of money (Lopez v. Hernaez, 32 Phil.
631; Bachrach Motor Co. v. Espiritu, 52 Phil. 346; Equitable
Banking Corporation v. Liwanag, 32 SCRA 293, March 30, 1970).
Interest by way of damages is governed by Article 2209 of the
Civil Code of the Philippines which provides:
Art. 2209. If the obligation consists in the
payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the
payment of the interest agreed upon,...
In the Bachrach case (supra) the Supreme Court ruled that the
Civil Code permits the agreement upon a penalty apart from the
interest. Should there be such an agreement, the penalty does
not include the interest, and as such the two are different and
distinct things which may be demanded separately. Reiterating
the same principle in the later case of Equitable Banking Corp.
(supra), where this Court held that the stipulation about
payment of such additional rate partakes of the nature of a
penalty clause, which is sanctioned by law.
IV.
Based on the finding that the GSIS had the legal right to impose
an interest 9% per annum, compounded monthly, on the loans
of the Medinas and an interest of 9%/12% per annum on all due
and unpaid amortizations or installments, there is no question
that the Medinas failed to settle their accounts with the GSIS
which as computed by the latter reached an outstanding
balance of P630,130.55 as of April 12, 1975 and that the GSIS

had a perfect right to foreclose the mortgage.
In the same manner, there is obvious error in invalidating the
extra-judicial foreclosure on the basis of a typographical error in
the Sheriff's Certificate of Sale which stated that the mortgage
was foreclosed on May 17, 1963 instead of February 17, 1963.
There is merit in GSIS' contention that the Sheriff's Certificate of
Sale is merely provisional in character and is not intended to
operate as an absolute transfer of the subject property, but
merely to Identify the property, to show the price paid and the
date when the right of redemption expires (Section 27, Rule 39,
Rules of Court, Francisco, The Revised Rules of Court, 1972 Vol.,
IV-B, Part I, p. 681). Hence the date of the foreclosed mortgage
is not even a material content of the said Certificate. (Rollo, p.
174).
V.
PREMISES CONSIDERED, the decision of the Court of Appeals, in
CA-G.R. No. 62541-R Medina, et al. v. Government Service
Insurance System et al., is hereby REVERSED and SET ASIDE,
and a new one is hereby RENDERED, affirming the validity of
the extra-judicial foreclosure of the real estate mortgages of the
respondent-appellee spouses Medina dated April 4, 1962, as
amended on July 6, 1962, and February 17, 1963.
SO ORDERED.
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendantappellant.
Mabanag, Eliger and Associates and Saura, Magno and
Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendantappellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila,
judgment was rendered on June 28, 1965 sentencing defendant
Development Bank of the Philippines (DBP) to pay actual and
consequential damages to plaintiff Saura Import and Export Co.,
Inc. in the amount of P383,343.68, plus interest at the legal rate
from the date the complaint was filed and attorney's fees in the
amount of P5,000.00. The present appeal is from that judgment.

SUPREME COURT
Manila
EN BANC
G.R. No. L-24968 April 27, 1972
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.)

applied to the Rehabilitation Finance Corporation (RFC), before
its conversion into DBP, for an industrial loan of P500,000.00, to
be used as follows: P250,000.00 for the construction of a
factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the
jute mill machinery and equipment; and P9,100.00 as additional
working capital.
Parenthetically, it may be mentioned that the jute mill
machinery had already been purchased by Saura on the
strength of a letter of credit extended by the Prudential Bank

and Trust Co., and arrived in Davao City in July 1953; and that to
secure its release without first paying the draft, Saura, Inc.
executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving
the loan application for P500,000.00, to be secured by a first
mortgage on the factory building to be constructed, the land
site thereof, and the machinery and equipment to be installed.
Among the other terms spelled out in the resolution were the
following:
1. That the proceeds of the loan shall be utilized
exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto
Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall
sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the
Rehabilitation Finance Corporation, subject to availability of
funds, and as the construction of the factory buildings
progresses, to be certified to by an appraiser of this
Corporation;"
Saura, Inc. was officially notified of the resolution on January 9,

1954. The day before, however, evidently having otherwise
been informed of its approval, Saura, Inc. wrote a letter to RFC,
requesting a modification of the terms laid down by it, namely:
that in lieu of having China Engineers, Ltd. (which was willing to
assume liability only to the extent of its stock subscription with
Saura, Inc.) sign as co-maker on the corresponding promissory
notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca
would be substituted for Inocencia Arellano as one of the other
co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on
February 4, 1954, designating of the members of its Board of
Governors, for certain reasons stated in the resolution, "to
reexamine all the aspects of this approved loan ... with special
reference as to the advisability of financing this particular
project based on present conditions obtaining in the operations
of jute mills, and to submit his findings thereon at the next
meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers,
Ltd. had again agreed to act as co-signer for the loan, and
asked that the necessary documents be prepared in accordance
with the terms and conditions specified in Resolution No. 145. In
connection with the reexamination of the project to be financed
with the loan applied for, as stated in Resolution No. 736, the
parties named their respective committees of engineers and
technical men to meet with each other and undertake the
necessary studies, although in appointing its own committee
Saura, Inc. made the observation that the same "should not be
taken as an acquiescence on (its) part to novate, or accept new
conditions to, the agreement already) entered into," referring to
its acceptance of the terms and conditions mentioned in
Resolution No. 145.
On April 13, 1954 the loan documents were executed: the

promissory note, with F.R. Halling, representing China
Engineers, Ltd., as one of the co-signers; and the corresponding
deed of mortgage, which was duly registered on the following
April 17.
It appears, however, that despite the formal execution of the
loan agreement the reexamination contemplated in Resolution
No. 736 proceeded. In a meeting of the RFC Board of Governors
on June 10, 1954, at which Ramon Saura, President of Saura,
Inc., was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00. Resolution No. 3989 was approved
as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura
Import & Export Co., Inc. under Resolution No. 145, C.S., from
P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s.,
authorizing the re-examination of all the various aspects of the
loan granted the Saura Import & Export Co. under Resolution
No. 145, c.s., for the purpose of financing the manufacture of
jute sacks in Davao, with special reference as to the advisability
of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard
Ramon E. Saura and after extensive discussion on the subject
the Board, upon recommendation of the Chairman, RESOLVED
that the loan granted the Saura Import & Export Co. be
REDUCED from P500,000 to P300,000 and that releases up to
P100,000 may be authorized as may be necessary from time to
time to place the factory in actual operation: PROVIDED that all
terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had
signed the promissory note for China Engineers Ltd. jointly and
severally with the other RFC that his company no longer to of
the loan and therefore considered the same as cancelled as far

as it was concerned. A follow-up letter dated July 2 requested
RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the
loan of P500,000.00 be granted. The request was denied by
RFC, which added in its letter-reply that it was "constrained to
consider as cancelled the loan of P300,000.00 ... in view of a
notification ... from the China Engineers Ltd., expressing their
desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation
of the loan and informed RFC that China Engineers, Ltd. "will at
any time reinstate their signature as co-signer of the note if RFC
releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083,
restoring the loan to the original amount of P500,000.00, "it
appearing that China Engineers, Ltd. is now willing to sign the
promissory notes jointly with the borrower-corporation," but
with the following proviso:
That in view of observations made of the
shortage and high cost of imported raw materials,
the Department of Agriculture and Natural
Resources shall certify to the following:
1. That the raw materials needed by the
borrower-corporation to carry out its operation
are available in the immediate vicinity; and
2. That there is prospect of increased production
thereof
to
provide
adequately
for
the
requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a

letter of RFC dated December 22, 1954, wherein it was
explained that the certification by the Department of
Agriculture and Natural Resources was required "as the
intention of the original approval (of the loan) is to develop the
manufacture of sacks on the basis of locally available raw
materials." This point is important, and sheds light on the
subsequent actuations of the parties. Saura, Inc. does not deny
that the factory he was building in Davao was for the
manufacture of bags from local raw materials. The cover page
of its brochure (Exh. M) describes the project as a "Joint venture
by and between the Mindanao Industry Corporation and the
Saura Import and Export Co., Inc. to finance, manage and
operate aKenaf mill plant, to manufacture copra and corn bags,
runners, floor mattings, carpets, draperies; out of 100% local
raw materials, principal kenaf." The explanatory note on page 1
of the same brochure states that, the venture "is the first
serious attempt in this country to use 100% locally grown raw
materials notably kenaf which is presently grown commercially
in theIsland of Mindanao where the proposed jutemill is
located ..."
This fact, according to defendant DBP, is what moved RFC to

approve the loan application in the first place, and to require, in
its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local
raw materials to provide adequately for the requirements of the
factory. Saura, Inc. itself confirmed the defendant's stand
impliedly in its letter of January 21, 1955: (1) stating that
according to a special study made by the Bureau of Forestry
"kenaf will not be available in sufficient quantity this year or
probably even next year;" (2) requesting "assurances (from
RFC) that my company and associates will be able to bring in
sufficient jute materials as may be necessary for the full
operation of the jute mill;" and (3) asking that releases of the
loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on
the
opening of the letter of credit for raw
jute
for $25,000.00.
2) P25,000.00 to be released upon

arrival
of raw jute.
3) P17,586.09 to be released as
soon
as
the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter
of January 21, 1955, regarding the
release
of
your
loan
under
consideration of P500,000. As
stated in our letter of December
22, 1954, the releases of the loan,
if revived, are proposed to be made
from time to time, subject to
availability of funds towards the
end that the sack factory shall be
placed in actual operating status.
We shall be able to act on your
request for revised purpose and
manner of releases upon reappraisal of the securities offered
for the loan.
With respect to our requirement
that the Department of Agriculture
and Natural Resources certify that
the raw materials needed are
available in the immediate vicinity
and that there is prospect of

increased production thereof to
provide
adequately
the
requirements of the factory, we
wish to reiterate that the basis of
the original approval is to develop
the manufacture of sacks on the
basis of the locally available raw
materials. Your statement that you
will have to rely on the importation
of jute and your request that we
give you assurance that your
company will be able to bring in
sufficient jute materials as may be
necessary for the operation of your
factory, would not be in line with
our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill.
Saura, Inc. did not pursue the matter further. Instead, it
requested RFC to cancel the mortgage, and so, on June 17,
1955 RFC executed the corresponding deed of cancellation and
delivered it to Ramon F. Saura himself as president of Saura,
Inc.
It appears that the cancellation was requested to make way for
the registration of a mortgage contract, executed on August 6,
1954, over the same property in favor of the Prudential Bank
and Trust Co., under which contract Saura, Inc. had up to
December 31 of the same year within which to pay its
obligation on the trust receipt heretofore mentioned. It appears
further that for failure to pay the said obligation the Prudential
Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor

of RFC was cancelled at the request of Saura, Inc., the latter
commenced the present suit for damages, alleging failure of
RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or
paying contractual commitments it had entered into, in
connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that
there was a perfected contract between the parties and that the
defendant was guilty of breach thereof. The defendant pleaded
below, and reiterates in this appeal: (1) that the plaintiff's cause
of action had prescribed, or that its claim had been waived or
abandoned; (2) that there was no perfected contract; and (3)
that assuming there was, the plaintiff itself did not comply with
the terms thereof.
We hold that there was indeed a perfected consensual contract,
as recognized in Article 1934 of the Civil Code, which provides:
ART. 1954. 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
perferted until the delivery of the object of the
contract.
There was undoubtedly offer and acceptance in this case: the

application of Saura, Inc. for a loan of P500,000.00 was
approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls
short of resolving the basic claim that the defendant failed to
fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
It should be noted that RFC entertained the loan application of
Saura, Inc. on the assumption that the factory to be constructed
would utilize locally grown raw materials, principally kenaf.
There is no serious dispute about this. It was in line with such
assumption that when RFC, by Resolution No. 9083 approved on
December 17, 1954, restored the loan to the original amount of
P500,000.00. it imposed two conditions, to wit: "(1) that the raw
materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and (2) that
there is prospect of increased production thereof to provide
adequately for the requirements of the factory." The imposition
of those conditions was by no means a deviation from the terms
of the agreement, but rather a step in its implementation. There
was nothing in said conditions that contradicted the terms laid
down in RFC Resolution No. 145, passed on January 7, 1954,
namely "that the proceeds of the loan shall be
utilizedexclusively for the following purposes: for construction of
factory building P250,000.00; for payment of the balance of
purchase price of machinery and equipment P240,900.00; for
working capital P9,100.00." Evidently Saura, Inc. realized that
it could not meet the conditions required by RFC, and so wrote
its letter of January 21, 1955, stating that local jute "will not be
able in sufficient quantity this year or probably next year," and
asking that out of the loan agreed upon the sum of P67,586.09
be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in
the mortgage contract, implying as it did a diversion of part of
the proceeds of the loan to purposes other than those agreed

upon.
WHEREFORE, the judgment appealed from is reversed and the

complaint dismissed, with costs against the plaintiff-appellee.
When RFC turned down the request in its letter of January 25,
1955 the negotiations which had been going on for the
implementation of the agreement reached an impasse. Saura,
Inc. obviously was in no position to comply with RFC's
conditions. So instead of doing so and insisting that the loan be
released as agreed upon, Saura, Inc. asked that the mortgage
be cancelled, which was done on June 15, 1955. The action thus
taken by both parties was in the nature cf mutual desistance
what Manresa terms "mutuo disenso" 1 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. 2
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee,

Barredo and Antonio, JJ., concur.
The subsequent conduct of Saura, Inc. confirms this desistance.

It did not protest against any alleged breach of contract by RFC,
or even point out that the latter's stand was legally unjustified.
Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against
RFC for the latter's non-compliance. In 1962 it even applied with
DBP for another loan to finance a rice and corn project, which
application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request,
that Saura, Inc. brought this action for damages.All these
circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance and
that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to
consider and resolve the other issues raised in the respective
briefs of the parties.
Makasiar, J., took no part.
THIRD DIVISION
[G.R. No. 138677. February 12, 2002]
TOLOMEO
LIGUTAN
and
LEONIDAS
DE
LA
LLANA, petitioners, vs. HON. COURT OF APPEALS
&
SECURITY
BANK
&
TRUST
COMPANY,respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under
Rule 45 of the Rules of Court, assailing the decision and
resolutions of the Court of Appeals in CA-G.R. CV No. 34594,
entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtain
ed on 11 May 1981 a loan in the amount of P120,000.00 from
respondent Security Bank and Trust Company. Petitioners
executed a promissory note binding themselves, jointly and
severally, to pay the sum borrowed with an interest of 15.189%

per annum upon maturity and to pay a penalty of 5% every
month on the outstanding principal and interest in case of
default. In addition, petitioners agreed to pay 10% of the total
amount due by way of attorneys fees if the matter were
indorsed to a lawyer for collection or if a suit were instituted to
enforce payment. The obligation matured on 8 September
1981; the bank, however, granted an extension but only up
until 29 December 1981.
Despite several demands from the bank, petitioners failed
to settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a final
demand letter to petitioners informing them that they had five
days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November
1982, with the Regional Trial Court of Makati, Branch 143, a
complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint,
the bank presented its evidence and, on 27 March 1985, rested
its case. Petitioners, instead of introducing their own evidence,
had the hearing of the case reset on two consecutive
occasions. In view of the absence of petitioners and their
counsel on 28 August 1985, the third hearing date, the bank
moved, and the trial court resolved, to consider the case
submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a
motion for reconsideration of the order of the trial court
declaring them as having waived their right to present evidence
and prayed that they be allowed to prove their case. The
court a quo denied the motion in an order, dated 5 September
1988, and on 20 October 1989, it rendered its decision,
[1]
the dispositiveportion of which read:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiff and against the defendants, ordering the latter to pay,
jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum, 2% service charge and
5% per month penalty charge, commencing on 20
May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the
total amount of indebtedness for and as attorneys
fees; and
"3. To pay the costs of the suit.[2]
Petitioners interposed an appeal with the Court of Appeals,
questioning the rejection by the trial court of their motion to
present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's
fees. In its decision[3] of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of
the 2% service charge which was deleted pursuant to Central
Bank Circular No. 783. Not fully satisfied with the decision of the
appellate court, both parties filed their respective motions for
reconsideration.[4] Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The bank, on the
other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from
the time of default as so stipulated in the contract of the
parties.
On 28 October 1998, the Court of Appeals resolved the two
motions thusly:
We find merit in plaintiff-appellees claim that the principal sum

of P114,416.00 with interest thereon must commence not on
the date of filing of the complaint as we have previously held in
our decision but on the date when the obligation became due.
Default generally begins from the moment the creditor
demands the performance of the obligation. However, demand
is not necessary to render the obligor in default when the
obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory
note where they undertook to pay the obligation on its maturity
date 'without necessity of demand.' They also agreed to pay the
interest in case of non-payment from the date of default.
xxxxxxxxx
While we maintain that defendants-appellants must be bound
by the contract which they acknowledged and signed, we take
cognizance of their plea for the application of the provisions of
Article 1229 x x x.
Considering that defendants-appellants partially complied with
their obligation under the promissory note by the reduction of
the original amount of P120,000.00 to P114,416.00 and in order
that they will finally settle their obligation, it is our view and we
so hold that in the interest of justice and public policy, a penalty
of 3% per month or 36% per annum would suffice.
xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby

MODIFIED. The
defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are hereby
ordered to pay the plaintiff-appellee Security Bank and Trust
Company the following:
1. The sum of P114,416.00 with interest thereon at
the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20,
1982 until fully paid;
2. The sum equivalent to 10% of the total amount
of the indebtedness as and for attorneys fees.[5]
On 16 November 1998, petitioners filed an omnibus motion
for reconsideration and to admit newly discovered evidence,
[6]
alleging that while the case was pending before the trial
court,
petitioner Tolomeo Ligutan and
his
wife Bienvenida Ligutan executed a real estate mortgage on 18
January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llanawith
the
bank. Petitioners
contended that the execution of the real estate mortgage had
the effect of novating the contract between them and the
bank. Petitioners
further
averred
that
the
mortgage
was extrajudicially foreclosed on 26 August 1986, that they
were not informed about it, and the bank did not credit them
with the proceeds of the sale. The appellate court denied the
omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion
for reconsideration cannot be entertained under Section 2, Rule
52, of the 1997 Rules of Civil Procedure. Furthermore, the
appellate court said, the newly-discovered evidence being
invoked by petitioners had actually been known to them when
the case was brought on appeal and when the first motion for
reconsideration was filed.[7]
Aggrieved by the decision and resolutions of the Court of

Appeals, petitioners elevated their case to this Court on 9 July
1999 via a petition for review on certiorari under Rule 45 of the
Rules of Court, submitting thusly I. The respondent Court of Appeals seriously erred in
not holding that the 15.189% interest and
the penalty of three (3%) percent per month
or thirty-six (36%) percent per annum
imposed by private respondent bank on
petitioners loan obligation are still manifestly
exorbitant, iniquitous and unconscionable.
II. The respondent Court of Appeals gravely erred in not
reducing to a reasonable level the ten (10%)
percent award of attorneys fees which is
highly and grossly excessive, unreasonable
and unconscionable.
III. The respondent Court of Appeals gravely erred in
not admitting petitioners newly discovered
evidence which could not have been timely
produced during the trial of this case.
IV. The respondent Court of Appeals seriously erred in
not holding that there was a novation of the
cause of action of private respondents
complaint in the instant case due to the
subsequent execution of the real estate
mortgage during the pendency of this case
and the subsequent foreclosure of the
mortgage.[8]
Respondent bank, which did not take an appeal, would,

however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and compensate
for the cost of money brought about by the radical devaluation
and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time
frame of its occurrence. The Bank would stress that only the
amount of P5,584.00 had been remitted out of the entire loan of
P120,000.00.[9]
A penalty clause, expressly recognized by law, [10] is an
accessory undertaking to assume greater liability on the part of
an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation [11] and to provide,
in effect, for what could be the liquidated damages resulting
from such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the
breach.[12] Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and conditions as
they see fit that contravene neither law nor morals, good
customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the courts if it is
iniquitous or unconscionable or if the principal obligation has
been partly or irregularly complied with.[13]
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not necessarily
confined to, the type, extent and purpose of the penalty, the
nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which,
by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals,
[14]
just an example, the Court has tempered the penalty

charges after taking into account the debtors pitiful situation
and its offer to settle the entire obligation with the creditor
bank. The stipulated penalty might likewise be reduced when a
partial or irregular performance is made by the debtor. [15] The
stipulated penalty might even be deleted such as when there
has been substantial performance in good faith by the obligor,
[16]
when the penalty clause itself suffers from fatal infirmity, or
when exceptional circumstances so exist as to warrant it.[17]
Petitioners next assail the award of 10% of the total amount

of indebtedness by way of attorney's fees for being grossly
excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for the
bank and the nature of the case. Bearing in mind that the rate
of attorneys fees has been agreed to by the parties and
intended to answer not only for litigation expenses but also for
collection efforts as well, the Court, like the appellate court,
deems the award of 10% attorneys fees to be reasonable.
The Court of Appeals, exercising its good judgment in the

instant case, has reduced the penalty interest from 5% a month
to 3% a month which petitioner still disputes. Given the
circumstances, not to mention the repeated acts of breach by
petitioners of their contractual obligation, the Court sees no
cogent ground to modify the ruling of the appellate court..
Neither can the appellate court be held to have erred in

rejecting petitioners' call for a new trial or to admit newly
discovered evidence. As the appellate court so held in its
resolution of14 May 1999 -
Anent the stipulated interest of 15.189% per annum,

petitioners, for the first time, question its reasonableness and
prays that the Court reduce the amount. This contention is a
fresh issue that has not been raised and ventilated before the
courts below. In any event, the interest stipulation, on its face,
does not appear as being that excessive. The essence or
rationale for the payment of interest, quite often referred to as
cost of money, is not exactly the same as that of a surcharge or
a penalty. A penalty stipulation is not necessarily preclusive of
interest, if there is an agreement to that effect, the two being
distinct concepts which may separately be demanded. [18] What
may justify a court in not allowing the creditor to impose full
surcharges
and
penalties,
despite
an
express
stipulation therefor in a valid agreement, may not equally justify
the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part
of the banking business and the core of a bank's existence.[19]
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure,

no second motion for reconsideration of a judgment or final
resolution by the same party shall be entertained. Considering
that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this
court that the newly-discovered evidence being invoked by
defendants-appellants have actually been existent when the
case was brought on appeal to this court as well as when the
first motion for reconsideration was filed. Hence, it is quite
surprising why defendants-appellants raised the alleged newlydiscovered evidence only at this stage when they could have
done so in the earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for
reconsideration is not contingent upon the averment of 'new'
grounds to assail the judgment, i.e., grounds other than those
theretofore presented and rejected. Otherwise, attainment of
finality of a judgment might be stayed off indefinitely,

depending on the partys ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly
discovered errors' therein, or thinking up some injury or
prejudice to the rights of the movant for reconsideration.[20]
At any rate, the subsequent execution of the real estate
mortgage as security for the existing loan would not have
resulted in the extinguishment of the original contract of loan
because ofnovation. Petitioners acknowledge that the real
estate mortgage contract does not contain any express
stipulation by the parties intending it to supersede the existing
loan agreement between the petitioners and the bank.
[21]
Respondent bank has correctly postulated that the mortgage
is but an accessory contract to secure the loan in the
promissory note.
Extinctive novation requires, first,
a
previous
valid
obligation; second, the agreement of all the parties to the new
contract; third, the
extinguishment
of
the
obligation;
and fourth, the validity of the new one.[22] In order that an
obligation may be extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligation be on every point
incompatible with each other. [23] An obligation to pay a sum of
money is not extinctively novated by a new instrument which
merely changes the terms of payment or adding compatible
covenants or where the old contract is merely supplemented by
the new one.[24] When not expressed, incompatibility is required
so as to ensure that the parties have indeed intended
such novation despite their failure to express it in categorical
terms. The incompatibility, to be sure, should take place in any
of the essential elements of the obligation, i.e., (1) the juridical
relation or tie, such as from a mere commodatum to lease of
things, or from negotiorum gestio to agency, or from a
mortgage to antichresis,[25] or from a sale to one of loan; [26] (2)

the object or principal conditions, such as a change of the
nature of the prestation; or (3) the subjects, such as the
substitution of a debtor[27] or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the
new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to
the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

SUPREME COURT
Manila
petitioner received from respondent the amount of P20,000

every month on August 5, September 5, October 5 and
November 5, 1995.11
FIRST DIVISION
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
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 certiorari 1 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
check4 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 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
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
The petition is impressed with merit.
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.
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
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
"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:
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
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
Last, respondent inexplicably never presented Santiago as a

witness to corroborate her story. 39 The presumption is that
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.

SUPREME COURT
Manila
EN BANC
G.R. No. L-46240
November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffsappellants,

vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to
return her certain furniture which she lent him for his use. She
appealed from the judgment of the Court of First Instance of
Manila which ordered that the defendant return to her the three
has heaters and the four electric lamps found in the possession
of the Sheriff of said city, that she call for the other furniture
from the said sheriff of Manila at her own expense, and that the
fees which the Sheriff may charge for the deposit of the
furniture
be
paid pro
rata by
both
parties,
without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such
occupied the latter's house on M. H. del Pilar street, No. 1175.
On January 14, 1936, upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously
granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the
condition that the defendant would return them to the plaintiff
upon the latter's demand. The plaintiff sold the property to

Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving
him sixty days to vacate the premises under one of the clauses
of the contract of lease. There after the plaintiff required the
defendant to return all the furniture transferred to him for them
in the house where they were found. On
November 5,
1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in the
ground floor of the house. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that
he could not give up the three gas heaters and the four electric
lamps because he would use them until the 15th of the same
month when the lease in due to expire. The plaintiff refused to
get the furniture in view of the fact that the defendant had
declined to make delivery of all of them. On
November
15th, before vacating the house, the defendant deposited with
the Sheriff all the furniture belonging to the plaintiff and they
are now on deposit in the warehouse situated at No. 1521, Rizal
Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the
trial court incorrectly applied the law: in holding that they
violated the contract by not calling for all the furniture on
November 5, 1936, when the defendant placed them at their
disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they
should get all the furniture from the Sheriff at their expenses; in
ordering them to pay-half of the expenses claimed by the
Sheriff for the deposit of the furniture; in ruling that both parties
should pay their respective legal expenses or the costs; and in
denying pay their respective legal expenses or the costs; and in
denying the motions for reconsideration and new trial. To
dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture
upon the plaintiff's demand; whether the latter is bound to bear

the deposit fees thereof, and whether she is entitled to the
costs of litigation.lawphi1.net
The contract entered into between the parties is one
of commadatum, 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
latters 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 eletric lamps. The
provisions of article 1169 of the Civil Code cited by counsel for
the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the
plaintiff failed to comply with her obligation to get the furniture
when they were offered to her.
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.
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 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 latter determined by the trial Court
through evidence which the parties may desire to present.
The costs in both instances should be borne by the defendant
because the plaintiff is the prevailing party (section 487 of the
Code of Civil Procedure). The defendant was the one who
breached the contract of commodatum, and without any reason
he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other judicial
costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is
ordered to return and deliver to the plaintiff, in the residence to
return and deliver to the plaintiff, in the residence or house of
the latter, all the furniture described in paragraph 3 of the
stipulation of facts Exhibit A. The expenses which may be
occasioned by the delivery to and deposit of the furniture with
the Sheriff shall be for the account of the defendant. the
defendant shall pay the costs in both instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ.,
concur.
G.R. No. L-4150
February 10, 1910
FELIX DE LOS SANTOS, plaintiff-appelle,

vs.
AGUSTINA JARRA, administratrix of the estate of
Magdaleno Jimenea, deceased, defendant-appellant.
Matias Hilado, for appellant.
Jose Felix Martinez, for appellee.
TORRES, J.:

SUPREME COURT
Manila
EN BANC
On the 1st of September, 1906, Felix de los Santos brought suit

against Agustina Jarra, the administratrix of the estate of
Magdaleno Jimenea, alleging that in the latter part of 1901
Jimenea borrowed and obtained from the plaintiff ten first-class
carabaos, to be used at the animal-power mill of his hacienda
during the season of 1901-2, without recompense or
remuneration whatever for the use thereof, under the sole
condition that they should be returned to the owner as soon as
the work at the mill was terminated; that Magdaleno Jimenea,
however, did not return the carabaos, notwithstanding the fact
that the plaintiff claimed their return after the work at the mill
was finished; that Magdaleno Jimenea died on the 28th of
October, 1904, and the defendant herein was appointed by the
Court of First Instance of Occidental Negros administratrix of his
estate and she took over the administration of the same and is
still performing her duties as such administratrix; that the
plaintiff presented his claim to the commissioners of the estate
of Jimenea, within the legal term, for the return of the said ten
carabaos, but the said commissioners rejected his claim as
appears in their report; therefore, the plaintiff prayed that
judgment be entered against the defendant as administratrix of
the estate of the deceased, ordering her to return the ten first-
class carabaos loaned to the late Jimenea, or their present

value, and to pay the costs.
The defendant was duly summoned, and on the 25th of
September, 1906, she demurred in writing to the complaint on
the ground that it was vague; but on the 2d of October of the
same year, in answer to the complaint, she said that it was true
that the late Magdaleno Jimenea asked the plaintiff to loan him
ten carabaos, but that he only obtained three second-class
animals, which were afterwards transferred by sale by the
plaintiff to the said Jimenea; that she denied the allegations
contained in paragraph 3 of the complaint; for all of which she
asked the court to absolve her of the complaint with the cost
against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose
Felix Martinez notified the defendant and her counsel, Matias
Hilado, that he had made an agreement with the plaintiff to the
effect that the latter would not compromise the controversy
without his consent, and that as fees for his professional
services he was to receive one half of the amount allowed in the
judgment if the same were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both
parties, and either exhibits were made of record. On the 10th of
January, 1907, the court below entered judgment sentencing
Agustina Jarra, as administratrix of the estate of Magdaleno
Jimenea, to return to the plaintiff, Felix de los Santos, the
remaining six second and third class carabaos, or the value
thereof at the rate of P120 each, or a total of P720 with the
costs.
Counsel for the defendant excepted to the foregoing judgment,
and, by a writing dated January 19, moved for anew trial on the
ground that the findings of fact were openly and manifestly

contrary to the weight of the evidence. The motion was
overruled, the defendant duly excepted, and in due course
submitted the corresponding bill of exceptions, which was
approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the
plaintiff for the loan of ten carabaos which are now claimed by
the latter, as shown by two letters addressed by the said
Jimenea to Felix de los Santos; but in her answer the said
defendant alleged that the late Jimenea only obtained three
second-class carabaos, which were subsequently sold to him by
the owner, Santos; therefore, in order to decide this litigation it
is indispensable that proof be forthcoming that Jimenea only
received three carabaos from his son-in-law Santos, and that
they were sold by the latter to him.
The record discloses that it has been fully proven from the
testimony of a sufficient number of witnesses that the plaintiff,
Santos, sent in charge of various persons the ten carabaos
requested by his father-in-law, Magdaleno Jimenea, in the two
letters produced at the trial by the plaintiff, and that Jimenea
received them in the presence of some of said persons, one
being a brother of said Jimenea, who saw the animals arrive at
the hacienda where it was proposed to employ them. Four died
of rinderpest, and it is for this reason that the judgment
appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his
son-in-law Santos is not evidenced by any trustworthy
documents such as those of transfer, nor were the declarations
of the witnesses presented by the defendant affirming it
satisfactory; for said reason it can not be considered that
Jimenea only received three carabaos on loan from his son-in-
law, and that he afterwards kept them definitely by virtue of the

purchase.
By the laws in force the transfer of large cattle was and is still
made by means of official documents issued by the local
authorities; these documents constitute the title of ownership of
the carabao or horse so acquired. Furthermore, not only should
the purchaser be provided with a new certificate or credential, a
document which has not been produced in evidence by the
defendant, nor has the loss of the same been shown in the
case, but the old documents ought to be on file in the
municipality, or they should have been delivered to the new
purchaser, and in the case at bar neither did the defendant
present the old credential on which should be stated the name
of the previous owner of each of the three carabaos said to
have been sold by the plaintiff.
From the foregoing it may be logically inferred that the
carabaos loaned or given on commodatum to the now deceased
Magdaleno Jimenea were ten in number; that they, or at any
rate the six surviving ones, have not been returned to the
owner thereof, Felix de los Santos, and that it is not true that
the latter sold to the former three carabaos that the purchaser
was already using; therefore, as the said six carabaos were not
the property of the deceased nor of any of his descendants, it is
the duty of the administratrix of the estate to return them or
indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which
generic denomination the specific one of commodatum is
derived, establishes prescriptions in relation to the lastmentioned contract by the following articles:
ART. 1740. By the contract of loan, one of the parties

delivers to the other, either anything not perishable, in
order that the latter may use it during a certain period
and return it to the former, in which case it is called
commodatum, or money or any other perishable thing,
under the condition to return an equal amount of the
same kind and quality, in which case it is merely called a
loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a
stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of
the thing loaned. The bailee acquires the use thereof,
but not its fruits; if any compensation is involved, to be
paid by the person requiring the use, the agreement
ceases to be a commodatum.
ART. 1742. The obligations and rights which arise from
the commodatum pass to the heirs of both contracting
parties, unless the loan has been in consideration for the
person of the bailee, in which case his heirs shall not
have the right to continue using the thing loaned.
The carabaos delivered to be used not being returned by the
defendant upon demand, there is no doubt that she is under
obligation to indemnify the owner thereof by paying him their
value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of

fraud, negligence, or delay, and those who in any
manner whatsoever act in contravention of the
stipulations of the same, shall be subjected to indemnify
for the losses and damages caused thereby.
The obligation of the bailee or of his successors to return either
the thing loaned or its value, is sustained by the supreme
tribunal of Sapin. In its decision of March 21, 1895, it sets out
with precision the legal doctrine touching commodatum as
follows:
Although it is true that in a contract of commodatum the
bailor retains the ownership of the thing loaned, and at
the expiration of the period, or after the use for which it
was loaned has been accomplished, it is the imperative
duty of the bailee to return the thing itself to its owner,
or to pay him damages if through the fault of the bailee
the thing should have been lost or injured, it is clear that
where public securities are involved, the trial court, in
deferring to the claim of the bailor that the amount
loaned be returned him by the bailee in bonds of the
same class as those which constituted the contract,
thereby properly applies law 9 of title 11 ofpartida 5.
With regard to the third assignment of error, based on the fact
that the plaintiff Santos had not appealed from the decision of
the commissioners rejecting his claim for the recovery of his
carabaos, it is sufficient to estate that we are not dealing with a
claim for the payment of a certain sum, the collection of a debt
from the estate, or payment for losses and damages (sec. 119,
Code of Civil Procedure), but with the exclusion from the
inventory of the property of the late Jimenea, or from his
capital, of six carabaos which did not belong to him, and which
formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to

a third party and which did not form part of the property of the
deceased, must be the subject of a direct decision of the court
in an ordinary action, wherein the right of the third party to the
property which he seeks to have excluded from the inheritance
and the right of the deceased has been discussed, and rendered
in view of the result of the evidence adduced by the
administrator of the estate and of the claimant, since it is so
provided by the second part of section 699 and by section 703
of the Code of Civil Procedure; the refusal of the commissioners
before whom the plaintiff unnecessarily appeared can not affect
nor reduce the unquestionable right of ownership of the latter,
inasmuch as there is no law nor principle of justice authorizing
the successors of the late Jimenea to enrich themselves at the
cost and to the prejudice of Felix de los Santos.
For the reasons above set forth, by which the errors assigned to
the judgment appealed from have been refuted, and
considering that the same is in accordance with the law and the
merits of the case, it is our opinion that it should be affirmed
and we do hereby affirm it with the costs against the appellant.
So ordered.
Arellano, C.J., Johnson, Moreland
Carson, J., reserves his vote.
and
Elliott,
JJ., concur.

SUPREME COURT
Manila
EN BANC
G.R. No. L-19190
November 29, 1922
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiffappellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.
Attorney-General Villa-Real for appellee.
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the
Aparri branch of the Philippine National Bank, Venancio
Concepcion, President of the Philippine National Bank, between
April 10, 1919, and May 7, 1919, authorized an extension of
credit in favor of "Puno y Concepcion, S. en C." in the amount of
P300,000. This special authorization was essential in view of the
memorandum order of President Concepcion dated May 17,
1918, limiting the discretional power of the local manager at
Aparri, Cagayan, to grant loans and discount negotiable
documents to P5,000, which, in certain cases, could be
increased to P10,000. Pursuant to this authorization, credit
aggregating P300,000, was granted the firm of "Puno y
Concepcion, S. en C.," the only security required consisting of
six demand notes. The notes, together with the interest, were
taken up and paid by July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized
at P100,000. Anacleto Concepcion contributed P5,000; Clara
Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000;
Clemente Puno, P20,000; and Rosario San Agustin, "casada con
Gral. Venancio Concepcion," P50,000. Member Miguel S.
Concepcion was the administrator of the company.
On the facts recounted, Venancio Concepcion, as President of

the Philippine National Bank and as member of the board of
directors of this bank, was charged in the Court of First Instance
of Cagayan with a violation of section 35 of Act No. 2747. He
was found guilty by the Honorable Enrique V. Filamor, Judge of
First Instance, and was sentenced to imprisonment for one year
and six months, to pay a fine of P3,000, with subsidiary
imprisonment in case of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just
mentioned, to which reference must hereafter repeatedly be
made, reads as follows: "The National Bank shall not, directly or
indirectly, grant loans to any of the members of the board of
directors of the bank nor to agents of the branch banks."
Section 49 of the same Act provides: "Any person who shall
violate any of the provisions of this Act shall be punished by a
fine not to exceed ten thousand pesos, or by imprisonment not
to exceed five years, or by both such fine and imprisonment."
These two sections were in effect in 1919 when the alleged
unlawful acts took place, but were repealed by Act No. 2938,
approved on January 30, 1921.
Counsel for the defense assign ten errors as having been
committed by the trial court. These errors they have argued
adroitly and exhaustively in their printed brief, and again in oral
argument. Attorney-General Villa-Real, in an exceptionally
accurate and comprehensive brief, answers the proposition of
appellant one by one.
The question presented are reduced to their simplest elements
in the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C." by Venancio Concepcion,
President of the Philippine National Bank, a "loan" within the

meaning of section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove that
authority to make a loan was given, but only show the
concession of a credit. In this statement of fact, counsel is
correct, for the exhibits in question speak of a "credito" (credit)
and not of a " prestamo" (loan).
The "credit" of an individual means his ability to borrow money
by virtue of the confidence or trust reposed by a lender that he
will pay what he may promise. (Donnell vs. Jones [1848], 13
Ala., 490; Bouvier's Law Dictionary.) A "loan" means the delivery
by one party and the receipt by the other party of a given sum
of money, upon an agreement, express or implied, to repay the
sum loaned, with or without interest. (Payne vs. Gardiner
[1864], 29 N. Y., 146, 167.) The concession of a "credit"
necessarily involves the granting of "loans" up to the limit of the
amount fixed in the "credit,"
II. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C.," by Venancio Concepcion,
President of the Philippine National Bank, a "loan" or a
"discount"?
referred to loans alone, and placed no restriction upon discount

transactions. It becomes material, therefore, to discover the
distinction between a "loan" and a "discount," and to ascertain
if the instant transaction comes under the first or the latter
denomination.
Discounts are favored by bankers because of their liquid nature,
growing, as they do, out of an actual, live, transaction. But in its
last analysis, to discount a paper is only a mode of loaning
money, with, however, these distinctions: (1) In a discount,
interest is deducted in advance, while in a loan, interest is taken
at the expiration of a credit; (2) a discount is always on doublename paper; a loan is generally on single-name paper.
Conceding, without deciding, that, as ruled by the Insular
Auditor, the law covers loans and not discounts, yet the
conclusion is inevitable that the demand notes signed by the
firm "Puno y Concepcion, S. en C." were not discount paper but
were mere evidences of indebtedness, because (1) interest was
not deducted from the face of the notes, but was paid when the
notes fell due; and (2) they were single-name and not doublename paper.
Counsel argue that while section 35 of Act No. 2747 prohibits

the granting of a "loan," it does not prohibit what is commonly
known as a "discount."
The facts of the instant case having relation to this phase of the
argument are not essentially different from the facts in the
Binalbagan Estate case. Just as there it was declared that the
operations constituted a loan and not a discount, so should we
here lay down the same ruling.
In a letter dated August 7, 1916, H. Parker Willis, then President

of the National Bank, inquired of the Insular Auditor whether
section 37 of Act No. 2612 was intended to apply to discounts
as well as to loans. The ruling of the Acting Insular Auditor,
dated August 11, 1916, was to the effect that said section
III. Was the granting of a credit of P300,000 to the

copartnership, "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, an
"indirect loan" within the meaning of section 35 of Act No.
2747?
Counsel argue that a loan to the partnership "Puno y

Concepcion, S. en C." was not an "indirect loan." In this
connection, it should be recalled that the wife of the defendant
held one-half of the capital of this partnership.
In the interpretation and construction of statutes, the primary
rule is to ascertain and give effect to the intention of the
Legislature. In this instance, the purpose of the Legislature is
plainly to erect a wall of safety against temptation for a director
of the bank. The prohibition against indirect loans is a
recognition of the familiar maxim that no man may serve two
masters that where personal interest clashes with fidelity to
duty the latter almost always suffers. If, therefore, it is shown
that the husband is financially interested in the success or
failure of his wife's business venture, a loan to partnership of
which the wife of a director is a member, falls within the
prohibition.
Various provisions of the Civil serve to establish the familiar
relationship called a conjugal partnership. (Articles 1315, 1393,
1401, 1407, 1408, and 1412 can be specially noted.) A loan,
therefore, to a partnership of which the wife of a director of a
bank is a member, is an indirect loan to such director.
That it was the intention of the Legislature to prohibit exactly
such an occurrence is shown by the acknowledged fact that in
this instance the defendant was tempted to mingle his personal
and family affairs with his official duties, and to permit the loan
P300,000 to a partnership of no established reputation and
without asking for collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md.,
558; 3 Am. Rep., 211), the Supreme Court of Maryland said:
What then was the purpose of the law when it declared

that no director or officer should borrow of the bank, and
"if any director," etc., "shall be convicted," etc., "of
directly or indirectly violating this section he shall be
punished by fine and imprisonment?" We say to protect
the stockholders, depositors and creditors of the bank,
against the temptation to which the directors and
officers might be exposed, and the power which as such
they must necessarily possess in the control and
management of the bank, and the legislature unwilling
to rely upon the implied understanding that in assuming
this relation they would not acquire any interest hostile
or adverse to the most exact and faithful discharge of
duty, declared in express terms that they should not
borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied
upon in the Binalbagan Estate decision, it was said:
We are of opinion the statute forbade the loan to his
copartnership firm as well as to himself directly. The loan
was made indirectly to him through his firm.
IV. Could Venancio Concepcion, President of the Philippine
National Bank, be convicted of a violation of section 35 of Act
No. 2747 in relation with section 49 of the same Act, when
these portions of Act No. 2747 were repealed by Act No. 2938,
prior to the finding of the information and the rendition of the
judgment?
As noted along toward the beginning of this opinion, section 49
of Act No. 2747, in relation to section 35 of the same Act,
provides a punishment for any person who shall violate any of
the provisions of the Act. It is contended, however, by the
appellant, that the repeal of these sections of Act No. 2747 by

Act No. 2938 has served to take away the basis for criminal
prosecution.
This same question has been previously submitted and has
received an answer adverse to such contention in the cases
of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs.
Concepcion ([1922], 43 Phil., 653); and Ong Chang Wing and
Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil.,
1046). In other words, it has been the holding, and it must again
be the holding, that where an Act of the Legislature which
penalizes an offense, such repeals a former Act which penalized
the same offense, such repeal does not have the effect of
thereafter depriving the courts of jurisdiction to try, convict, and
sentenced offenders charged with violations of the old law.
V. Was the granting of a credit of P300,000 to the copartnership
"Puno y Concepcion, S. en C." by Venancio Concepcion,
President of the Philippine National Bank, in violation of section
35 of Act No. 2747, penalized by this law?
Counsel argue that since the prohibition contained in section 35
of Act No. 2747 is on the bank, and since section 49 of said Act
provides a punishment not on the bank when it violates any
provisions of the law, but on a personviolating any provisions of
the same, and imposing imprisonment as a part of the penalty,
the prohibition contained in said section 35 is without penal
sanction.lawph!l.net
The answer is that when the corporation itself is forbidden to do
an act, the prohibition extends to the board of directors, and to
each
director
separately
and
individually.
(People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion,

President of the Philippine National Bank, in extending the
credit of P300,000 to the copartnership "Puno y Concepcion, S.
en C." constitute a legal defense?
Counsel argue that if defendant committed the acts of which he
was convicted, it was because he was misled by rulings coming
from the Insular Auditor. It is furthermore stated that since the
loans made to the copartnership "Puno y Concepcion, S. en C."
have been paid, no loss has been suffered by the Philippine
National Bank.
Neither argument, even if conceded to be true, is conclusive.
Under the statute which the defendant has violated, criminal
intent is not necessarily material. The doing of the inhibited act,
inhibited on account of public policy and public interest,
constitutes the crime. And, in this instance, as previously
demonstrated, the acts of the President of the Philippine
National Bank do not fall within the purview of the rulings of the
Insular Auditor, even conceding that such rulings have
controlling effect.
Morse, in his work, Banks and Banking, section 125, says:
It is fraud for directors to secure by means of their trust,
and advantage not common to the other stockholders.
The law will not allow private profit from a trust, and will
not listen to any proof of honest intent.
JUDGMENT
On a review of the evidence of record, with reference to the
decision of the trial court, and the errors assigned by the
appellant, and with reference to previous decisions of this court
on the same subject, we are irresistibly led to the conclusion

that no reversible error was committed in the trial of this case,
and that the defendant has been proved guilty beyond a
reasonable doubt of the crime charged in the information. The
penalty imposed by the trial judge falls within the limits of the
punitive provisions of the law.
Judgment is affirmed, with the costs of this instance against the
appellant. So ordered.
Araullo, C. J., Johnson, Street, Avancea, Villamor, Ostrand,

Johns, and Romualdez, JJ., concur.

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Republic of the Philippines

Spouses Eduardo and Lydia Silos (petitioners) have been in

SPOUSES EDUARDO and LYDIA SILOS, Petitioners,

To secure a one-year revolving credit line of P150,000.00

The eight Promissory Notes, on the other hand, contained a

plus applicable spread in effect as of the date of each

Petitioners religiously paid interest on the notes at the following

2. 10th Promissory Note dated March 19, 1992 25%;

1. 1st Promissory Note dated July 24, 1989 19.5%;

3. 11th Promissory Note dated July 11, 1992 23%;

2. 2nd Promissory Note dated November 22, 1989

4. 12th Promissory Note dated November 10, 1992

3. 3rd Promissory Note dated March 21, 1990 22%;

5. 13th Promissory Note dated March 15, 1993 21%;

4. 4th Promissory Note dated July 19, 1990 24%;

6. 14th Promissory Note dated July 12, 1993 17.5%;

5. 5th Promissory Note dated December 17, 1990 28%;

7. 15th Promissory Note dated November 17, 1993

6. 6th Promissory Note dated February 14, 1991 32%;

8. 16th Promissory Note dated March 28, 1994 21%;

8. 8th Promissory Note dated July 11, 1991 24%.13

10. 18th Promissory Note dated November 16, 1994

14. 22nd Promissory Note dated April 22, 1996 18.5%;

16. 24th Promissory Note dated November 25, 1996

Incidentally, PN 9707237 provided for the penalty equivalent to

17. 25th Promissory Note dated May 30, 1997 17.5%;

Without need for notice or demand, failure to pay this note or

18. 26th Promissory Note (PN 9707237) dated July 30,

PNB prepared a Statement of Account20 as of October 12, 1998,

Despite demand, petitioners failed to pay the foregoing amount.

On pre-trial, the parties mutually agreed to the following

on prevailing rates upon which to peg such variable

3. The Promissory Note, as the principal contract

Ruling of the Regional Trial Court

6. By the admission of petitioners during pre-trial, all

On February 28, 2003, the trial court rendered judgment

As such, the rate of interest, penalties and attorneys

The dispositive portion of the trial courts Decision reads:

WHEREFORE, judgment is hereby rendered upholding the

2) Whether x x x the penalty charges were secured by

Petitioners appealed to the CA, which issued the questioned

3) Whether x x x the extrajudicial foreclosure and sale

WHEREFORE, in view of the foregoing, the instant appeal is

The CA noted that, based on receipts presented by petitioners

1. [T]hat the interest rate to be applied after the

For and in consideration of certain loans, overdrafts and other

A. THE COURT OF APPEALS AS WELL AS THE

The CA believes that the 24% penalty is covered by the phrase

B. CONSEQUENTLY, THE COURT OF APPEALS AND

Finally, the CA ruled that petitioners are entitled to P377,505.09

The following issues are raised in this Petition:

THE COURT OF APPEALS AND THE LOWER COURT ERRED IN

MORTGAGE AS A SECURED AMOUNT AND THEREFORE THE

Petitioners argue that if the interest rates were nullified, then

For its part, respondent disputes petitioners claim that interest

b. That interest rates were at short periods Respondent

Respondent adds that the purpose of the penalty or a penal

findings are not supported by the evidence on record or are

the effectivity date of the increase or decrease in maximum

The Promissory Note, in turn, authorized the PNB to raise the

Sec. 7-a. Parties to an agreement pertaining to a loan or

The Real Estate Mortgage contract likewise provided that

This clause is authorized by Section 2 of Presidential Decree

Section 1 of P.D. No. 1684 also empowered the Central Banks

THREE HUNDRED SIXTY FIVE DAYS AFTER DATE