Investment and Banking Laws Cases

G.R. No.
117604 March 26, 1997

CHINA BANKING CORPORATION, petitioner, vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner
China Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15
August 1994 nullifying the Securities and Exchange Commission's order and resolution dated 4
June 1993 and 7 December 1993, respectively, for lack of jurisdiction. Similarly impugned is the
Court of Appeals' resolution dated 4 September 1994 which denied petitioner's motion for
reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private
respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No.
1219 to petitioner China Banking Corporation (CBC, for brevity). 1
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge
agreement be recorded in its books. 2
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia
in petitioner's favor was duly noted in its corporate books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was
secured by the aforestated pledge agreement still existing between Calapatia and petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for
extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to
conduct a public auction sale of the pledged stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and
requested that the pledged stock be transferred to its (petitioner's) name and the same be
recorded in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its
inability to accede to petitioner's request in view of Calapatia's unsettled accounts with the club. 6
Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and
petitioner emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently,
petitioner was issued the corresponding certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue
account in the amount of P18,783.24. 8 Said notice was followed by a demand letter dated 12
December 1985 for the same amount 9and another notice dated 22 November 1986 for
P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m.
Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his
membership due to the sale of his share of stock in the 10 December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate
No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested
that a new certificate of stock be issued in its name. 12
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the
public auction held on 10 December 1986 for P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and
thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction
over the subject matter on the theory that it involves an intra-corporate dispute and on 27 August
1990 denied petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission
(SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new
stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name;
and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI,
stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason
not to transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order
reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the pledged
share and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner
can proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET
ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared
NULL and VOID. Finally, appellee-respondent Club is ordered to issue another membership
certificate in the name of appellant-petitioner bank.
SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its
resolution dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August
1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC
and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently,
dismissed petitioner's original complaint. The Court of Appeals declared that the controversy
between CBC and VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case, the controversy must
pertain to any of the following relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation, partnership or association and its
stockholders, partners, members, or officers; (c) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to operate is concerned, and (d)
among the stockholders, partners or associates themselves (Union Glass and Container
Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the
relationship mentioned will not necessarily always confer jurisdiction over the dispute on the
Securities and Exchange Commission to the exclusion of the regular courts. The statement made in
Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions is
not that absolute. The better policy in determining which body has jurisdiction over a case would
be to consider not only the status or relationship of the parties but also the nature of the question
that is the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA
308, 322-323).
Indeed, the controversy between petitioner and respondent bank which involves ownership of the
stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission
to decide. It is not any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent
Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated
January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for
lack of jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent
China Banking Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in this
instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its
resolution dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:

II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY ERRED
WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED
DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN IT
DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK
OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE COMMISSION EN
BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS
THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular
courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the Philippines, and in the exercise of its
authority, it shall have the power to enlist the aid and support of and to deputize any and all
enforcement agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership
or association of which they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers, or managers of such
corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of suspension
of payments in cases where the corporation, partnership or association possesses property to
cover all of its debts but foresees the impossibility of meeting them when they respectively fall due
or in cases where the corporation, partnership or association has no sufficient assets to cover its
liabilities, but is under the Management Committee created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases of Mainland
Construction Co., Inc. v. Movilla 23 and Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has jurisdiction over a case would be to consider
not only the status or relationship of the parties but also the nature of the question that is the
subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we
have to determine therefore whether or not petitioner is a stockholder of VGCCI and whether or
not the nature of the controversy between petitioner and private respondent corporation is
intra-corporate.
As to the first query, there is no question that the purchase of the subject share or membership
certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate of
Sale) transferred ownership of the same to the latter and thus entitled petitioner to have the said
share registered in its name as a member of VGCCI. It is readily observed that VGCCI did not assail
the transfer directly and has in fact, in its letter of 27 September 1974, expressly recognized the
pledge agreement executed by the original owner, Calapatia, in favor of petitioner and has even
noted said agreement in its corporate books. 25 In addition, Calapatia, the original owner of the
subject share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and,
therefore, the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate
controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between petitioner and
private respondent corporation. VGCCI claims a prior right over the subject share anchored mainly
on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have been posted as
delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club. . ." 26 It is
pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was
the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws should prevail.
The bone of contention, thus, is the proper interpretation and application of VGCCI's aforequoted
by-laws, a subject which irrefutably calls for the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management controversies likely to cause
strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in
the law. The Court held that under the "sense-making and expeditious doctrine of primary
jurisdiction . . . the courts cannot or will not determine a controversy involving a question which is
within the jurisdiction of an administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate matters of fact, and a uniformity of
ruling is essential to comply with the purposes of the regulatory statute administered.
In this era of clogged court dockets, the need for specialized administrative boards or commissions
with the special knowledge, experience and capability to hear and determine promptly disputes on
technical matters or essentially factual matters, subject to judicial review in case of grave abuse of
discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the
power lodged in an administrative body and a court, the unmistakable trend has been to refer it to
the former. 'Increasingly, this Court has been committed to the view that unless the law speaks
clearly and unequivocably, the choice should fall on [an administrative agency.]'" The Court in the
earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor
arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the
previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently, . . . had
second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award
damages in labor cases because that setup would mean duplicity of suits, splitting the cause of
action and possible conflicting findings and conclusions by two tribunals on one and the same
claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it
does the meticulous analysis and correct interpretation of a corporation's by-laws as well as the
applicable provisions of the Corporation Code in order to determine the validity of VGCCI's claims.
The SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position, in the first
complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate
relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it
does not prevent the plaintiff from filing the same complaint later with the competent court. The
plaintiff is not estopped from doing so simply because it made a mistake before in the choice of
the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in
its motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted
that it is the SEC and not the regular courts which has jurisdiction. This is precisely the reason why
the said court dismissed petitioner's complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of
Appeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in the
same proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari
on the issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on
the merits of the case. In turn, in its responsive pleadings, private respondent duly answered and
countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Y.
Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic
Archbishop of Manila v. Court of Appeals. 31
In the interest of the public and for the expeditious administration of justice the issue on
infringement shall be resolved by the court considering that this case has dragged on for years and
has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future litigation. No useful purpose will
be served if a case or the determination of an issue in a case is remanded to the trial court only to
have its decision raised again to the Court of Appeals and from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an issue to the lower court for further
reception of evidence is not necessary where the Court is in position to resolve the dispute based
on the records before it and particularly where the ends of justice would not be subserved by the
remand thereof. Moreover, the Supreme Court is clothed with ample authority to review matters,
even those not raised on appeal if it finds that their consideration is necessary in arriving at a just
disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court, through Mr.
Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that since the filing of this suit before the
trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues
raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly
prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this
will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just,
speedy and inexpensive determination of every action or proceeding. The Court, therefore, feels
that the central issues of the case, albeit unresolved by the courts below, should now be settled
specially as they involved pure questions of law. Furthermore, the pleadings of the respective
parties on file have amply ventilated their various positions and arguments on the matter
necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the proceedings before the
SEC) sufficient to enable us to render a sound judgment and since only questions of law were
raised (the proper jurisdiction for Supreme Court review), we can, therefore, unerringly take
cognizance of and rule on the merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It
contends that the same was null and void for lack of consideration because the pledge agreement
was entered into on 21 August
1974 33 but the loan or promissory note which it secured was obtained by Calapatia much later or
only on 3 August 1983. 34
VGCCI's contention is unmeritorious.

A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly
stipulated therein that the said pledge will also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due of all loans, overdrafts,
promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind which
have heretofore been contracted, or which may hereafter be contracted, by the PLEDGOR(S)
and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including discounts of Chinese
drafts, bills of exchange, promissory notes, etc., without any further endorsement by the
PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, together
with the accrued interest thereon, as hereinafter provided, plus the costs, losses, damages and
expenses (including attorney's fees) which PLEDGEE may incur in connection with the collection
thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held
suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the
amount of P20,000.00 was but a renewal of the first promissory note covered by the same pledge
agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the
right to sell the share in question in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending
notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14
May 1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although
Calapatia has been delinquent in paying his monthly dues to the club since 1975. Stranger still,
petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was neither
informed nor furnished copies of these letters of overdue accounts until VGCCI itself sold the
pledged share at another public auction. By doing so, VGCCI completely disregarded petitioner's
rights as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of
VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues
in this wise:
The general rule really is that third persons are not bound by the by-laws of a corporation since
they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when
third persons have actual or constructive knowledge of the same. In the case at bar, petitioner had
actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge
made by Calapatia and when petitioner purchased the share foreclosed on September 17, 1985.
This is proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion
of private respondent's by-laws which is material to the issue herein in a letter it wrote to private
respondent. Because of this actual knowledge of such by-laws then the same bound the petitioner
as of the time when petitioner purchased the share. Since the by-laws was already binding upon
petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the
petitioner purchased the said share subject to the right of the private respondent to sell the said
share for reasons of delinquency and the right of private respondent to have a first lien on said
shares as these rights are provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
And moreover, the by-law now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good faith
and for a valuable consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot
operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to
the corporation for a period of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and took part in its adoption. (10 Cyc.,
579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not
affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust &
Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to an unauthorized
by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is
not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I.,
9.)
A by-law of a corporation which provides that transfers of stock shall not be valid unless approved
by the board of directors, while it may be enforced as a reasonable regulation for the protection of
the corporation against worthless stockholders, cannot be made available to defeat the rights of
third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Emphasis
ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said third party and the shareholder was entered
into, in this case, at the time the pledge agreement was executed. VGCCI could have easily
informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee of
one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the
time of foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it. In other
words, by-laws are the relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals composing it and having the
direction, management and control of its affairs, in whole or in part, in the management and
control of its affairs and activities. (9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the members towards
the corporation and among themselves. They are self-imposed and, although adopted pursuant to
statutory authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or constructively. In the case of Fleisher
v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of
shares cannot have any effect on the transferee of the shares in question as he "had no knowledge
of such by-law when the shares were assigned to him. He obtained them in good faith and for a
valuable consideration. He was not a privy to the contract created by the by-law between the
shareholder . . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a
purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound
by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of
stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent only
in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the general accepted rule that
third persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time
of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil Code
provides that it is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists maybe alienated for the
payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an
opinion to the effect that:
According to the weight of authority, the pledgee's right is entitled to full protection without
surrender of the certificate, their cancellation, and the issuance to him of new ones, and when done,
the pledgee will be fully protected against a subsequent purchaser who would be charged with
constructive notice that the certificate is covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to him
the amount due on the debt secured. In other words, the pledgee has the right to resort to its
collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new certificate to a third person who
purchased the same certificate covered by the pledge, will certainly defeat the right of the pledgee
to resort to its collateral for the payment of the debt. The pledgor or his representative or
registered stockholders has no right to require a return of the pledged stock until the debt for
which it was given as security is paid and satisfied, regardless of the length of time which have
elapsed since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the
corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it free
of liens or claims that may subsequently arise in favor of the corporation if it has notice of the
pledge, although no demand for a transfer of the stock to the pledgee on the corporate books has
been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art.
2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with
the diligence of a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H.
Lee, 39 is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind that the ordinary
pawn ticket is a document by virtue of which the property in the thing pledged passes from hand
to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to
bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge;
and it is the holder who must renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite different in
character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia's unpaid
accounts and the restrictive provisions in VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot
be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid
subscription, and not to any indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transaction." 40 In the case at bar, the subscription for the share
in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219.
41 What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted
provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and
the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 189206 June 8, 2011
GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner,
vs.
THE HONORABLE 15th DIVISION OF THE COURT OF APPEALS and INDUSTRIAL BANK OF KOREA,
TONG YANG MERCHANT BANK, HANAREUM BANKING CORP., LAND BANK OF THE PHILIPPINES,
WESTMONT BANK and DOMSAT HOLDINGS, INC., Respondents.
DECISION
PEREZ, J.:
The subject of this petition for certiorari is the Decision1 of the Court of Appeals in CA-G.R. SP No.
82647 allowing the quashal by the Regional Trial Court (RTC) of Makati of a subpoena for the
production of bank ledger. This case is incident to Civil Case No. 99-1853, which is the main case
for collection of sum of money with damages filed by Industrial Bank of Korea, Tong Yang
Merchant Bank, First Merchant Banking Corporation, Land Bank of the Philippines, and Westmont
Bank (now United Overseas Bank), collectively known as "the Banks" against Domsat Holdings, Inc.
(Domsat) and the Government Service Insurance System (GSIS). Said case stemmed from a Loan
Agreement,2 whereby the Banks agreed to lend United States (U.S.) $11 Million to Domsat for the
purpose of financing the lease and/or purchase of a Gorizon Satellite from the International
Organization of Space Communications (Intersputnik).3
The controversy originated from a surety agreement by which Domsat obtained a surety bond
from GSIS to secure the payment of the loan from the Banks. We quote the terms of the Surety
Bond in its entirety.4
Republic of the Philippines
GOVERNMENT SERVICE INSURANCE SYSTEM
GENERAL INSURANCE FUND
GSIS Headquarters, Financial Center
Roxas Boulevard, Pasay City
G(16) GIF Bond 027461
SURETYBOND
KNOW ALL MEN BY THESE PRESENTS:
That we, DOMSAT HOLDINGS, INC., represented by its President as PRINCIPAL, and the
GOVERNMENT SERVICE INSURANCE SYSTEM, as Administrator of the GENERAL INSURANCE FUND,
a corporation duly organized and existing under and by virtue of the laws of the Philippines, with
principal office in the City of Pasay, Metro Manila, Philippines as SURETY, are held and firmly bound
unto the OBLIGEES: LAND BANK OF THE PHILIPPINES, 7th Floor, Land Bank Bldg. IV. 313 Sen. Gil J.
Puyat Avenue, Makati City; WESTMONT BANK, 411 Quintin Paredes St., Binondo, Manila: TONG
YANG MERCHANT BANK, 185, 2-Ka, Ulchi-ro, Chungk-ku, Seoul, Korea; INDUSTRIAL BANK OF
KOREA, 50, 2-Ga, Ulchi-ro, Chung-gu, Seoul, Korea; and FIRST MERCHANT BANKING
CORPORATION, 199-40, 2-Ga, Euliji-ro, Jung-gu, Seoul, Korea, in the sum, of US $ ELEVEN MILLION
DOLLARS ($11,000,000.00) for the payment of which sum, well and truly to be made, we bind
ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly
by these presents.
THE CONDITIONS OF THE OBLIGATION ARE AS FOLLOWS:
WHEREAS, the above bounden PRINCIPAL, on the 12th day of December, 1996 entered into a
contract agreement with the aforementioned OBLIGEES to fully and faithfully
Guarantee the repayment of the principal and interest on the loan granted the PRINCIPAL to be
used for the financing of the two (2) year lease of a Russian Satellite from INTERSPUTNIK, in
accordance with the terms and conditions of the credit package entered into by the parties.
This bond shall remain valid and effective until the loan including interest has been fully paid and
liquidated,
a copy of which contract/agreement is hereto attached and made part hereof;
WHEREAS, the aforementioned OBLIGEES require said PRINCIPAL to give a good and sufficient
bond in the above stated sum to secure the full and faithful performance on his part of said
contract/agreement.
NOW, THEREFORE, if the PRINCIPAL shall well and truly perform and fulfill all the undertakings,
covenants, terms, conditions, and agreements stipulated in said contract/agreements, then this
obligation shall be null and void; otherwise, it shall remain in full force and effect.
WITNESS OUR HANDS AND SEALS this 13th day of December 1996 at Pasay City, Philippines.
GOVERNMENT SERVICE INSURANCE

DOMSAT HOLDINGS, INC.
SYSTEM
Principal
General Insurance Fund
By:
By:
AMALIO A. MALLARI
CAPT. RODRIGO A. SILVERIO
Senior Vice-President
President
General Insurance Group
When Domsat failed to pay the loan, GSIS refused to comply with its obligation reasoning that
Domsat did not use the loan proceeds for the payment of rental for the satellite. GSIS alleged that
Domsat, with Westmont Bank as the conduit, transferred the U.S. $11 Million loan proceeds from
the Industrial Bank of Korea to Citibank New York account of Westmont Bank and from there to the
Binondo Branch of Westmont Bank.5 The Banks filed a complaint before the RTC of Makati against
Domsat and GSIS.
In the course of the hearing, GSIS requested for the issuance of a subpoena duces tecum to the
custodian of records of Westmont Bank to produce the following documents:
1. Ledger covering the account of DOMSAT Holdings, Inc. with Westmont Bank (now United
Overseas Bank), any and all documents, records, files, books, deeds, papers, notes and other data
and materials relating to the account or transactions of DOMSAT Holdings, Inc. with or through the
Westmont Bank (now United Overseas Bank) for the period January 1997 to December 2002, in
his/her direct or indirect possession, custody or control (whether actual or constructive), whether in
his/her capacity as Custodian of Records or otherwise;
2. All applications for cashiers/ managers checks and bank transfers funded by the account of
DOMSAT Holdings, Inc. with or through the Westmont Bank (now United Overseas Bank) for the
period January 1997 to December 2002, and all other data and materials covering said applications,
in his/her direct or indirect possession, custody or control (whether actual or constructive), whether
in his/her capacity as Custodian of Records or otherwise;
3. Ledger covering the account of Philippine Agila Satellite, Inc. with Westmont Bank (now United
Overseas Bank), any and all documents, records, files, books, deeds, papers, notes and other data
and materials relating to the account or transactions of Philippine Agila Satellite, Inc. with or
through the Westmont bank (now United Overseas Bank) for the period January 1997 to December
2002, in his/her direct or indirect possession, custody or control (whether actual or constructive),
whether in his/her capacity as Custodian of Records or otherwise;
4. All applications for cashiers/managers checks funded by the account of Philippine Agila
Satellite, Inc. with or through the Westmont Bank (now United Overseas Bank) for the period
January 1997 to December 2002, and all other data and materials covering said applications, in
his/her direct or indirect possession, custody or control (whether actual or constructive), whether in
his/her capacity as Custodian of Records or otherwise.6
The RTC issued a subpoena decus tecum on 21 November 2002.7 A motion to quash was filed by
the banks on three grounds: 1) the subpoena is unreasonable, oppressive and does not establish
the relevance of the documents sought; 2) request for the documents will violate the Law on
Secrecy of Bank Deposits; and 3) GSIS failed to advance the reasonable cost of production of the
documents.8 Domsat also joined the banks motion to quash through its
Manifestation/Comment.9 On 9 April 2003, the RTC issued an Order denying the motion to quash
for lack of merit. We quote the pertinent portion of the Order, thus:
After a careful consideration of the arguments of the parties, the Court did not find merit in the
motion.
The serious objection appears to be that the subpoena is violative of the Law on Secrecy of Bank
Deposit, as amended. The law declares bank deposits to be "absolutely confidential" except: x x x
(6) In cases where the money deposited or invested is the subject matter of the litigation.
The case at bench is for the collection of a sum of money from defendants that obtained a loan
from the plaintiff. The loan was secured by defendant GSIS which was the surety. It is the
contention of defendant GSIS that the proceeds of the loan was deviated to purposes other than to
what the loan was extended. The quashal of the subpoena would deny defendant GSIS its right to
prove its defenses.
WHEREFORE, for lack of merit the motion is DENIED.10
On 26 June 2003, another Order was issued by the RTC denying the motion for reconsideration
filed by the banks.11 On 1 September 2003 however, the trial court granted the second motion for
reconsideration filed by the banks. The previous subpoenas issued were consequently quashed.12
The trial court invoked the ruling in Intengan v. Court of Appeals,13 where it was ruled that foreign
currency deposits are absolutely confidential and may be examined only when there is a written
permission from the depositor. The motion for reconsideration filed by GSIS was denied on 30
December 2003.
Hence, these assailed orders are the subject of the petition for certiorari before the Court of
Appeals. GSIS raised the following arguments in support of its petition:
I.
Respondent Judge acted with grave abuse of discretion when it favorably considered respondent
banks (second) Motion for Reconsideration dated July 9, 2003 despite the fact that it did not
contain a notice of hearing and was therefore a mere scrap of paper.
II.
Respondent judge capriciously and arbitrarily ignored Section 2 of the Foreign Currency Deposit
Act (RA 6426) in ruling in his Orders dated September 1 and December 30, 2003 that the
US$11,000,000.00 deposit in the account of respondent Domsat in Westmont Bank is covered by
the secrecy of bank deposit.
III.
Since both respondent banks and respondent Domsat have disclosed during the trial the
US$11,000,000.00 deposit, it is no longer secret and confidential, and petitioner GSIS right to
inquire into what happened to such deposit can not be suppressed.14
The Court of Appeals addressed these issues in seriatim.
The Court of Appeals resorted to a liberal interpretation of the rules to avoid miscarriage of justice
when it allowed the filing and acceptance of the second motion for reconsideration. The appellate
court also underscored the fact that GSIS did not raise the defect of lack of notice in its opposition
to the second motion for reconsideration. The appellate court held that failure to timely object to
the admission of a defective motion is considered a waiver of its right to do so.
The Court of Appeals declared that Domsats deposit in Westmont Bank is covered by Republic Act
No. 6426 or the Bank Secrecy Law. We quote the pertinent portion of the Decision:
It is our considered opinion that Domsats deposit of $11,000,000.00 in Westmont Bank is covered
by the Bank Secrecy Law, as such it cannot be examined, inquired or looked into without the
written consent of its owner. The ruling in Van Twest vs. Court of Appeals was rendered during the
effectivity of CB Circular No. 960, Series of 1983, under Sec. 102 thereof, transfer to foreign
currency deposit account or receipt from another foreign currency deposit account, whether for
payment of legitimate obligation or otherwise, are not eligible for deposit under the System.
CB Circular No. 960 has since been superseded by CB Circular 1318 and later by CB Circular 1389.
Section 102 of Circular 960 has not been re-enacted in the later Circulars. What is applicable now is
the decision in Intengan vs. Court of Appeals where the Supreme Court has ruled that the under
R.A. 6426 there is only a single exception to the secrecy of foreign currency deposits, that is,
disclosure is allowed only upon the written permission of the depositor. Petitioner, therefore, had
inappropriately invoked the provisions of Central Bank (CB) Circular Nos. 343 which has already
been superseded by more recently issued CB Circulars. CB Circular 343 requires the surrender to
the banking system of foreign exchange, including proceeds of foreign borrowings. This
requirement, however, can no longer be found in later circulars.
In its Reply to respondent banks comment, petitioner appears to have conceded that what is
applicable in this case is CB Circular 1389. Obviously, under CB 1389, proceeds of foreign
borrowings are no longer required to be surrendered to the banking system.
Undaunted, petitioner now argues that paragraph 2, Section 27 of CB Circular 1389 is applicable
because Domsats $11,000,000.00 loan from respondent banks was intended to be paid to a
foreign supplier Intersputnik and, therefore, should have been paid directly to Intersputnik and not
deposited into Westmont Bank. The fact that it was deposited to the local bank Westmont Bank,
petitioner claims violates the circular and makes the deposit lose its confidentiality status under
R.A. 6426. However, a reading of the entire Section 27 of CB Circular 1389 reveals that the portion
quoted by the petitioner refers only to the procedure/conditions of drawdown for service of debts
using foreign exchange. The above-said provision relied upon by the petitioner does not in any
manner prescribe the conditions before any foreign currency deposit can be entitled to the
confidentiality provisions of R.A. 6426.15
Anent the third issue, the Court of Appeals ruled that the testimony of the incumbent president of
Westmont Bank is not the written consent contemplated by Republic Act No. 6426.
The Court of Appeals however upheld the issuance of subpoena praying for the production of
applications for cashiers or managers checks by Domsat through Westmont Bank, as well as a
copy of an Agreement and/or Contract and/or Memorandum between Domsat and/or Philippine
Agila Satellite and Intersputnik for the acquisition and/or lease of a Gorizon Satellite. The appellate
court believed that the production of these documents does not involve the examination of
Domsats account since it will never be known how much money was deposited into it or
withdrawn therefrom and how much remains therein.
On 29 February 2008, the Court of Appeals rendered the assailed Decision, the decretal portion of
which reads:
WHEREFORE, the petition is partially GRANTED. Accordingly, the assailed Order dated December
30, 2003 is hereby modified in that the quashal of the subpoena for the production of Domsats
bank ledger in Westmont Bank is upheld while respondent court is hereby ordered to issue
subpoena duces tecum ad testificandum directing the records custodian of Westmont Bank to
bring to court the following documents:
a) applications for cashiers or managers checks by respondent Domsat through Westmont Bank
from January 1997 to December 2002;
b) bank transfers by respondent Domsat through Westmont Bank from January 1997 to December
2002; and
c) copy of an agreement and/or contract and/or memorandum between respondent Domsat
and/or Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of a Gorizon
satellite.
No pronouncement as to costs.16
GSIS filed a motion for reconsideration which the Court of Appeals denied on 19 June 2009. Thus,
the instant petition ascribing grave abuse of discretion on the part of the Court of Appeals in ruling
that Domsats deposit with Westmont Bank cannot be examined and in finding that the banks
second motion for reconsideration in Civil Case No. 99-1853 is procedurally acceptable.17
This Court notes that GSIS filed a petition for certiorari under Rule 65 of the Rules of Court to assail
the Decision and Resolution of the Court of Appeals. Petitioner availed of the improper remedy as
the appeal from a final disposition of the Court of Appeals is a petition for review under Rule 45
and not a special civil action under Rule 65.18 Certiorari under Rule 65 lies only when there is no
appeal, nor plain, speedy and adequate remedy in the ordinary course of law. That action is not a
substitute for a lost appeal in general; it is not allowed when a party to a case fails to appeal a
judgment to the proper forum.19 Where an appeal is available, certiorari will not prosper even if
the ground therefor is grave abuse of discretion. Accordingly, when a party adopts an improper
remedy, his petition may be dismissed outright.20lauuphil
Yet, even if this procedural infirmity is discarded for the broader interest of justice, the petition
sorely lacks merit.
GSIS insists that Domsats deposit with Westmont Bank can be examined and inquired into. It
anchored its argument on Republic Act No. 1405 or the "Law on Secrecy of Bank Deposits," which
allows the disclosure of bank deposits in cases where the money deposited is the subject matter of
the litigation. GSIS asserts that the subject matter of the litigation is the U.S. $11 Million obtained
by Domsat from the Banks to supposedly finance the lease of a Russian satellite from Intersputnik.
Whether or not it should be held liable as a surety for the principal amount of U.S. $11 Million,
GSIS contends, is contingent upon whether Domsat indeed utilized the amount to lease a Russian
satellite as agreed in the Surety Bond Agreement. Hence, GSIS argues that the whereabouts of the
U.S. $11 Million is the subject matter of the case and the disclosure of bank deposits relating to the
U.S. $11 Million should be allowed.
GSIS also contends that the concerted refusal of Domsat and the banks to divulge the
whereabouts of the U.S. $11 Million will greatly prejudice and burden the GSIS pension fund
considering that a substantial portion of this fund is earmarked every year to cover the surety bond
issued.
Lastly, GSIS defends the acceptance by the trial court of the second motion for reconsideration
filed by the banks on the grounds that it is pro forma and did not conform to the notice
requirements of Section 4, Rule 15 of the Rules of Civil Procedure.21
Domsat denies the allegations of GSIS and reiterates that it did not give a categorical or affirmative
written consent or permission to GSIS to examine its bank statements with Westmont Bank.
The Banks maintain that Republic Act No. 1405 is not the applicable law in the instant case because
the Domsat deposit is a foreign currency deposit, thus covered by Republic Act No. 6426. Under
said law, only the consent of the depositor shall serve as the exception for the disclosure of his/her
deposit.
The Banks counter the arguments of GSIS as a mere rehash of its previous arguments before the
Court of Appeals. They justify the issuance of the subpoena as an interlocutory matter which may
be reconsidered anytime and that the pro forma rule has no application to interlocutory orders.
It appears that only GSIS appealed the ruling of the Court of Appeals pertaining to the quashal of
the subpoena for the production of Domsats bank ledger with Westmont Bank. Since neither
Domsat nor the Banks interposed an appeal from the other portions of the decision, particularly
for the production of applications for cashiers or managers checks by Domsat through Westmont
Bank, as well as a copy of an agreement and/or contract and/or memorandum between Domsat
and/or Philippine Agila Satellite and Intersputnik for the acquisition and/or lease of a Gorizon
satellite, the latter became final and executory.
GSIS invokes Republic Act No. 1405 to justify the issuance of the subpoena while the banks cite
Republic Act No. 6426 to oppose it. The core issue is which of the two laws should apply in the
instant case.
Republic Act No. 1405 was enacted in 1955. Section 2 thereof was first amended by Presidential
Decree No. 1792 in 1981 and further amended by Republic Act No. 7653 in 1993. It now reads:
Section 2. All deposits of whatever nature with banks or banking institutions in the Philippines
including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature
and may not be examined, inquired or looked into by any person, government official, bureau or
office, except upon written permission of the depositor, or in cases of impeachment, or upon order
of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where
the money deposited or invested is the subject matter of the litigation.
Section 8 of Republic Act No. 6426, which was enacted in 1974, and amended by Presidential
Decree No. 1035 and later by Presidential Decree No. 1246, provides:
Section 8. Secrecy of Foreign Currency Deposits. All foreign currency deposits authorized under
this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits
authorized under Presidential Decree No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the written permission of the depositor, in no
instance shall foreign currency deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or administrative or legislative or any other
entity whether public or private; Provided, however, That said foreign currency deposits shall be
exempt from attachment, garnishment, or any other order or process of any court, legislative body,
government agency or any administrative body whatsoever. (As amended by PD No. 1035, and
further amended by PD No. 1246, prom. Nov. 21, 1977.)
On the one hand, Republic Act No. 1405 provides for four (4) exceptions when records of deposits
may be disclosed. These are under any of the following instances: a) upon written permission of
the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of
bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is the
subject matter of the litigation, and e) in cases of violation of the Anti-Money Laundering Act
(AMLA), the Anti-Money Laundering Council (AMLC) may inquire into a bank account upon order
of any competent court.22 On the other hand, the lone exception to the non-disclosure of foreign
currency deposits, under Republic Act No. 6426, is disclosure upon the written permission of the
depositor.
These two laws both support the confidentiality of bank deposits. There is no conflict between
them. Republic Act No. 1405 was enacted for the purpose of giving encouragement to the people
to deposit their money in banking institutions and to discourage private hoarding so that the same
may be properly utilized by banks in authorized loans to assist in the economic development of the
country.23 It covers all bank deposits in the Philippines and no distinction was made between
domestic and foreign deposits. Thus, Republic Act No. 1405 is considered a law of general
application. On the other hand, Republic Act No. 6426 was intended to encourage deposits from
foreign lenders and investors.24 It is a special law designed especially for foreign currency deposits
in the Philippines. A general law does not nullify a specific or special law. Generalia specialibus non
derogant.25 Therefore, it is beyond cavil that Republic Act No. 6426 applies in this case.
Intengan v. Court of Appeals affirmed the above-cited principle and categorically declared that for
foreign currency deposits, such as U.S. dollar deposits, the applicable law is Republic Act No. 6426.
In said case, Citibank filed an action against its officers for persuading their clients to transfer their
dollar deposits to competitor banks. Bank records, including dollar deposits of petitioners,
purporting to establish the deception practiced by the officers, were annexed to the complaint.
Petitioners now complained that Citibank violated Republic Act No. 1405. This Court ruled that
since the accounts in question are U.S. dollar deposits, the applicable law therefore is not Republic
Act No. 1405 but Republic Act No. 6426.
The above pronouncement was reiterated in China Banking Corporation v. Court of Appeals,26
where respondent accused his daughter of stealing his dollar deposits with Citibank. The latter
allegedly received the checks from Citibank and deposited them to her account in China Bank. The
subject checks were presented in evidence. A subpoena was issued to employees of China Bank to
testify on these checks. China Bank argued that the Citibank dollar checks with both respondent
and/or her daughter as payees, deposited with China Bank, may not be looked into under the law
on secrecy of foreign currency deposits. This Court highlighted the exception to the non-disclosure
of foreign currency deposits, i.e., in the case of a written permission of the depositor, and ruled that
respondent, as owner of the funds unlawfully taken and which are undisputably now deposited
with China Bank, he has the right to inquire into the said deposits.
Applying Section 8 of Republic Act No. 6426, absent the written permission from Domsat,
Westmont Bank cannot be legally compelled to disclose the bank deposits of Domsat, otherwise, it
might expose itself to criminal liability under the same act.27
The basis for the application of subpoena is to prove that the loan intended for Domsat by the
Banks and guaranteed by GSIS, was diverted to a purpose other than that stated in the surety bond.
The Banks, however, argue that GSIS is in fact liable to them for the proper applications of the loan
proceeds and not vice-versa. We are however not prepared to rule on the merits of this case lest
we pre-empt the findings of the lower courts on the matter.
The third issue raised by GSIS was properly addressed by the appellate court. The appellate court
maintained that the judge may, in the exercise of his sound discretion, grant the second motion for
reconsideration despite its being pro forma. The appellate court correctly relied on precedents
where this Court set aside technicality in favor of substantive justice. Furthermore, the appellate
court accurately pointed out that petitioner did not assail the defect of lack of notice in its
opposition to the second motion of reconsideration, thus it can be considered a waiver of the
defect.
WHEREFORE, the petition for certiorari is DISMISSED. The Decision dated 29 February 2008 and 19
June 2009 Resolution of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.
G.R. No. 159912 August 17, 2007
UNITED COCONUT PLANTERS BANK, Petitioner,
vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul
the Court of Appeals Decision1 dated 21 January 2003 and its Resolution2 dated 9 September
2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and Resolution affirmed in
turn the Decision3 dated 23 March 2000 and Order4 dated 8 May 2000 of the Regional Trial Court
(RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest rate provided in
the promissory notes executed by the respondents Spouses Samuel and Odette Beluso (spouses
Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a maximum amount of
P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other than
their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by
Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the obligation. The
Credit Agreement was subsequently amended to increase the amount of the Promissory Notes
Line to a maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:
PN # Date of PN Maturity Date Amount Secured
8314-96-00083-3 29 April 1996 27 August 1996 P 700,000
8314-96-00085-0 2 May 1996 30 August 1996 P 500,000
8314-96-000292-2 20 November 1996 20 March 1997 P 800,000
The three promissory notes were renewed several times. On 30 April 1997, the payment of the
principal and interest of the latter two promissory notes were debited from the spouses Belusos
account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the spouses
Beluso under one promissory note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for a total of P350,000.00:
PN # Date of PN Maturity Date Amount Secured
97-00363-1 11 December 1997 28 February 1998 P 200,000
98-00002-4 2 January 1998 28 February 1998 P 150,000
However, the spouses Beluso alleged that the amounts covered by these last two promissory notes
were never released or credited to their account and, thus, claimed that the principal indebtedness
was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum of
P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:
PN # Amount Secured Interest Penalty Total
97-00363-1 P 200,000 31% 36% P 225,313.24
30.17% 32.786%
97-00366-6 P 700,000 P 795,294.72
(7 days) (102 days)
28% 30.41%
97-00368-2 P 1,300,000 P 1,462,124.54
(2 days) (102 days)
33%
98-00002-4 P 150,000 36% P 170,034.71
(102 days)
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith. On 28
December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure their
credit line, which, by that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB]
void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered to return to
[the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses Beluso] the
amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The spouses Beluso]
are hereby ordered to pay [UCPB] the sum of P1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,6 prompting UCPB to appeal
the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial Court,
Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the modification
that defendant-appellant UCPB is not liable for attorneys fees or the costs of suit.7
On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack of
merit. UCPB thus filed the present petition, submitting the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE
ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE
PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER AND RESPONDENTS
II
ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS
INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF ONLY ONE
MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)
III
ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE
FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED "INCORRECT
COMPUTATION" OF RESPONDENTS INDEBTEDNESS
IV
ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER
LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT
V
ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS
ARE GUILTY OF FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO
(BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK
(LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of ______________
PESOS, (P_____), Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or
as determined by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically fixed, at
the time of execution thereof, at the "rate indicative of the DBD retail rate." UCPB contends that
said provision must be read with another stipulation in the promissory notes subjecting to review
the interest rate as fixed:
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.10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or "prime
rate" allowed by this Court in Polotan v. Court of Appeals.11 Furthermore, UCPB argues that even if
the proviso "as determined by the branch head" is considered void, such a declaration would not
ipso facto render the connecting clause "indicative of DBD retail rate" void in view of the
separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in this AGREEMENT,
or documents executed in connection herewith shall be declared invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in
any way be affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not infringe on the principle
of mutuality of contracts, because the spouses Beluso had the liberty to choose whether or not to
renew their credit line at the new interest rates pegged by petitioner.13 UCPB also claims that
assuming there was any defect in the mutuality of the contract at the time of its inception, such
defect was cured by the subsequent conduct of the spouses Beluso in availing themselves of the
credit line from April 1996 to February 1998 without airing any protest with respect to the interest
rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left
to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals,15 where we held:
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 party's (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.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as
determined by the Branch Head" is indeed dependent solely on the will of petitioner UCPB. Under
such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is given
this choice, the rate should be categorically determinable in both choices. If either of these two
choices presents an opportunity for UCPB to fix the rate at will, the bank can easily choose such an
option, thus making the entire interest rate provision violative of the principle of mutuality of
contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a
rate "as determined by the Branch Head" gives the latter unfettered discretion on what the rate
may be. The Branch Head may choose any rate he or she desires. As regards the rate "indicative of
the DBD retail rate," the same cannot be considered as valid for being akin to a "prevailing rate" or
"prime rate" allowed by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and
Trust Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can
easily determine the interest rate by applying simple arithmetic. On the other hand, the provision
in the case at bar does not specify any margin above or below the DBD retail rate. UCPB can peg
the interest at any percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.
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:
dealings with the BORROWER.17
It should be pointed out that the authority to review the interest rate was given 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
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.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel 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.18
The interest rate provisions in the case at bar are illegal not only because of the provisions of the
Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the
Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions of
credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of
the State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure
of such cost with a view of preventing the uninformed use of credit to the detriment of the national
economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending
provisions are found in the promissory notes themselves, not in the credit line. In fixing the interest
rates in the promissory notes to cover the renewed credit line, UCPB still reserved to itself the same
two options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed
by UCPB, both failed to include in their computation of the outstanding obligation of the spouses
Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges were also
deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on "Interest
and other Bank Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic)
payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be used
on the total principal amount outstanding and unpaid computed from the date of acceleration
until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the
Note as attorneys fee, aside from the expenses and costs of collection whether actually incurred or
not, and a penalty charge of one percent (1%) per month on the total amount due and unpaid
from date of default until fully paid.21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06 of the
Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be entitled
to recover attorneys fees equivalent to not less than twenty-five percent (25%) of the total
amounts due and outstanding exclusive of costs and other expenses.22
Another alleged computational error pointed out by UCPB is the negation of the Compounding
Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and
shall be subject to the same interest rate as herein stipulated.23 and paragraph 3 of the subject
promissory notes:
Interest not paid when due shall be added to, and become part of the principal and shall likewise
bear interest at the same rate.24
UCPB lastly avers that the application of the spouses Belusos payments in the disputed
computation does not reflect the parties agreement.1avvphi1 The RTC deducted the payment
made by the spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00. This
was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties
as to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on
Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties agreed that the
amount of P763,693.00 was applied to the interest and not to the principal, in accord with Section
3.03, Article II of the Credit Agreement on "Order of the Application of Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in accordance
with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total
amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There being
no valid demand, according to the spouses Beluso, there would be no default, and therefore the
interests and penalties would not commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso, attorneys fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand.26
The excess amount in such a demand does not nullify the demand itself, which is valid with respect
to the proper amount. A contrary ruling would put commercial transactions in disarray, as validity
of demands would be dependent on the exactness of the computations thereof, which are too
often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that
said legal interest should be imposed, thus: "There being no valid stipulation as to interest, the
legal rate of interest shall be charged."27 It seems that the RTC inadvertently overlooked its
non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in
both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is
null and void, only the legal rate of interest which is 12% per annum can be legally charged and
imposed by the bank, which would amount to only about P599,000.00 since 1996 up to August 31,
1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair advantage of the weaker
party to their contract, declaring the legal rate of 12% per annum, as the imposable rate of interest
up to February 28, 1999 on the loan of 2.350 million.28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a
12% legal interest on their loans. When the RTC failed to include the 12% legal interest in its
computation, however, the spouses Beluso merely defended in the appellate courts this
non-inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a
12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the compounding of
interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the spouses
Beluso in their petition with the RTC. The compounding of interests has furthermore been declared
by this Court to be legal. We have held in Tan v. Court of Appeals,29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the interest due and unpaid, which
as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise upholding the imposition
thereof in the contract, we find the rate iniquitous. Like in the case of grossly excessive interests,
the penalty stipulated in the contract may also be reduced by the courts if it is iniquitous or
unconscionable.30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering
the fact that this penalty is already over and above the compounded interest likewise imposed in
the contract. If a 36% interest in itself has been declared unconscionable by this Court,31 what
more a 30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself
must have realized this, as it gave us a sample computation of the spouses Belusos obligation if
both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there had
been no demand. Filing a case in court is the judicial demand referred to in Article 116932 of the
Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso were
forced to litigate the issue on the illegality of the interest rate provision of the promissory notes.
The award of attorneys fees, it must be recalled, falls under the sound discretion of the court.33
Since both parties were forced to litigate to protect their respective rights, and both are entitled to
the award of attorneys fees from the other, practical reasons dictate that we set off or compensate
both parties liabilities for attorneys fees. Therefore, instead of awarding attorneys fees in favor of
petitioner, we shall merely affirm the deletion of the award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of
12% per annum and a penalty charge of 12% per annum. We also hold that, instead of awarding
attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of attorneys
fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated
on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses Beluso failed to
exercise their right of redemption which expired on 25 March 2000. The RTC, however, annulled the
foreclosure of mortgage based on an alleged incorrect computation of the spouses Belusos
indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the
case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates of sale
were mooted by the subsequent issuance of new certificates of title in the name of said bank.
UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a collateral
attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree No. 1529,
otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in
accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive demand
on their account, they cannot be said to be in default for refusing to pay the same. Consequently,
according to the spouses Beluso, the "enforcement of such illegal and overcharged demand
through foreclosure of mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found
that a valid demand was made by UCPB upon the spouses Beluso, despite being excessive, the
spouses Beluso are considered in default with respect to the proper amount of their obligation to
UCPB and, thus, the property they mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be applied to the extent of the amounts to
which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this
case. The grounds for the proper annulment of the foreclosure sale are the following: (1) that there
was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser; (2)
that the sale had not been fairly and regularly conducted; or (3) that the price was inadequate and
the inadequacy was so great as to shock the conscience of the court.34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged
violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the following
circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be liable to
such person in the amount of P100 or in an amount equal to twice the finance charge required by
such creditor in connection with such transaction, whichever is greater, except that such liability
shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought
by such person within one year from the date of the occurrence of the violation, in any court of
competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint did
not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the
amended petition [which expressly alleges violation of the Truth in Lending Act] was made either
by [respondents] spouses Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending
Act had been barred by the one-year prescriptive period provided for in the Act. UCPB asserts that
per the records of the case, the latest of the subject promissory notes had been executed on 2
January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9
February 1999, which was after the expiration of the period to file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act
and no action to formally admit the amended petition was made either by [respondents] spouses
Beluso and the lower court. In such transactions, the debtor and the lending institutions do not
deal on an equal footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof by the lender. We
find that its infringement may be inferred or implied from allegations that when [respondents]
spouses Beluso executed the promissory notes, the interest rate chargeable thereon were left
blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose in full to [respondents]
Spouses Beluso the charges applicable on their loans.36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the Court of Appeals, we find that the allegation
of violation of the Truth in Lending Act can also be inferred from the same allegation in the
complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the
provision of their promissory note granting respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the promissory note but was left solely to the will
of the Branch Head of the respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates
certainly also means that the promissory notes do not contain a "clear statement in writing" of "(6)
the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the
finance charge bears to the amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation."38Furthermore, the spouses Belusos prayer "for
such other reliefs just and equitable in the premises" should be deemed to include the civil penalty
provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending
Act has already prescribed is likewise without merit. The penalty for the violation of the act is P100
or an amount equal to twice the finance charge required by such creditor in connection with such
transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any credit
transaction.39 As this penalty depends on the finance charge required of the borrower, the
borrowers cause of action would only accrue when such finance charge is required. In the case at
bar, the date of the demand for payment of the finance charge is 2 September 1998, while the
foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is therefore
within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint.40 Pertinent provisions of the Act
read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person
any information in violation of this Act or any regulation issued thereunder shall be liable to such
person in the amount of P100 or in an amount equal to twice the finance charge required by such
creditor in connection with such transaction, whichever is the greater, except that such liability shall
not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by
such person within one year from the date of the occurrence of the violation, in any court of
competent jurisdiction. In any action under this subsection in which any person is entitled to a
recovery, the creditor shall be liable for reasonable attorneys fees and court costs as determined
by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder
shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6
months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section
6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty therefor
is an amount of P100 or in an amount equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that the liability shall not exceed
P2,000.00 on any credit transaction. The action to recover such penalty may be instituted by the
aggrieved private person separately and independently from the criminal case for the same
offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in
Lending Act had been jointly instituted with (1) the action to declare the interests in the promissory
notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2,
Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate
amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same was
not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed, due
process mandates that a defendant should be sufficiently apprised of the matters he or she would
be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the
spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in Lending Act
was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing
the borrower in writing before the execution of the Promissory Notes of the interest rate expressed
as a percentage of the total loan, the respondent bank instead is liable to pay petitioners double
the amount the bank is charging petitioners by way of sanction for its violation.41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act
provision to express the interest rate as a simple annual percentage of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the
assertion of this issue in this case as to prevent it from putting up a defense thereto is plainly
hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the
Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure void. There had been no
question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the
above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since
the former is merely a preparatory contract to the contract of loan or mutuum. Under such credit
line, the bank is merely obliged, for the considerations specified therefor, to lend to the other party
amounts not exceeding the limit provided. The credit transaction thus occurred not when the
credit line was opened, but rather when the credit line was availed of. In the case at bar, the
violation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit
Agreement, where no interest rate was mentioned, but when the parties executed the promissory
notes, where the allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
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:
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;
(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.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on
the ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before the RTC
of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case No. V-7227
initially appears to be a different action, as it prayed for the issuance of a temporary restraining
order and/or injunction to stop foreclosure of spouses Belusos properties, it poses issues which are
similar to those of the present case.43 To prove its point, UCPB cited the spouses Belusos
Amended Petition in Civil Case No. V-7227, which contains similar allegations as those in the
present case. The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-314 for lack of merit.
Petitioner UCPB raised the same issue with the Court of Appeals, and is raising the same issue with
us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a
Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true
account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before
the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that
Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could act on the
restraining order, UCPB proceeded with the foreclosure and auction sale. As the act sought to be
restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to file
a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati
City.
Even if we assume for the sake of argument, however, that only one cause of action is involved in
the two civil actions, namely, the violation of the right of the spouses Beluso not to have their
property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the
filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before the
filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as provided for in
the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following
instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss
based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action or
claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1,
not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived, abandoned,
or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the provisions of the
statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with.44 (Emphases
supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the
dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled. As
regards all the other grounds, the complainant is allowed to file same action, but should take care
that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent
condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the
spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been
ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the same issue at the time
of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will still not
change our findings. It is indeed the general rule that in cases where there are two pending actions
between the same parties on the same issue, it should be the later case that should be dismissed.
However, this rule is not absolute. According to this Court in Allied Banking Corporation v. Court of
Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of the later
action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal of
the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if
the later action is the more appropriate vehicle for the ventilation of the issues between the parties.
Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.
What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant considerations in
determining which action should be dismissed: (1) the date of filing, with preference generally
given to the first action filed to be retained; (2) whether the action sought to be dismissed was filed
merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and (3)
whether the action is the appropriate vehicle for litigating the issues between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction
against a foreclosure sale that has already been held, while Civil Case No. 99-314 before the RTC of
Makati City includes an action for the annulment of said foreclosure, an action certainly more
proper in view of the execution of the foreclosure sale. The former case was improperly filed in
Roxas City, while the latter was filed in Makati City, the proper venue of the action as mandated by
the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is the more appropriate
vehicle for litigating the issues between the parties, as compared to Civil Case No. V-7227. Thus,
we rule that the RTC of Makati City was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent spouses
Samuel and Odette Beluso are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due47 from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette
Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments shall be applied
to the date of actual payment of the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to the
following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the
Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure sale.
SO ORDERED.
G.R. No. 161397 June 30, 2005
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
FELIPE P. ARCILLA, JR., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 161426 June 30, 2005
FELIPE P. ARCILLA, JR., Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
CALLEJO, SR., J.:
Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP) in
October 1981. About five or six months thereafter, he was assigned to the legal department, and
thereafter, decided to avail of a loan under the Individual Housing Project (IHP) of the bank.1 On
September 12, 1983, DBP and Arcilla executed a Deed of Conditional Sale2 over a parcel of land, as
well as the house to be constructed thereon, for the price of P160,000.00. Arcilla borrowed the said
amount from DBP for the purchase of the lot and the construction of a residential building thereon.
He obliged himself to pay the loan in 25 years, with a monthly amortization of P1,417.91, with 9%
interest per annum, to be deducted from his monthly salary.3
DBP obliged itself to transfer the title of the property upon the payment of the loan, including any
increments thereof. It was also agreed therein that if Arcilla availed of optional retirement, he could
elect to continue paying the loan, provided that the loan/amount would be converted into a
regular real estate loan account with the prevailing interest assigned on real estate loans, payable
within the remaining term of the loan account.4
Arcilla was notified of the periodic release of his loan.5 During the period of July 1984 to December
31, 1986, the monthly amortizations for the said account were deducted from his monthly salary,
for which he was issued receipts.6
The monthly amortization was increased to P1,468.92 in November 1984, and to P1,691.51
beginning January 1985. However, Arcilla opted to resign from the bank in December 1986.
Conformably with the Deed of Conditional Sale, the bank informed him, on June 11, 1987, that the
balance of his loan account with the bank had been converted to a regular housing loan, thus:
Amount converted to Monthly

Interest Rate Remaining Term
PHLoan Amortization
P 155,218.79 - 1 9% 22 yrs. & 6 mos< P1,342.72
6,802.45 - 2 9% 21 yrs. & 10 mos. 59.41
24,342.91 - 3 9% 22 yrs. 212.07

Plus:
MRI
at
PC. P1,614.20
41/th
ousa
nd
76.41
P186,
364.1 Total P1,690.617
5 =========
On July 24, 1987, Arcilla signed three Promissory Notes8 for the total amount of P186,364.15. He
was also obliged to pay service charge and interests, as follows:
a.1 On the amount advanced or balance thereof that remains unpaid for 30
days* or less:
Interest on advances at 7% p.a. over DBP's borrowing

i.
cost:
ii. No 2% service charge
iii. No 8% penalty charge
a.2 On the amount advanced or balance thereof that remains unpaid for
more than 30 days:
Interest on the advance

at 7% p.a. ]
i.
over DBP's borrowing ]
cost;
One time 2% service -- To be

ii. ]
charge computed from
Interest on the service the start of the

iii. ]
charge 30-day
8% penalty charge on
the balances
iv. ] period
of the advances and
service charge.9
Arcilla also agreed to pay to DBP the following:

*Insurance Premiums - 30-day period to be computed from date of advances
Other Advances - 30-day period to be computed from date of notification
b. Taxes
b. One time service

2% of the amount advanced
1 charge
Interest - 7% p.a. over borrowing cost

b. Interest and penalty
Penalty charge 8% p.a. if unpaid
2 charge
after 30 days from date of advance
Interest of the
]
advance at
i. 7% p.a. over DBP's ]
To be computed from start of

borrowing costs; ]--
30-day period
One time 2% service

ii. ]
charge
Interest on the service

iii. ]
charge
8% penalty charge on
the ]
iv. balances of the ]
advance and ]
service charge.
*Insurance Premiums - 30-day period to be computed from date of advances.

Other Advances - 30-day period to be computed from date of notification.
b. Taxes
b. One time service

2% of the amount advanced
1 charge
Interest - 7% p.a. over borrowing

cost
b. Interest and penalty Penalty charge 8% p.a. if
2 charge unpaid
after 30 days from date of
advance
However, Arcilla also agreed to the reservation by the DBP of its right to increase (with notice to
him) the "rate of interest on the loan, as well as all other fees and charges on loans and advances
pursuant to such policy as it may adopt from time to time during the period of the loan; Provided,
that the rate of interest on the loan shall be reduced by law or by the Monetary Board; Provided,
further, that the adjustment in the rate of interest shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest."10
Upon his request, DBP agreed to grant Arcilla an additional cash advance of P32,000.00. Thereafter,
on May 23, 1984, a Supplement to the Conditional Sale Agreement was executed in which DBP and
Arcilla agreed on the following terms of the loan:
Intere
st Te
Am
Rate r
oun Amortization
Per m
t
Annu s
m
Nine
(9%)
per
cent
MRI 24
P32, P271.57
for ye
000.
P32,0 ar
00 12.80
00.00 s
at
P0.40/
1,000.
00
P32, same (E
000. to be st.
00 conso A P 284.37
lidate m =========
d with or
the t.)
origin
al
advan
ce in
accor
dance
with
Condi
tion
No. 8
hereof
.11
The additional advance was, thus, consolidated to the outstanding balance of Arcilla's original
advance, payable within the remaining term thereof at 9% per annum. However, he failed to pay his
loan account, advances, penalty charges and interests which, as of October 31, 1990, amounted to
P241,940.93.12 DBP rescinded the Deed of Conditional Sale by notarial act on November 27,
1990.13 Nevertheless, it wrote Arcilla, on January 3, 1992, giving him until October 24, 1992, within
which to repurchase the property upon full payment of the current appraisal or updated total,
whichever is lesser; in case of failure to do so, the property would be advertised for bidding.14 DBP
reiterated the said offer on October 7, 1992.15 Arcilla failed to respond. Consequently, the property
was advertised for sale at public bidding on February 14, 1994.16
Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo, Rizal, on
February 21, 1994. He alleged that DBP failed to furnish him with the disclosure statement required
by Republic Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158 prior to the execution of the
deed of conditional sale and the conversion of his loan account with the bank into a regular
housing loan account. Despite this, DBP immediately deducted the account from his salary as early
as 1984. Moreover, the bank applied its own formula and imposed its usurious interests, penalties
and charges on his loan account and advances. He further alleged, thus:
13. That when plaintiff could no longer cope-up with defendant's illegal and usurious impositions,
the DBP unilaterally increased further the rate of interest, without notice to the latter, and
heaped-up usurious interests, penalties and charges;
---
14. That to further bend the back of the plaintiff, defendant rescinded the subject deed of
conditional sale on 4 December 1990 without giving due notice to plaintiff;
15. That much later, on 10 October 1993, plaintiff received a letter from defendant dated 19
September 1993, informing plaintiff that the subject deed of conditional sale was already rescinded
on 4 December 1990 (xerox copy of the same is hereto attached and made an integral part hereof
as Annex "C";17
In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No. 3765
and CB Circular No. 158 because the details required in said statements were particularly disclosed
in the promissory notes, deed of conditional sale and the required notices sent to Arcilla. In any
event, its failure to comply strictly with R.A. No. 3765 did not affect the validity and enforceability
of the subject contracts or transactions. DBP interposed a counterclaim for the possession of the
property.
On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified the notarial
rescission of the deeds executed by the parties. The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant.1avvphil.zw+ Defendant is hereby directed to furnish the disclosure
statement to the plaintiff within five (5) days upon receipt hereof in the manner and form provided
by R.A. No. 3765 and submit to this Court for approval the total obligation of the plaintiff as of this
date, within ten (10) days from receipt of this order. The Notarial Rescission (Exh. "16") dated
November 27, 1990 is hereby declared null and void. Costs against the defendant.
SO ORDERED.18
DBP appealed the decision to the Court of Appeals (CA) wherein it made the following assignment
of errors:
4.1. The trial court erred in ruling that the provision of the details of the loan without the issuance
of a "Disclosure Statement" is not compliance with the "Truth in Lending Act;"
4.2. The trial court erred in declaring the Notarial Rescission null and void; and
4.3. The trial court erred in denying DBP's counterclaims for recovery of possession, back rentals
and litigation expenses.19
On May 29, 2003, the CA rendered judgment setting aside and reversing the decision of the RTC. In
ordering the dismissal of the complaint, the appellate court ruled that DBP substantially complied
with R.A. No. 3765 and CB Circular No. 158. Arcilla filed a motion for reconsideration of the
decision. For its part, DBP filed a motion for partial reconsideration of the decision, praying that
Arcilla be ordered to vacate the property. However, the appellate court denied both motions.
The parties filed separate petitions for review on certiorari with this Court. The first petition,
entitled Development Bank of the Philippines v. Court of Appeals, was docketed as G.R. No. 161397;
the second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was docketed as G.R. No. 161426.
The Court resolved to consolidate the two cases.
The issues raised in the two petitions are the following: a) whether or not petitioner DBP complied
with the disclosure requirement of R.A. No. 3765 and CB Circular No. 158, Series of 1978, in the
execution of the deed of conditional sale, the supplemental deed of conditional sale, as well as the
promissory notes; and b) whether or not respondent Felipe Arcilla, Jr. is mandated to vacate the
property and pay rentals for his occupation thereof after the notarial rescission of the deed of
conditional sale was rescinded by notarial act, as well as the supplement executed by DBP.
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the DBP, as the
creditor bank, was mandated to furnish him with the requisite information in such form prescribed
by the Central Bank before the commutation of the loan transaction. He avers that the disclosure
of the details of the loan contained in the deed of conditional sale and the supplement thereto, the
promissory notes and release sheet, do not constitute substantial compliance with the law and the
CB Circular. He avers that the required disclosure did not include the following:
[T]he percentage of Finance Charges to Total Amount Financed (Computed in accordance with
Sec. 2(i) of CB Circular 158; the Additional Charges in case certain stipulations in the contract are
not met by the debtor; Total Non-Finance Charges; Total Finance Charges, Effective Interest Rate,
etc. 20
Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No. 3765 and
CB Circular No. 158 forecloses its right to rescind the transaction between them, and to demand
compliance of his obligation arising from said transaction. Moreover, the bank had no right to
deduct the monthly amortizations from his salary without first complying with the mandate of R.A.
No. 3765.
DBP, on the other hand, avers that all the information required by R.A. No. 3765 was already
contained in the loan transaction documents. It posits that even if it failed to comply strictly with
the disclosure requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the law, the validity
and enforceability of any action or transaction is not affected. It asserts that Arcilla was estopped
from invoking R.A. No. 3765 because he failed to demand compliance with R.A. No. 3765 from the
bank before the consummation of the loan transaction, until the time his complaint was filed with
the trial court.
In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering judgment on its
counterclaim for the possession of the subject property, and the liability of Arcilla for rentals while
in the possession of the property after the notarial rescission of the deeds of conditional sale. For
his part, Arcilla (in G.R. No. 161426) insists that the respondent failed to comply with its obligation
under R.A. No. 3765; hence, the notarial rescission of the deed of conditional sale and the
supplement thereof was null and void. Until DBP complies with its obligation, he is not obliged to
comply with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank,
as creditor, is obliged to furnish a client with a clear statement, in writing, setting forth, to the
extent applicable and in accordance with the rules and regulations prescribed by the Monetary
Board of the Central Bank of the Philippines, the following information:
(3) the difference between the amounts set forth under clauses (1) and (2);
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be
included in the contract covering the credit transaction or any other document to be
acknowledged and signed by the debtor, thus:
The contract covering the credit transaction, or any other document to be acknowledged and
signed by the debtor, shall indicate the above seven items of information. In addition, the contract
or document shall specify additional charges, if any, which will be collected in case certain
stipulations in the contract are not met by the debtor.
Furthermore, the contract or document shall specify additional charges, if any, which will be
collected in case certain stipulations in the contract are not met by the debtor.21
If the borrower is not duly informed of the data required by the law prior to the consummation of
the availment or drawdown, the lender will have no right to collect such charge or increases thereof,
even if stipulated in the promissory note.22 However, such failure shall not affect the validity or
enforceability of any contract or transaction.23
In the present case, DBP failed to disclose the requisite information in the disclosure statement
form authorized by the Central Bank, but did so in the loan transaction documents between it and
Arcilla. There is no evidence on record that DBP sought to collect or collected any interest, penalty
or other charges, from Arcilla other than those disclosed in the said
deeds/documents.1avvphi1.zw+
The Court is convinced that Arcilla's claim of not having been furnished the data/information
required by R.A. No. 3765 and CB Circular No. 158 was but an afterthought. Despite the notarial
rescission of the conditional sale in 1990, and DBP's subsequent repeated offers to repurchase the
property, the latter maintained his silence. Arcilla filed his complaint only on February 21, 1994, or
four years after the said notarial rescission. The Court finds and so holds that the following findings
and ratiocinations of the CA are correct:
After a careful perusal of the records, We find that the appellee had been sufficiently informed of
the terms and the requisite charges necessarily included in the subject loan. It must be stressed
that the Truth in Lending Act (R.A. No. 3765), was enacted primarily "to protect its 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" (Emata vs. Intermediate Appellate Court, 174, SCRA 464 [1989];
Sec. 2, R.A. No. 3765). Contrary to appellee's claim that he was not sufficiently informed of the
details of the loan, the records disclose that the required informations were readily available in the
three (3) promissory notes he executed. Precisely, the said promissory notes were executed to
apprise appellee of the remaining balance on his loan when the same was converted into a regular
housing loan. And on its face, the promissory notes signed by no less than the appellee readily
shows all the data required by the Truth in Lending Act (R.A. No. 3765).
Apropos, We agree with the appellant that appellee, a lawyer, would not be so gullible or negligent
as to sign documents without knowing fully well the legal implications and consequences of his
actions, and that appellee was a former employee of appellant. As such employee, he is as well
presumed knowledgeable with matters relating to appellant's business and fully cognizant of the
terms of the loan he applied for, including the charges that had to be paid.
It might have been different if the borrower was, say, an ordinary employee eager to buy his first
house and is easily lured into accepting onerous terms so long as the same is payable on
installments. In such cases, the Court would be disposed to be stricter in the application of the
Truth in Lending Act, insisting that the borrower be fully informed of what he is entering into. But
in the case at bar, considering appellee's education and training, We must hold, in the light of the
evidence at hand, that he was duly informed of the necessary charges and fully understood their
implications and effects. Consequently, the trial court's annulment of the rescission anchored on
this ground was unjustified.24
Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from 1990,
a review of the records has shown that it failed to adduce evidence on the reasonable amount of
rentals for Arcilla's occupancy of the property. Hence, the Court orders a remand of the case to the
court of origin, for the parties to adduce their respective evidence on the bank's counterclaim.
IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is DENIED for lack of merit. The
petition in G.R. No. 161397 is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional Trial Court of Antipolo, Rizal,
Branch 73, for it to resolve the counterclaim of the Development Bank of the Philippines for
possession of the property, and for the reasonable rentals for Felipe P. Arcilla, Jr.'s occupancy
thereof after the notarial rescission of the Deed of Conditional Sale in 1990.
Costs against petitioner Felipe P. Arcilla, Jr.
SO ORDERED.
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 Certiorari1 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
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.
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
Notes8 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
Petitioners religiously paid interest on the notes at the following rates:
1. 1st Promissory Note dated July 24, 1989 19.5%;
2. 2nd Promissory Note dated November 22, 1989 23%;
3. 3rd Promissory Note dated March 21, 1990 22%;
4. 4th Promissory Note dated July 19, 1990 24%;
5. 5th Promissory Note dated December 17, 1990 28%;
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 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%;
2. 10th Promissory Note dated March 19, 1992 25%;
6. 14th Promissory Note dated July 12, 1993 17.5%;
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%;
17. 25th Promissory Note dated May 30, 1997 17.5%; and
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 due 120
days later or on October 28, 1997 became past due, and despite repeated demands, petitioners
failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in case of default,
as follows:
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)
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:
Princ
P 2,500,000.00
ipal
Inter
538,874.94
est
581,666.66
Pena
lties
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
For his part, PNB Kalibo Branch Manager Diosdado Aspa, Jr. (Aspa), the sole witness for respondent,
stated on cross-examination 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
Ruling of the Regional Trial Court
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 on prevailing rates upon which to peg such variable interest rates;33
3. The Promissory Note, as the principal contract evidencing petitioners loan, prevails over the
Credit Agreement and the Real Estate Mortgage.
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 and demandable, the foreclosure was regularly made;36
6. By the admission of petitioners during pre-trial, all payments made to PNB were properly
applied to the principal, interest and penalties.37
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 Order39 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.
SO ORDERED.40
Ruling of the Court of Appeals
Petitioners appealed to the CA, which issued the questioned Decision with the following decretal
portion:
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:
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 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;
2) Whether x x x the penalty charges were secured by the real estate mortgage; and
3) Whether x x x the extrajudicial foreclosure and sale are valid.42
The CA noted that, based on receipts presented by petitioners during trial, the latter dutifully paid
a total of P3,027,324.60 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.
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 of P736.56 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)
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
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
The following issues are raised in this Petition:
I
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.
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 1991-1998 IN THE ADMITTED TOTAL AMOUNT OF
P3,484,287.00, TO PAYMENT OF THE PRINCIPAL OF P2,500,000.[00] LEAVING AN OVERPAYMENT
OFP984,287.00 REFUNDABLE BY RESPONDENT TO PETITIONER[S] WITH INTEREST OF 12% PER
ANNUM.
II
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 of P984,287.00.
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 T-16208. 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 the P581,666.66
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 self-serving,
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 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."
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
interest rate 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
maximum interest rate.
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:
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.
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.
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 de-escalation, 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 de-escalation 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:
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 the limits allowed by law at any
time depending on whatever policy it may adopt in the future: Provided, that the interest rate on
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.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan depending on
imposed on the Loan interest at a rate per annum which is equal to the Banks spread over 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
8th Promissory Note dated July 11, 1991 24%.79
On the other hand, the August 1991 Amendment to Credit Agreement contains the following
stipulation regarding interest:
date of each 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:
9th Promissory Note dated November 8, 1991 26%;
10th Promissory Note dated March 19, 1992 25%;
14th Promissory Note dated July 12, 1993 17.5%;
19th Promissory Note dated April 10, 1995 21%;
20th Promissory Note dated July 19, 1995 18.5%;
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:
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
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 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 rate 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
maximum interest rate.85 (Emphasis supplied)
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan depending on
imposed on the Loan interest at a rate per annum, which is equal to the Banks spread over the
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
date of each 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:
information:
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 execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
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:
information:
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
re-negotiation; 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 Frames99 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.
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.
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 necessary for him to have excepted to and appealed from the judgment.102
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;
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;
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);
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;
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, 1998106 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 balance/obligation precisely
because petitioners have paid beyond the amount of the principal and interest;
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
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.
G.R. No. 192413 June 13, 2012
Rizal Commercial Banking Corporation, Petitioner,
vs.
Hi-Tri Development Corporation and Luz R. Bakunawa, Respondents.
DECISION
SERENO, J.:
Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal Commercial
Banking Corporation (RCBC) against respondents Hi-Tri Development Corporation (Hi-Tri) and Luz
R. Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26 November 2009 Decision and 27
May 2010 Resolution of the Court of Appeals (CA),1 which reversed and set aside the 19 May 2008
Decision and 3 November 2008 Order of the Makati City Regional Trial Court (RTC) in Civil Case No.
06-244.2 The case before the RTC involved the Complaint for Escheat filed by the Republic of the
Philippines (Republic) pursuant to Act No. 3936, as amended by Presidential Decree No. 679 (P.D.
679), against certain deposits, credits, and unclaimed balances held by the branches of various
banks in the Philippines. The trial court declared the amounts, subject of the special proceedings,
escheated to the Republic and ordered them deposited with the Treasurer of the Philippines
(Treasurer) and credited in favor of the Republic.3 The assailed RTC judgments included an
unclaimed balance in the amount of P 1,019,514.29, maintained by RCBC in its Ermita Business
Center branch.
We quote the narration of facts of the CA4 as follows:
x x x Luz [R.] Bakunawa and her husband Manuel, now deceased ("Spouses Bakunawa") are
registered owners of six (6) parcels of land covered by TCT Nos. 324985 and 324986 of the Quezon
City Register of Deeds, and TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of
Deeds. These lots were sequestered by the Presidential Commission on Good Government
[(PCGG)].
Sometime in 1990, a certain Teresita Millan ("Millan"), through her representative, Jerry
Montemayor, offered to buy said lots for "P 6,724,085.71", with the promise that she will take care
of clearing whatever preliminary obstacles there may[]be to effect a "completion of the sale". The
Spouses Bakunawa gave to Millan the Owners Copies of said TCTs and in turn, Millan made a
down[]payment of "P 1,019,514.29" for the intended purchase. However, for one reason or another,
Millan was not able to clear said obstacles. As a result, the Spouses Bakunawa rescinded the sale
and offered to return to Millan her down[]payment of P 1,019,514.29. However, Millan refused to
accept back the P 1,019,514.29 down[]payment. Consequently, the Spouses Bakunawa, through
their company, the Hi-Tri Development Corporation ("Hi-Tri") took out on October 28, 1991, a
Managers Check from RCBC-Ermita in the amount of P 1,019,514.29, payable to Millans company
Rosmil Realty and Development Corporation ("Rosmil") c/o Teresita Millan and used this as one of
their basis for a complaint against Millan and Montemayor which they filed with the Regional Trial
Court of Quezon City, Branch 99, docketed as Civil Case No. Q-91-10719 [in 1991], praying that:
1. That the defendants Teresita Mil[l]an and Jerry Montemayor may be ordered to return to
plaintiffs spouses the Owners Copies of Transfer Certificates of Title Nos. 324985, 324986, 103724,
98827, 98828 and 98829;
2. That the defendant Teresita Mil[l]an be correspondingly ordered to receive the amount of One
Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine Centavos (P
1,019,514.29);
3. That the defendants be ordered to pay to plaintiffs spouses moral damages in the amount of P
2,000,000.00; and
4. That the defendants be ordered to pay plaintiffs attorneys fees in the amount of P 50,000.00.
Being part and parcel of said complaint, and consistent with their prayer in Civil Case No.
Q-91-10719 that "Teresita Mil[l]an be correspondingly ordered to receive the amount of One
Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine [Centavos] ("P
1,019,514.29")["], the Spouses Bakunawa, upon advice of their counsel, retained custody of RCBC
Managers Check No. ER 034469 and refrained from canceling or negotiating it.
All throughout the proceedings in Civil Case No. Q-91-10719, especially during negotiations for a
possible settlement of the case, Millan was informed that the Managers Check was available for
her withdrawal, she being the payee.
On January 31, 2003, during the pendency of the abovementioned case and without the
knowledge of [Hi-Tri and Spouses Bakunawa], x x x RCBC reported the "P 1,019,514.29-credit
existing in favor of Rosmil" to the Bureau of Treasury as among its "unclaimed balances" as of
January 31, 2003. Allegedly, a copy of the Sworn Statement executed by Florentino N. Mendoza,
Manager and Head of RCBCs Asset Management, Disbursement & Sundry Department ("AMDSD")
was posted within the premises of RCBC-Ermita.
On December 14, 2006, x x x Republic, through the [Office of the Solicitor General (OSG)], filed with
the RTC the action below for Escheat [(Civil Case No. 06-244)].
On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute with Rosmil and Millan.
Instead of only the amount of "P 1,019,514.29", [Spouses Bakunawa] agreed to pay Rosmil and
Millan the amount of "P 3,000,000.00", [which is] inclusive [of] the amount of ["]P 1,019,514.29". But
during negotiations and evidently prior to said settlement, [Manuel Bakunawa, through Hi-Tri]
inquired from RCBC-Ermita the availability of the P 1,019,514.29 under RCBC Managers Check No.
ER 034469. [Hi-Tri and Spouses Bakunawa] were however dismayed when they were informed that
the amount was already subject of the escheat proceedings before the RTC.
On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x RCBC, viz:
"We understand that the deposit corresponding to the amount of Php 1,019,514.29 stated in the
Managers Check is currently the subject of escheat proceedings pending before Branch 150 of the
Makati Regional Trial Court.
Please note that it was our impression that the deposit would be taken from [Hi-Tris] RCBC bank
account once an order to debit is issued upon the payees presentation of the Managers Check.
Since the payee rejected the negotiated Managers Check, presentation of the Managers Check
was never made.
Consequently, the deposit that was supposed to be allocated for the payment of the Managers
Check was supposed to remain part of the Corporation[s] RCBC bank account, which, thereafter,
continued to be actively maintained and operated. For this reason, We hereby demand your
confirmation that the amount of Php 1,019,514.29 continues to form part of the funds in the
Corporations RCBC bank account, since pay-out of said amount was never ordered. We wish to
point out that if there was any attempt on the part of RCBC to consider the amount indicated in
the Managers Check separate from the Corporations bank account, RCBC would have issued a
statement to that effect, and repeatedly reminded the Corporation that the deposit would be
considered dormant absent any fund movement. Since the Corporation never received any
statements of account from RCBC to that effect, and more importantly, never received any single
letter from RCBC noting the absence of fund movement and advising the Corporation that the
deposit would be treated as dormant."
On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBC reiterating their position as
above-quoted.
In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Tri and Spouses Bakunawa]
that:
"The Banks Ermita BC informed Hi-Tri and/or its principals regarding the inclusion of Managers
Check No. ER034469 in the escheat proceedings docketed as Civil Case No. 06-244, as well as the
status thereof, between 28 January 2008 and 1 February 2008.
xxx xxx xxx
Contrary to what Hi-Tri hopes for, the funds covered by the Managers Check No. ER034469 does
not form part of the Banks own account. By simple operation of law, the funds covered by the
managers check in issue became a deposit/credit susceptible for inclusion in the escheat case
initiated by the OSG and/or Bureau of Treasury.
xxx xxx xxx
Granting arguendo that the Bank was duty-bound to make good the check, the Banks obligation
to do so prescribed as early as October 2001."
(Emphases, citations, and annotations were omitted.)
The RTC Ruling
The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial court
rendered its assailed Decision declaring the deposits, credits, and unclaimed balances subject of
Civil Case No. 06-244 escheated to the Republic. Among those included in the order of forfeiture
was the amount of P 1,019,514.29 held by RCBC as allocated funds intended for the payment of the
Managers Check issued in favor of Rosmil. The trial court ordered the deposit of the escheated
balances with the Treasurer and credited in favor of the Republic. Respondents claim that they were
not able to participate in the trial, as they were not informed of the ongoing escheat proceedings.
Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the partial
reconsideration of the RTC Decision insofar as it escheated the fund allocated for the payment of
the Managers Check. They asked that they be included as party-defendants or, in the alternative,
allowed to intervene in the case and their motion considered as an answer-in-intervention.
Respondents argued that they had meritorious grounds to ask reconsideration of the Decision or,
alternatively, to seek intervention in the case. They alleged that the deposit was subject of an
ongoing dispute (Civil Case No. Q-91-10719) between them and Rosmil since 1991, and that they
were interested parties to that case.5
On 3 November 2008, the RTC issued an Order denying the motion of respondents. The trial court
explained that the Republic had proven compliance with the requirements of publication and
notice, which served as notice to all those who may be affected and prejudiced by the Complaint
for Escheat. The RTC also found that the motion failed to point out the findings and conclusions
that were not supported by the law or the evidence presented, as required by Rule 37 of the Rules
of Court. Finally, it ruled that the alternative prayer to intervene was filed out of time.
The CA Ruling
On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008 Decision and
3 November 2008 Order of the RTC. According to the appellate court,6 RCBC failed to prove that
the latter had communicated with the purchaser of the Managers Check (Hi-Tri and/or Spouses
Bakunawa) or the designated payee (Rosmil) immediately before the bank filed its Sworn
Statement on the dormant accounts held therein. The CA ruled that the banks failure to notify
respondents deprived them of an opportunity to intervene in the escheat proceedings and to
present evidence to substantiate their claim, in violation of their right to due process. Furthermore,
the CA pronounced that the Makati City RTC Clerk of Court failed to issue individual notices
directed to all persons claiming interest in the unclaimed balances, as well as to require them to
appear after publication and show cause why the unclaimed balances should not be deposited
with the Treasurer of the Philippines. It explained that the jurisdictional requirement of individual
notice by personal service was distinct from the requirement of notice by publication.
Consequently, the CA held that the Decision and Order of the RTC were void for want of
jurisdiction.
Issue
After a perusal of the arguments presented by the parties, we cull the main issues as follows:
I. Whether the Decision and Order of the RTC were void for failure to send separate notices to
respondents by personal service
II. Whether petitioner had the obligation to notify respondents immediately before it filed its
Sworn Statement with the Treasurer
III. Whether or not the allocated funds may be escheated in favor of the Republic
Discussion
Petitioner bank assails7 the CA judgments insofar as they ruled that notice by personal service
upon respondents is a jurisdictional requirement in escheat proceedings. Petitioner contends that
respondents were not the owners of the unclaimed balances and were thus not entitled to notice
from the RTC Clerk of Court. It hinges its claim on the theory that the funds represented by the
Managers Check were deemed transferred to the credit of the payee or holder upon its issuance.
We quote the pertinent provision of Act No. 3936, as amended, on the rule on service of processes,
to wit:
Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances, he shall
commence an action or actions in the name of the People of the Republic of the Philippines in the
Court of First Instance of the province or city where the bank, building and loan association or trust
corporation is located, in which shall be joined as parties the bank, building and loan association or
trust corporation and all such creditors or depositors. All or any of such creditors or depositors or
banks, building and loan association or trust corporations may be included in one action. Service
of process in such action or actions shall be made by delivery of a copy of the complaint and
summons to the president, cashier, or managing officer of each defendant bank, building and loan
association or trust corporation and by publication of a copy of such summons in a newspaper of
general circulation, either in English, in Filipino, or in a local dialect, published in the locality where
the bank, building and loan association or trust corporation is situated, if there be any, and in case
there is none, in the City of Manila, at such time as the court may order. Upon the trial, the court
must hear all parties who have appeared therein, and if it be determined that such unclaimed
balances in any defendant bank, building and loan association or trust corporation are unclaimed
as hereinbefore stated, then the court shall render judgment in favor of the Government of the
Republic of the Philippines, declaring that said unclaimed balances have escheated to the
Government of the Republic of the Philippines and commanding said bank, building and loan
association or trust corporation to forthwith deposit the same with the Treasurer of the Philippines
to credit of the Government of the Republic of the Philippines to be used as the National Assembly
may direct.
At the time of issuing summons in the action above provided for, the clerk of court shall also issue
a notice signed by him, giving the title and number of said action, and referring to the complaint
therein, and directed to all persons, other than those named as defendants therein, claiming any
interest in any unclaimed balance mentioned in said complaint, and requiring them to appear
within sixty days after the publication or first publication, if there are several, of such summons,
and show cause, if they have any, why the unclaimed balances involved in said action should not
be deposited with the Treasurer of the Philippines as in this Act provided and notifying them that if
they do not appear and show cause, the Government of the Republic of the Philippines will apply
to the court for the relief demanded in the complaint. A copy of said notice shall be attached to,
and published with the copy of, said summons required to be published as above, and at the end
of the copy of such notice so published, there shall be a statement of the date of publication, or
first publication, if there are several, of said summons and notice. Any person interested may
appear in said action and become a party thereto. Upon the publication or the completion of the
publication, if there are several, of the summons and notice, and the service of the summons on
the defendant banks, building and loan associations or trust corporations, the court shall have full
and complete jurisdiction in the Republic of the Philippines over the said unclaimed balances and
over the persons having or claiming any interest in the said unclaimed balances, or any of them,
and shall have full and complete jurisdiction to hear and determine the issues herein, and render
the appropriate judgment thereon. (Emphasis supplied.)
Hence, insofar as banks are concerned, service of processes is made by delivery of a copy of the
complaint and summons upon the president, cashier, or managing officer of the defendant bank.8
On the other hand, as to depositors or other claimants of the unclaimed balances, service is made
by publication of a copy of the summons in a newspaper of general circulation in the locality where
the institution is situated.9 A notice about the forthcoming escheat proceedings must also be
issued and published, directing and requiring all persons who may claim any interest in the
unclaimed balances to appear before the court and show cause why the dormant accounts should
not be deposited with the Treasurer.
Accordingly, the CA committed reversible error when it ruled that the issuance of individual notices
upon respondents was a jurisdictional requirement, and that failure to effect personal service on
them rendered the Decision and the Order of the RTC void for want of jurisdiction. Escheat
proceedings are actions in rem,10whereby an action is brought against the thing itself instead of
the person.11 Thus, an action may be instituted and carried to judgment without personal service
upon the depositors or other claimants.12 Jurisdiction is secured by the power of the court over
the res.13 Consequently, a judgment of escheat is conclusive upon persons notified by
advertisement, as publication is considered a general and constructive notice to all persons
interested.14
Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds allocated
for the payment of the Managers Check in the escheat proceedings.
Escheat proceedings refer to the judicial process in which the state, by virtue of its sovereignty,
steps in and claims abandoned, left vacant, or unclaimed property, without there being an
interested person having a legal claim thereto.15 In the case of dormant accounts, the state
inquires into the status, custody, and ownership of the unclaimed balance to determine whether
the inactivity was brought about by the fact of death or absence of or abandonment by the
depositor.16 If after the proceedings the property remains without a lawful owner interested to
claim it, the property shall be reverted to the state "to forestall an open invitation to self-service by
the first comers."17 However, if interested parties have come forward and lain claim to the
property, the courts shall determine whether the credit or deposit should pass to the claimants or
be forfeited in favor of the state.18 We emphasize that escheat is not a proceeding to penalize
depositors for failing to deposit to or withdraw from their accounts. It is a proceeding whereby the
state compels the surrender to it of unclaimed deposit balances when there is substantial ground
for a belief that they have been abandoned, forgotten, or without an owner.19
Act No. 3936, as amended, outlines the proper procedure to be followed by banks and other
similar institutions in filing a sworn statement with the Treasurer concerning dormant accounts:
Sec. 2. Immediately after the taking effect of this Act and within the month of January of every odd
year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer
of the Philippines a statement, under oath, of their respective managing officers, of all credits and
deposits held by them in favor of persons known to be dead, or who have not made further
deposits or withdrawals during the preceding ten years or more, arranged in alphabetical order
according to the names of creditors and depositors, and showing:
(a) The names and last known place of residence or post office addresses of the persons in whose
favor such unclaimed balances stand;
(b) The amount and the date of the outstanding unclaimed balance and whether the same is in
money or in security, and if the latter, the nature of the same;
(c) The date when the person in whose favor the unclaimed balance stands died, if known, or the
date when he made his last deposit or withdrawal; and
(d) The interest due on such unclaimed balance, if any, and the amount thereof.
A copy of the above sworn statement shall be posted in a conspicuous place in the premises of the
bank, building and loan association, or trust corporation concerned for at least sixty days from the
date of filing thereof: Provided, That immediately before filing the above sworn statement, the
bank, building and loan association, and trust corporation shall communicate with the person in
whose favor the unclaimed balance stands at his last known place of residence or post office
address.
It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time to
time the existence of unclaimed balances held by banks, building and loan associations, and trust
corporations. (Emphasis supplied.)
As seen in the afore-quoted provision, the law sets a detailed system for notifying depositors of
unclaimed balances. This notification is meant to inform them that their deposit could be
escheated if left unclaimed. Accordingly, before filing a sworn statement, banks and other similar
institutions are under obligation to communicate with owners of dormant accounts. The purpose
of this initial notice is for a bank to determine whether an inactive account has indeed been
unclaimed, abandoned, forgotten, or left without an owner. If the depositor simply does not wish
to touch the funds in the meantime, but still asserts ownership and dominion over the dormant
account, then the bank is no longer obligated to include the account in its sworn statement.20 It is
not the intent of the law to force depositors into unnecessary litigation and defense of their rights,
as the state is only interested in escheating balances that have been abandoned and left without
an owner.
In case the bank complies with the provisions of the law and the unclaimed balances are eventually
escheated to the Republic, the bank "shall not thereafter be liable to any person for the same and
any action which may be brought by any person against in any bank xxx for unclaimed balances so
deposited xxx shall be defended by the Solicitor General without cost to such bank."21 Otherwise,
should it fail to comply with the legally outlined procedure to the prejudice of the depositor, the
bank may not raise the defense provided under Section 5 of Act No. 3936, as amended.
Petitioner asserts22 that the CA committed a reversible error when it required RCBC to send prior
notices to respondents about the forthcoming escheat proceedings involving the funds allocated
for the payment of the Managers Check. It explains that, pursuant to the law, only those "whose
favor such unclaimed balances stand" are entitled to receive notices. Petitioner argues that, since
the funds represented by the Managers Check were deemed transferred to the credit of the payee
upon issuance of the check, the proper party entitled to the notices was the payee Rosmil and
not respondents. Petitioner then contends that, in any event, it is not liable for failing to send a
separate notice to the payee, because it did not have the address of Rosmil. Petitioner avers that it
was not under any obligation to record the address of the payee of a Managers Check.
In contrast, respondents Hi-Tri and Bakunawa allege23 that they have a legal interest in the fund
allocated for the payment of the Managers Check. They reason that, since the funds were part of
the Compromise Agreement between respondents and Rosmil in a separate civil case, the approval
and eventual execution of the agreement effectively reverted the fund to the credit of respondents.
Respondents further posit that their ownership of the funds was evidenced by their continued
custody of the Managers Check.
An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank (drawee),24
requesting the latter to pay a person named therein (payee) or to the order of the payee or to the
bearer, a named sum of money.25 The issuance of the check does not of itself operate as an
assignment of any part of the funds in the bank to the credit of the drawer.26 Here, the bank
becomes liable only after it accepts or certifies the check.27After the check is accepted for
payment, the bank would then debit the amount to be paid to the holder of the check from the
account of the depositor-drawer.
There are checks of a special type called managers or cashiers checks. These are bills of exchange
drawn by the banks manager or cashier, in the name of the bank, against the bank itself.28
Typically, a managers or a cashiers check is procured from the bank by allocating a particular
amount of funds to be debited from the depositors account or by directly paying or depositing to
the bank the value of the check to be drawn. Since the bank issues the check in its name, with itself
as the drawee, the check is deemed accepted in advance.29Ordinarily, the check becomes the
primary obligation of the issuing bank and constitutes its written promise to pay upon demand.30
Nevertheless, the mere issuance of a managers check does not ipso facto work as an automatic
transfer of funds to the account of the payee. In case the procurer of the managers or cashiers
check retains custody of the instrument, does not tender it to the intended payee, or fails to make
an effective delivery, we find the following provision on undelivered instruments under the
Negotiable Instruments Law applicable:31
Sec. 16. Delivery; when effectual; when presumed. Every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto.
As between immediate parties and as regards a remote party other than a holder in due course,
the delivery, in order to be effectual, must be made either by or under the authority of the party
making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may
be shown to have been conditional, or for a special purpose only, and not for the purpose of
transferring the property in the instrument. But where the instrument is in the hands of a holder in
due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is
proved. (Emphasis supplied.)
Petitioner acknowledges that the Managers Check was procured by respondents, and that the
amount to be paid for the check would be sourced from the deposit account of Hi-Tri.32 When
Rosmil did not accept the Managers Check offered by respondents, the latter retained custody of
the instrument instead of cancelling it. As the Managers Check neither went to the hands of
Rosmil nor was it further negotiated to other persons, the instrument remained undelivered.
Petitioner does not dispute the fact that respondents retained custody of the instrument.33
Since there was no delivery, presentment of the check to the bank for payment did not occur. An
order to debit the account of respondents was never made. In fact, petitioner confirms that the
Managers Check was never negotiated or presented for payment to its Ermita Branch, and that the
allocated fund is still held by the bank.34As a result, the assigned fund is deemed to remain part of
the account of Hi-Tri, which procured the Managers Check. The doctrine that the deposit
represented by a managers check automatically passes to the payee is inapplicable, because the
instrument although accepted in advance remains undelivered. Hence, respondents should
have been informed that the deposit had been left inactive for more than 10 years, and that it may
be subjected to escheat proceedings if left unclaimed.1wphi1
After a careful review of the RTC records, we find that it is no longer necessary to remand the case
for hearing to determine whether the claim of respondents was valid. There was no contention that
they were the procurers of the Managers Check. It is undisputed that there was no effective
delivery of the check, rendering the instrument incomplete. In addition, we have already settled
that respondents retained ownership of the funds. As it is obvious from their foregoing actions that
they have not abandoned their claim over the fund, we rule that the allocated deposit, subject of
the Managers Check, should be excluded from the escheat proceedings. We reiterate our
pronouncement that the objective of escheat proceedings is state forfeiture of unclaimed balances.
We further note that there is nothing in the records that would show that the OSG appealed the
assailed CA judgments. We take this failure to appeal as an indication of disinterest in pursuing the
escheat proceedings in favor of the Republic.
WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May 2010 Resolution
of the Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.
SO ORDERED.
G.R. No. 176944 March 6, 2013
RET. LT. GEN. JACINTO C. LIGOT, ERLINDA Y. LIGOT, PAULO Y. LIGOT, RIZA Y. LIGOT, and MIGUEL Y.
LIGOT, Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, represented by the ANTI-MONEY LAUNDERING COUNCIL,
Respondent.
DECISION
BRION, J.:
In this petition for certiorari,1 retired Lieutenant General (Lt. Gen.) Jacinto C. Ligot, Erlinda Y. Ligot
(Mrs. Ligot), Paulo Y. Ligot, Riza Y. Ligot, and Miguel Y. Ligot (petitioners) claim that the Court of
Appeals (CA) acted with grave abuse of discretion amounting to lack or excess of jurisdiction when
it issued its January 12, 2007 resolution2 in CA G.R. SP No. 90238. This assailed resolution affirmed
in toto the CAs earlier January 4, 2006 resolution3 extending the freeze order issued against the
Ligots properties for an indefinite period of time.
BACKGROUND FACTS
On June 27, 2005, the Republic of the Philippines (Republic), represented by the Anti-Money
Laundering Council (AMLC), filed an Urgent Ex-Parte Application for the issuance of a freeze order
with the CA against certain monetary instruments and properties of the petitioners, pursuant to
Section 104 of Republic Act (RA) No. 9160, as amended (otherwise known as the Anti-Money
Laundering Act of 2001). This application was based on the February 1, 2005 letter of the Office of
the Ombudsman to the AMLC, recommending that the latter conduct an investigation on Lt. Gen.
Ligot and his family for possible violation of RA No. 9160.5
In support of this recommendation, the Ombudsman attached the Complaint6 it filed against the
Ligots for perjury under Article 183 of the Revised Penal Code, and for violations of Section 87 of
RA No. 67138 and RA No. 3019 (Anti-Graft and Corrupt Practices Act).
The Ombudsmans Complaint
a. Lt. Gen. Ligot and immediate family
The Ombudsmans complaint alleges that Lt. Gen. Ligot served in the Armed Forces of the
Philippines (AFP) for 33 years and 2 months, from April 1, 1966 as a cadet until his retirement on
August 17, 2004.9 He and Mrs. Ligot have four children, namely: Paulo Y. Ligot, Riza Y. Ligot,
George Y. Ligot and Miguel Y. Ligot, who have all reached the age of majority at the time of the
filing of the complaint.10
Lt. Gen. Ligot declared in his Statement of Assets, Liabilities, and Net Worth (SALN) that as of
December 31, 2003, he had assets in the total amount of Three Million Eight Hundred Forty-Eight
Thousand and Three Pesos (P3,848,003.00).11 In contrast, his declared assets in his 1982 SALN
amounted to only One Hundred Five Thousand Pesos (P105,000.00).12
Aside from these declared assets, the Ombudsmans investigation revealed that Lt. Gen. Ligot and
his family had other properties and bank accounts, not declared in his SALN, amounting to at least
Fifty Four Million One Thousand Two Hundred Seventeen Pesos (P54,001,217.00). These
undeclared assets consisted of the following:
Undeclared Assets Amount
P
Jacinto Ligots undeclared assets 41,185,583.531
3
Jacinto Ligots childrens assets 1,744,035.6014
P
Tuition fees and travel expenses
2,308,047.8715
Edgardo Yambaos assets relative to the real P
properties 8,763,550.0016
Total P 54,001,217.00
Bearing in mind that Lt. Gen. Ligots main source of income was his salary as an officer of the
AFP,17 and given his wife and childrens lack of any other substantial sources of income,18 the
Ombudsman declared the assets registered in Lt. Gen. Ligots name, as well as those in his wifes
and childrens names, to be illegally obtained and unexplained wealth, pursuant to the provisions
of RA No. 1379 (An Act Declaring Forfeiture in Favor of the State Any Property Found to Have Been
Unlawfully Acquired by Any Public Officer or Employee and Providing for the Proceedings
Therefor).
b. Edgardo Tecson Yambao
The Ombudsmans investigation also looked into Mrs. Ligots younger brother, Edgardo Tecson
Yambao. The records of the Social Security System (SSS) revealed that Yambao had been employed
in the private sector from 1977 to 1994. Based on his contributions to the SSS, Yambao did not
have a substantial salary during his employment. While Yambao had an investment with Mabelline
Foods, Inc., the Ombudsman noted that this company only had a net income of P5,062.96 in 2002
and P693.67 in 2003.19 Moreover, the certification from the Bureau of Internal Revenue stated that
Yambao had no record of any annual Individual Income
Tax Return filed for the calendar year 1999 up to the date of the investigation.
Despite Yambaos lack of substantial income, the records show that he has real properties and
vehicles registered in his name, amounting to Eight Million Seven Hundred Sixty Three Thousand
Five Hundred Fifty Pesos (P8,763,550.00), which he acquired from 1993 onwards. The Office of the
Ombudsman further observed that in the documents it examined, Yambao declared three of the
Ligots addresses as his own.
From these circumstances, the Ombudsman concluded that Yambao acted as a dummy and/or
nominee of the Ligot spouses, and all the properties registered in Yambaos name actually belong
to the Ligot family.
Urgent Ex-Parte Freeze Order Application
As a result of the Ombudsmans complaint, the Compliance and Investigation staff (CIS) of the
AMLC conducted a financial investigation, which revealed the existence of the Ligots various bank
accounts with several financial institutions.20 On April 5, 2005, the Ombudsman for the Military
and Other Law Enforcement Officers issued a resolution holding that probable cause exists that Lt.
Gen. Ligot violated Section 8, in relation to Section 11, of RA No. 6713, as well as Article 18321 of
the Revised Penal Code.
On May 25, 2005, the AMLC issued Resolution No. 52, Series of 2005, directing the Executive
Director of the AMLC Secretariat to file an application for a freeze order against the properties of Lt.
Gen. Ligot and the members of his family with the CA.22 Subsequently, on June 27, 2005, the
Republic filed an Urgent Ex-Parte Application with the appellate court for the issuance of a Freeze
Order against the properties of the Ligots and Yambao.
The appellate court granted the application in its July 5, 2005 resolution, ruling that probable cause
existed that an unlawful activity and/or money laundering offense had been committed by Lt. Gen.
Ligot and his family, including Yambao, and that the properties sought to be frozen are related to
the unlawful activity or money laundering offense. Accordingly, the CA issued a freeze order
against the Ligots and Yambaos various bank accounts, web accounts and vehicles, valid for a
period of 20 days from the date of issuance.
On July 26, 2005, the Republic filed an Urgent Motion for Extension of Effectivity of Freeze Order,
arguing that if the bank accounts, web accounts and vehicles were not continuously frozen, they
could be placed beyond the reach of law enforcement authorities and the governments efforts to
recover the proceeds of the Ligots unlawful activities would be frustrated. In support of its motion,
it informed the CA that the Ombudsman was presently investigating the following cases involving
the Ligots:
Case Number Complainant(s) Nature
OMB-P-C-05- Wilfredo
Plunder
0523 Garrido
OMB-P-C-05- AGIO Gina

Perjury
0003 Villamor, et al.
Field Violation of RA No. 3019, Section 3(b); Perjury under Article 183,
OMB-P-C-05-
Investigation Revised Penal Code in relation to Section 11 of RA No. 6713;
0184
Office Forfeiture Proceedings in Relation to RA No. 1379
OMB-P-C-05-0
David Odilao Malicious Mischief; Violation of Section 20, RA No. 7856
352
Finding merit in the Republics arguments, the CA granted the motion in its September 20, 2005
resolution, extending the freeze order until after all the appropriate proceedings and/or
investigations have been terminated.
On September 28, 2005, the Ligots filed a motion to lift the extended freeze order, principally
arguing that there was no evidence to support the extension of the freeze order. They further
argued that the extension not only deprived them of their property without due process; it also
punished them before their guilt could be proven. The appellate court subsequently denied this
motion in its January 4, 2006 resolution.
Meanwhile, on November 15, 2005, the "Rule of Procedure in Cases of Civil Forfeiture, Asset
Preservation, and Freezing of Monetary Instrument, Property, or Proceeds Representing, Involving,
or Relating to an Unlawful Activity or Money Laundering Offense under Republic Act No. 9160, as
Amended"23 (Rule in Civil Forfeiture Cases) took effect. Under this rule, a freeze order could be
extended for a maximum period of six months.
On January 31, 2006, the Ligots filed a motion for reconsideration of the CAs January 4, 2006
resolution, insisting that the freeze order should be lifted considering: (a) no predicate crime has
been proven to support the freeze orders issuance; (b) the freeze order expired six months after it
was issued on July 5, 2005; and (c) the freeze order is provisional in character and not intended to
supplant a case for money laundering. When the CA denied this motion in its resolution dated
January 12, 2007, the Ligots filed the present petition.
THE PETITIONERS ARGUMENTS
Lt. Gen. Ligot argues that the appellate court committed grave abuse of discretion amounting to
lack or excess of jurisdiction when it extended the freeze order issued against him and his family
even though no predicate crime had been duly proven or established to support the allegation of
money laundering. He also maintains that the freeze order issued against them ceased to be
effective in view of the 6-month extension limit of freeze orders provided under the Rule in Civil
Forfeiture Cases. The CA, in extending the freeze order, not only unduly deprived him and his
family of their property, in violation of due process, but also penalized them before they had been
convicted of the crimes they stand accused of.
THE REPUBLICS ARGUMENTS
In opposition, the Republic claims that the CA can issue a freeze order upon a determination that
probable cause exists, showing that the monetary instruments or properties subject of the freeze
order are related to the unlawful activity enumerated in RA No. 9160. Contrary to the petitioners
claims, it is not necessary that a formal criminal charge must have been previously filed against
them before the freeze order can be issued.
The Republic further claims that the CAs September 20, 2005 resolution, granting the Republics
motion to extend the effectivity of the freeze order, had already become final and executory, and
could no longer be challenged. The Republic notes that the Ligots erred when they filed what is
effectively a second motion for reconsideration in response to the CAs January 4, 2006 resolution,
instead of filing a petition for review on certiorari via Rule 45 with this Court. Under these
circumstances, the assailed January 4, 2006 resolution granting the freeze order had already
attained finality when the Ligots filed the present petition before this Court.
THE COURTS RULING
We find merit in the petition.
I. Procedural aspect
a. Certiorari not proper remedy to assail freeze order; exception
Section 57 of the Rule in Civil Forfeiture Cases explicitly provides the remedy available in cases
involving freeze orders issued by the CA:
Section 57. Appeal. - Any party aggrieved by the decision or ruling of the court may appeal to the
Supreme Court by petition for review on certiorari under Rule 45 of the Rules of Court. The appeal
shall not stay the enforcement of the subject decision or final order unless the Supreme Court
directs otherwise. [italics supplied]
From this provision, it is apparent that the petitioners should have filed a petition for review on
certiorari, and not a petition for certiorari, to assail the CA resolution which extended the effectivity
period of the freeze order over their properties.
Even assuming that a petition for certiorari is available to the petitioners, a review of their petition
shows that the issues they raise (i.e., existence of probable cause to support the freeze order; the
applicability of the 6-month limit to the extension of freeze orders embodied in the Rule of
Procedure in Cases of Civil Forfeiture) pertain to errors of judgment allegedly committed by the CA,
which fall outside the Courts limited jurisdiction when resolving certiorari petitions. As held in
People v. Court of Appeals:24
In a petition for certiorari, the jurisdiction of the court is narrow in scope. It is limited to resolving
only errors of jurisdiction. It is not to stray at will and resolve questions or issues beyond its
competence such as errors of judgment. Errors of judgment of the trial court are to be resolved by
the appellate court in the appeal by and of error or via a petition for review on certiorari in this
Court under Rule 45 of the Rules of Court. Certiorari will issue only to correct errors of jurisdiction.
It is not a remedy to correct errors of judgment. An error of judgment is one in which the court
may commit in the exercise of its jurisdiction, and which error is reversible only by an appeal. Error
of jurisdiction is one where the act complained of was issued by the court without or in excess of
jurisdiction and which error is correctible only by the extraordinary writ of certiorari. Certiorari will
not be issued to cure errors by the trial court in its appreciation of the evidence of the parties, and
its conclusions anchored on the said findings and its conclusions of law. As long as the court acts
within its jurisdiction, any alleged errors committed in the exercise of its discretion will amount to
nothing more than mere errors of judgment, correctible by an appeal or a petition for review under
Rule 45 of the Rules of Court.25 (citations omitted; italics supplied)
Clearly, the Ligots should have filed a petition for review on certiorari, and not what is effectively a
second motion for reconsideration (nor an original action of certiorari after this second motion
was denied), within fifteen days from receipt of the CAs January 4, 2006 resolution. To recall, this
resolution denied the petitioners motion to lift the extended freeze order which is effectively a
motion for reconsideration of the CA ruling extending the freeze order indefinitely.26
However, considering the issue of due process squarely brought before us in the face of an
apparent conflict between Section 10 of RA No. 9160, as amended, and Section 53(b) of the Rule in
Civil Forfeiture Cases, this Court finds it imperative to relax the application of the rules of
procedure and resolve this case on the merits in the interest of justice.27
b. Applicability of 6-month extension period under the Rule in Civil Forfeiture Cases
Without challenging the validity of the fixed 6-month extension period, the Republic nonetheless
asserts that the Rule in Civil Forfeiture Cases does not apply to the present case because the CA
had already resolved the issues regarding the extension of the freeze order before the
Rule in Civil Forfeiture Cases came into effect.
This reasoning fails to convince us.
Notably, the Rule in Civil Forfeiture Cases came into effect on December 15, 2005. Section 59
provides that it shall "apply to all pending civil forfeiture cases or petitions for freeze order" at the
time of its effectivity.
A review of the record reveals that after the CA issued its September 20, 2005 resolution extending
the freeze order, the Ligots filed a motion to lift the extended freeze order on September 28, 2005.
Significantly, the CA only acted upon this motion on January 4, 2006, when it issued a resolution
denying it.
While denominated as a Motion to Lift Extended Freeze Order, this motion was actually a motion
for reconsideration, as it sought the reversal of the assailed CA resolution. Since the Ligots motion
for reconsideration was still pending resolution at the time the Rule in Civil Forfeiture Cases came
into effect on December 15, 2005, the Rule unquestionably applies to the present case.
c. Subsequent events
During the pendency of this case, the Republic manifested that on September 26, 2011, it filed a
Petition for Civil Forfeiture with the Regional Trial Court (RTC) of Manila. On September 28, 2011,
the RTC, Branch 22, Manila, issued a Provisional Asset Preservation Order and on October 5, 2011,
after due hearing, it issued an Asset Preservation Order.
On the other hand, the petitioners manifested that as of October 29, 2012, the only case filed in
connection with the frozen bank accounts is Civil Case No. 0197, for forfeiture of unlawfully
acquired properties under RA No. 1379 (entitled "Republic of the Philippines v. Lt. Gen. Jacinto
Ligot, et. al."), pending before the Sandiganbayan.
These subsequent developments and their dates are significant in our consideration of the present
case, particularly the procedural aspect. Under Section 56 of the Rule in Civil Forfeiture Cases which
provides that after the post-issuance hearing on whether to modify, lift or extend the freeze order,
the CA shall remand the case and transmit the records to the RTC for consolidation with the
pending civil forfeiture proceeding. This provision gives the impression that the filing of the
appropriate cases in courts in 2011 and 2012 rendered this case moot and academic.
A case is considered moot and academic when it "ceases to present a justiciable controversy by
virtue of supervening events, so that a declaration thereon would be of no practical use or value.
Generally, courts decline jurisdiction over such case or dismiss it on ground of mootness."28
However, the moot and academic principle is not an iron-clad rule and is subject to four settled
exceptions,29 two of which are present in this case, namely: when the constitutional issue raised
requires the formulation of controlling principles to guide the bench, the bar, and the public, and
when the case is capable of repetition, yet evading review.
The apparent conflict presented by the limiting provision of the Rule in Civil Forfeiture Cases, on
one hand, and the very broad judicial discretion under RA No. 9160, as amended, on the other
hand, and the uncertainty it casts on an individuals guaranteed right to due process indubitably
call for the Courts exercise of its discretion to decide the case, otherwise moot and academic,
under those two exceptions, for the future guidance of those affected and involved in the
implementation of RA No. 9160, as amended.
Additionally, we would be giving premium to the governments failure to file an appropriate case
until only after six years (despite the clear provision of the Rule in Civil Forfeiture Cases) were we to
dismiss the petition because of the filing of the forfeiture case during the pendency of the case
before the Court. The sheer length of time and the constitutional violation involved, as will be
discussed below, strongly dissuade us from dismissing the petition on the basis of the "moot and
academic" principle. The Court should not allow the seeds of future violations to sprout by hiding
under this principle even when directly confronted with the glaring issue of the respondents
violation of the petitioners due process right30 - an issue that the respondent itself chooses to
ignore.
We shall discuss the substantive relevance of the subsequent developments and their dates at
length below.
II. Substantive aspect
a. Probable cause exists to support the issuance of a freeze order
The legal basis for the issuance of a freeze order is Section 10 of RA No. 9160, as amended by RA
No. 9194, which states:
Section 10. Freezing of Monetary Instrument or Property. The Court of Appeals, upon application
ex parte by the AMLC and after determination that probable cause exists that any monetary
instrument or property is in any way related to an unlawful activity as defined in Section
3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order shall be
for a period of twenty (20) days unless extended by the court. [italics supplied]
The Ligots claim that the CA erred in extending the effectivity period of the freeze order against
them, given that they have not yet been convicted of committing any of the offenses enumerated
under RA No. 9160 that would support the AMLCs accusation of money-laundering activity.
We do not see any merit in this claim. The Ligots argument is founded on a flawed understanding
of probable cause in the context of a civil forfeiture proceeding31 or freeze order application.32
Based on Section 10 quoted above, there are only two requisites for the issuance of a freeze order:
(1) the application ex parte by the AMLC and (2) the determination of probable cause by the CA.33
The probable cause required for the issuance of a freeze order differs from the probable cause
required for the institution of a criminal action, and the latter was not an issue before the CA nor is
it an issue before us in this case.
As defined in the law, the probable cause required for the issuance of a freeze order refers to "such
facts and circumstances which would lead a reasonably discreet, prudent or cautious man to
believe that an unlawful activity and/or a money laundering offense is about to be, is being or has
been committed and that the account or any monetary instrument or property subject thereof
sought to be frozen is in any way related to said unlawful activity and/or money laundering
offense."34
In other words, in resolving the issue of whether probable cause exists, the CAs statutorily-guided
determinations focus is not on the probable commission of an unlawful activity (or money
laundering) that the Office of the Ombudsman has already determined to exist, but on whether the
bank accounts, assets, or other monetary instruments sought to be frozen are in any way related to
any of the illegal activities enumerated under RA No. 9160, as amended.35 Otherwise stated,
probable cause refers to the sufficiency of the relation between an unlawful activity and the
property or monetary instrument which is the focal point of Section 10 of RA No. 9160, as
amended. To differentiate this from any criminal case that may thereafter be instituted against the
same respondent, the Rule in Civil Forfeiture Cases expressly provides
SEC. 28. Precedence of proceedings. - Any criminal case relating to an unlawful activity shall be
given precedence over the prosecution of any offense or violation under Republic Act No. 9160, as
amended, without prejudice to the filing of a separate petition for civil forfeiture or the issuance of
an asset preservation order or a freeze order. Such civil action shall proceed independently of the
criminal prosecution. [italics supplied; emphases ours]
Section 10 of RA No. 9160 (allowing the extension of the freeze order) and Section 28 (allowing a
separate petition for the issuance of a freeze order to proceed independently) of the Rule in Civil
Forfeiture Cases are only consistent with the very purpose of the freeze order, which specifically is
to give the government the necessary time to prepare its case and to file the appropriate charges
without having to worry about the possible dissipation of the assets that are in any way related to
the suspected illegal activity. Thus, contrary to the Ligots claim, a freeze order is not dependent on
a separate criminal charge, much less does it depend on a conviction.
That a freeze order can be issued upon the AMLCs ex parte application further emphasizes the
laws consideration of how critical time is in these proceedings. As we previously noted in Republic
v. Eugenio, Jr.,36 "to make such freeze order anteceded by a judicial proceeding with notice to the
account holder would allow for or lead to the dissipation of such funds even before the order
could be issued."
It should be noted that the existence of an unlawful activity that would justify the issuance and the
extension of the freeze order has likewise been established in this case.
From the ex parte application and the Ombudsmans complaint, we glean that Lt. Gen. Ligot
himself admitted that his income came from his salary as an officer of the AFP. Yet, the
Ombudsmans investigation revealed that the bank accounts, investments and properties in the
name of Lt. Gen. Ligot and his family amount to more than Fifty-Four Million Pesos
(P54,000,000.00). Since these assets are grossly disproportionate to Lt. Gen. Ligots income, as well
as the lack of any evidence that the Ligots have other sources of income, the CA properly found
that probable cause exists that these funds have been illegally acquired. On the other hand, the
AMLCs verified allegations in its ex parte application, based on the complaint filed by the
Ombudsman against Ligot and his family for violations of the Anti-Graft and Corrupt Practices Act,
clearly sustain the CAs finding that probable cause exists that the monetary instruments subject of
the freeze order are related to, or are the product of, an unlawful activity.
b. A freeze order, however, cannot be issued for an indefinite period
Assuming that the freeze order is substantively in legal order, the Ligots now assert that its
effectiveness ceased after January 25, 2006 (or six months after July 25, 2005 when the original
freeze order first expired), pursuant to Section 53(b) of the Rule in Civil Forfeiture Cases (A.M. No.
05-11-04-SC). This section states:
Section 53. Freeze order.
xxxx
(b) Extension. On motion of the petitioner filed before the expiration of twenty days from
issuance of a freeze order, the court may for good cause extend its effectivity for a period not
exceeding six months. [italics supplied; emphasis ours]
We find merit in this claim.
A freeze order is an extraordinary and interim relief37 issued by the CA to prevent the dissipation,
removal, or disposal of properties that are suspected to be the proceeds of, or related to, unlawful
activities as defined in Section 3(i) of RA No. 9160, as amended.38 The primary objective of a
freeze order is to temporarily preserve monetary instruments or property that are in any way
related to an unlawful activity or money laundering, by preventing the owner from utilizing them
during the duration of the freeze order.39 The relief is pre-emptive in character, meant to prevent
the owner from disposing his property and thwarting the States effort in building its case and
eventually filing civil forfeiture proceedings and/or prosecuting the owner.
Our examination of the Anti-Money Laundering Act of 2001, as amended, from the point of view of
the freeze order that it authorizes, shows that the law is silent on the maximum period of time that
the freeze order can be extended by the CA. The final sentence of Section 10 of the Anti-Money
Laundering Act of 2001 provides, "the freeze order shall be for a period of twenty (20) days unless
extended by the court." In contrast, Section 55 of the Rule in Civil Forfeiture Cases qualifies the
grant of extension "for a period not exceeding six months" "for good cause" shown.
We observe on this point that nothing in the law grants the owner of the "frozen" property any
substantive right to demand that the freeze order be lifted, except by implication, i.e., if he can
show that no probable cause exists or if the 20-day period has already lapsed without any
extension being requested from and granted by the CA. Notably, the Senate deliberations on RA
No. 9160 even suggest the intent on the part of our legislators to make the freeze order effective
until the termination of the case, when necessary.40
The silence of the law, however, does not in any way affect the Courts own power under the
Constitution to "promulgate rules concerning the protection and enforcement of constitutional
rights xxx and procedure in all courts."41 Pursuant to this power, the Court issued A.M. No.
05-11-04-SC, limiting the effectivity of an extended freeze order to six months to otherwise leave
the grant of the extension to the sole discretion of the CA, which may extend a freeze order
indefinitely or to an unreasonable amount of time carries serious implications on an individuals
substantive right to due process.42 This right demands that no person be denied his right to
property or be subjected to any governmental action that amounts to a denial.43 The right to due
process, under these terms, requires a limitation or at least an inquiry on whether sufficient
justification for the governmental action.44
In this case, the law has left to the CA the authority to resolve the issue of extending the freeze
order it issued. Without doubt, the CA followed the law to the letter, but it did so by avoiding the
fundamental laws command under its Section 1, Article III. This command, the Court under its
constitutional rule-making power sought to implement through Section 53(b) of the Rule in Civil
Forfeiture Cases which the CA erroneously assumed does not apply.
The Ligots case perfectly illustrates the inequity that would result from giving the CA the power to
extend freeze orders without limitations. As narrated above, the CA, via its September 20, 2005
resolution, extended the freeze order over the Ligots various bank accounts and personal
properties "until after all the appropriate proceedings and/or investigations being conducted are
terminated."45 By its very terms, the CA resolution effectively bars the Ligots from using any of the
property covered by the freeze order until after an eventual civil forfeiture proceeding is concluded
in their favor and after they shall have been adjudged not guilty of the crimes they are suspected
of committing. These periods of extension are way beyond the intent and purposes of a freeze
order which is intended solely as an interim relief; the civil and criminal trial courts can very well
handle the disposition of properties related to a forfeiture case or to a crime charged and need not
rely on the interim relief that the appellate court issued as a guarantee against loss of property
while the government is preparing its full case. The term of the CAs extension, too, borders on
inflicting a punishment to the Ligots, in violation of their constitutionally protected right to be
presumed innocent, because the unreasonable denial of their property comes before final
conviction.
In more concrete terms, the freeze order over the Ligots properties has been in effect since 2005,
while the civil forfeiture case per the Republics manifestation was filed only in 2011 and the
forfeiture case under RA No. 1379 per the petitioners manifestation was filed only in 2012. This
means that the Ligots have not been able to access the properties subject of the freeze order for
six years or so simply on the basis of the existence of probable cause to issue a freeze order, which
was intended mainly as an interim preemptive remedy.
As correctly noted by the petitioners, a freeze order is meant to have a temporary effect; it was
never intended to supplant or replace the actual forfeiture cases where the provisional remedy -
which means, the remedy is an adjunct of or an incident to the main action of asking for the
issuance of an asset preservation order from the court where the petition is filed is precisely
available. For emphasis, a freeze order is both a preservatory and preemptive remedy.
To stress, the evils caused by the laws silence on the freeze orders period of effectivity46
compelled this Court to issue the Rule in Civil Forfeiture Cases. Specifically, the Court fixed the
maximum allowable extension on the freeze orders effectivity at six months. In doing so, the Court
sought to balance the States interest in going after suspected money launderers with an
individuals constitutionally-protected right not to be deprived of his property without due process
of law, as well as to be presumed innocent until proven guilty.
To our mind, the six-month extension period is ordinarily sufficient for the government to act
against the suspected money launderer and to file the appropriate forfeiture case against him, and
is a reasonable period as well that recognizes the property owners right to due process. In this
case, the period of inaction of six years, under the circumstances, already far exceeded what is
reasonable.
We are not unmindful that the State itself is entitled to due process.1wphi1 As a due process
concern, we do not say that the six-month period is an inflexible rule that would result in the
automatic lifting of the freeze order upon its expiration in all instances. An inflexible rule may lend
itself to abuse - to the prejudice of the States legitimate interests - where the property owner
would simply file numerous suits, questioning the freeze order during the six-month extension
period, to prevent the timely filing of a money laundering or civil forfeiture case within this period.
With the limited resources that our government prosecutors and investigators have at their
disposal, the end-result of an inflexible rule is not difficult to see.
We observe, too, that the factual complexities and intricacies of the case and other matters that
may be beyond the governments prosecutory agencies control may contribute to their inability to
file the corresponding civil forfeiture case before the lapse of six months. Given these
considerations, it is only proper to strike a balance between the individuals right to due process
and the governments interest in curbing criminality, particularly money laundering and the
predicate crimes underlying it.
Thus, as a rule, the effectivity of a freeze order may be extended by the CA for a period not
exceeding six months. Before or upon the lapse of this period, ideally, the Republic should have
already filed a case for civil forfeiture against the property owner with the proper courts and
accordingly secure an asset preservation order or it should have filed the necessary information.47
Otherwise, the property owner should already be able to fully enjoy his property without any legal
process affecting it. However, should it become completely necessary for the Republic to further
extend the duration of the freeze order, it should file the necessary motion before the expiration of
the six-month period and explain the reason or reasons for its failure to file an appropriate case
and justify the period of extension sought. The freeze order should remain effective prior to the
resolution by the CA, which is hereby directed to resolve this kind of motion for extension with
reasonable dispatch.
In the present case, we note that the Republic has not offered any explanation why it took six years
(from the time it secured a freeze order) before a civil forfeiture case was filed in court, despite the
clear tenor of the Rule in Civil Forfeiture Cases allowing the extension of a freeze order for only a
period of six months. All the Republic could proffer is its temporal argument on the inapplicability
of the Rule in Civil Forfeiture Cases; in effect, it glossed over the squarely-raised issue of due
process. Under these circumstances, we cannot but conclude that the continued extension of the
freeze order beyond the six-month period violated the Ligots right to due process; thus, the CA
decision should be reversed.
We clarify that our conclusion applies only to the CA ruling and does not affect the proceedings
and whatever order or resolution the RTC may have issued in the presently pending civil cases for
forfeiture. We make this clarification to ensure that we can now fully conclude and terminate this
CA aspect of the case.
As our last point, we commend the fervor of the CA in assisting the States efforts to prosecute
corrupt public officials. We remind the appellate court though that the governments
anti-corruption drive cannot be done at the expense of cherished fundamental rights enshrined in
our Constitution. So long as we continue to be guided by the Constitution and the rule of law, the
Court cannot allow the justification of governmental action on the basis of the noblest objectives
alone. As so oft-repeated, the end does not justify the means. Of primordial importance is that the
means employed must be in keeping with the Constitution. Mere expediency will certainly not
excuse constitutional shortcuts.48
WHEREFORE, premises considered, we GRANT the petition and LIFT the freeze order issued by the
Court of Appeals in CA G.R. SP No. 90238. This lifting is without prejudice to, and shall not affect,
the preservation orders that the lower courts have ordered on the same properties in the cases
pending before them. Pursuant to Section 56 of A.M. No. 05-11-04-SC, the Court of Appeals is
hereby ordered to remand the case and to transmit the records to the Regional Trial Court of
Manila, Branch 22, where the civil forfeiture proceeding is pending, for consolidation therewith as
may be appropriate.
SO ORDERED.

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G.R. No.

117604 March 26, 1997

Hence, this petition wherein the following issues were raised:

VGCCI's contention is unmeritorious.

GOVERNMENT SERVICE INSURANCE

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 P 700,000

8314-96-00085-0 2 May 1996 30 August 1996 P 500,000

8314-96-000292-2 20 November 1996 20 March 1997 P 800,000

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 P 200,000

98-00002-4 2 January 1998 28 February 1998 P 150,000

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24

Amount converted to Monthly

P 155,218.79 - 1 9% 22 yrs. & 6 mos< P1,342.72

6,802.45 - 2 9% 21 yrs. & 10 mos. 59.41

24,342.91 - 3 9% 22 yrs. 212.07

Interest on advances at 7% p.a. over DBP's borrowing

ii. No 2% service charge

iii. No 8% penalty charge

Interest on the advance

One time 2% service -- To be

Interest on the service the start of the

Arcilla also agreed to pay to DBP the following:

b. One time service

Interest - 7% p.a. over borrowing cost

i. 7% p.a. over DBP's ]

To be computed from start of

One time 2% service

Interest on the service

*Insurance Premiums - 30-day period to be computed from date of advances.

b. One time service

Interest - 7% p.a. over borrowing

Undeclared Assets Amount

Jacinto Ligots childrens assets 1,744,035.6014

Case Number Complainant(s) Nature

OMB-P-C-05- AGIO Gina

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