Philippine National Bank vs. Court of Appeals, G.R. No.

88880, 196 SCRA

536 , April 30, 1991
Philippine National Bank vs. Court of Appeals, G.R. No. 88880, 196 SCRA
536 , April 30, 1991
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Chief Legal Counsel for petitioner.
Ambrosio Padilla, Mempin & Reyes Law Offices for private respondent.
GRIO-AQUINO, J.:
The Philippine National Bank (PNB) has appealed by certiorari from the decision
promulgated on June 27, 1989 by the Court of Appeals in CA-G.R. CV No. 09791
entitled, AMBROSIO PADILLA, plaintiff-appellant versus PHILIPPINE NATIONAL
BANK, defendant-appellee, reversing the decision of the trial court which had
dismissed the private respondents complaint to annul interest increases. (p. 32,
Rollo.) The Court of Appeals rendered judgment:
x x x declaring the questioned increases of interest as unreasonable, excessive and
arbitrary and ordering the defendant-appellee [PNB] to refund to the plaintiff-appellant
the amount of interest collected from July, 1984 in excess of twenty-four percent (24%)
per annum. Costs against the defendant-appellee. (pp. 14-15, Rollo.)
In July 1982, the private respondent applied for, and was granted by petitioner PNB, a
credit line of P1.8 million, secured by a real estate mortgage, for a term of two (2) years,
with 18% interest per annum. Private respondent executed in favor of the PNB a Credit
Agreement, two (2) promissory notes in the amount of P900,000.00 each, and a Real
Estate Mortgage Contract.
The Credit Agreement provided that
9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and
those which the Bank may adopt in the future, which may have relation to or in any way
affect the Line, which rules, regulations and policies are incorporated herein by
reference as if set forth herein in full. Promptly upon receipt of a written request from
the Bank, the Borrowers shall execute and deliver such documents and instruments, in
form and substance satisfactory to the Bank, in order to effectuate or otherwise comply
with such rules, regulations and policies. (p. 85, Rollo.)
The Promissory Notes, in turn, uniformly authorized the PNB to increase the stipulated
18% interest per annum within the limits allowed by law at any time depending on
whatever policy it [PNB] may adopt in the future; Provided, that, the interest rate on
this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board. (pp. 85-86, Rollo; italics
ours.)
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 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. (p. 86, Rollo; emphasis supplied.)
Four (4) months advance interest and incidental expenses/ charges were deducted from
the loan, the net proceeds of which were released to the private respondent by crediting
or transferring the amount to his current account with the bank.
On June 20, 1984, PNB informed the private respondent that (1) his credit line of P1.8
million will expire on July 4, 1984, (2) [i]f renewal of the line for another year is
intended, please submit soonest possible your request, and (3) the present policy of
the Bank requires at least 30% reduction of principal before your line can be renewed.
(pp. 86-87, Rollo.) Complying, private respondent on June 25, 1984, paid PNB
P540,000.00 (30% of P1.8 million) and requested that the balance of P1,260,000.00
be renewed for another period of two (2) years under the same arrangement and that
the increase of the interest rate of my mortgage loan be from 18% to 21% (p. 87,
Rollo.)
On July 4, 1984, private respondent paid PNB P360,000.00.

On July 18, 1984, private respondent reiterated in writing his request that the increase
in the rate of interest from 18% be fixed at 21% of 24%. (p. 87, Rollo.)
On July 26, 1984, private respondent made an additional payment of P100,000.
On August 10, 1984, PNB informed private respondent that we can not give due course
to your request for preferential interest rate in view of the following reasons: Existing
Loan Policies of the bank requires 32% for loan of more than one year; Our present cost
of funds has substantially increased. (pp. 87-88, Rollo.)
On August 17, 1984, private respondent further paid PNB P150,000.00.
In a letter dated August 24, 1984 to PNB, private respondent announced that he would
continue making further payments, and instead of a loan of more than one year, I shall
pay the said loan before the lapse of one year or before July 4, 1985. x x x I reiterate my
request that the increase of my rate of interest from 18% be fixed at 21% or 24%. (p.
88, Rollo.) On September 12, 1984, private respondent paid PNB P160,000.00.
In letters dated September 12, 1984 and September 13, 1984, PNB informed private
respondent that the interest rate on your outstanding line/loan is hereby adjusted from
32% p.a. to 41% p.a. (35% prime rate + 6%) effective September 6, 1984; and further
explained why we can not grant your request for a lower rate of 21% or 24%. (pp. 88-
89, Rollo.)
In a letter dated September 24, 1984 to PNB, private respondent registered his protest
against the increase of interest rate from 18% to 32% on July 4, 1984 and from 32% to
41% on September 6, 1984.
On October 15, 1984, private respondent reiterated his request that the interest rate
should not be increased from 18% to 32% and from 32% to 41%. He also attached (as
payment) a check for P140,000.00.
Like rubbing salt on the private respondents wound, the petitioner informed private
respondent on October 29, 1984, that the interest rate on your outstanding line/loan is
hereby adjusted from 41% p.a. to 48% p.a. (42% prime rate plus 6% spread) effective 25
October 1984. (p. 89, Rollo.)
In November 1984, private respondent paid PNB P50,000.00 thus reducing his
principal loan obligation to P300,000.00.
On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a
complaint against PNB entitled, AMBROSIO PADILLA vs. PHILIPPINE NATIONAL
BANK (Civil Case No. 84-28391), praying that judgment be rendered:
a. Declaring that the unilateral increase of interest rates from 18% to 32%, then to
41% and again to 48% are illegal, not valid nor binding on plaintiff, and that an
adjustment of his interest rate from 18% to 24% is reasonable, fair and just;
b. The interest rate on the P900,000.00 released on September 27, 1982 be counted
from said date and not from July 4, 1984;
c. The excess of interest payment collected by defendant bank by debiting plaintiffs
current account be refunded to plaintiff or credited to his current account;
d. Pending the determination of the merits of this case, a restraining order and/or a
writ of preliminary injunction be issued (1) to restrain and/or enjoin defendant bank for
[sic] collecting from plaintiff and/or debiting his current account with illegal and
excessive increases of interest rates; and (2) to prevent defendant bank from declaring
plaintiff in default for non-payment and from instituting any foreclosure proceeding,
extrajudicial or judicial, of the valuable commercial property of plaintiff. (pp. 89-90,
Rollo.)
In its answer to the complaint, PNB denied that the increases in interest rates were
illegal, unilateral excessive and arbitrary and recited the reasons justifying said
increases.
On March 31, 1985, the private respondent paid the P300,000-balance of his obligation
to PNBN (Exh. 5).
The trial court rendered judgment on April 14, 1986, dismissing the complaint because
the increases of interest were properly made.
The private respondent appealed to the Court of Appeals. On June 27, 1989, the Court of
Appeals reversed the trial court, hence, PNBs recourse to this Court by a petition for
review under Rule 45 of the Rules of Court.
The assignments of error raised in PNBs petition for review can be resolved into a single
legal issue of whether the bank, within the term of the loan which it granted to the
private respondent, may unilaterally change or increase the interest rate stipulated
therein at will and as often as it pleased.
The answer to that question is no.
In the first place, although Section 2, P.D. No. 116 of January 29, 1973, authorizes the
Monetary Board to prescribe the maximum rate or rates of interest for loans or renewal
thereof and to change such rate or rates whenever warranted by prevailing economic
and social conditions, it expressly provides that such changes shall not be made oftener
than once every twelve months.
In this case, PNB, over the objection of the private respondent, and without authority
from the Monetary Board, within a period of only four (4) months, increased the 18%
interest rate on the private respondents loan obligation three (3) times: (a) to 32% in
July 1984; (b) to 41% in October 1984; and (c) to 48% in November 1984. Those
increases were null and void, for if the Monetary Board itself was not authorized to
make such changes oftener than once a year, even less so may a bank which is
subordinate to the Board.
Secondly, as pointed out by the Court of Appeals, while the private respondent-debtor
did agree in the Deed of Real Estate Mortgage (Exh. 5) that the interest rate may be
increased during the life of the contract to such increase within the rate allowed by law,
as the Board of Directors of the MORTGAGEE may prescribe (Exh. 5-e-1) or within
the limits allowed by law (Promissory Notes, Exhs. 2, 3, and 4), no law was ever passed
in July to November 1984 increasing the interest rates on loans or renewals thereof to
32%, 41% and 48% (per annum), and no documents were executed and delivered by the
debtor to effectuate the increases. The Court of Appeals observed.
x x x We focus Our attention first of all on the agreement between the parties as
embodied in the following instruments, to wit: (1) Exhibit 1Credit Agreement dated
July 1, 1982; (2) Exhibit 2Promissory Note dated July 5, 1982; (3) Exhibit 3
Promissory Note dated January 3, 1983; (4) Exhibit 4Promissory Note, dated
December 13, 1983; and (5) Exhibit 5Real Estate Mortgage contract dated July 1,
1982.
Exhibit 1 states in its portion marked Exhibit 1-g-1:
9.06 Other Conditions. The Borrowers hereby agree to be bound by the rules and
regulations of the Central Bank and the current and general policies of the Bank and
those which the Bank may adopt in the future, which may have relation to or in any way
affect the Line, which rules, regulations and policies are incorporated herein by
reference as if set forth herein in full. Promptly upon receipt of a written request from
the Bank, the Borrowers shall execute and deliver such documents and instruments, in
form and substance satisfactory to the Bank, in order to effectuate or otherwise comply
with such rules, regulations and policies.
Exhibits 2, 3, and 4 in their portions respectively marked Exhibits 2-B, 3-B, and
4-B uniformly authorize the defendant bank to increase the stipualted interest rte of
18% per annum 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 note shall be
correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board.
Exhibit 5 in its portion marked Exhibit 5-e-1 stipulates:

(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 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.
Clearly, then, the agreement between the parties authorized the defendant bank to
increase the interest rate beyond the original rate of 18% per annum but within the
limits allowed by law or within the rate allowed by law, it being declared the obligation
of the plaintiff as borrower to execute and deliver the corresponding documents and
instruments to effectuate the increase. (pp. 11-12, Rollo.)
In Banco Filipino Savings and Mortgage Bank vs. Navarro, 15 SCRA 346 (1987), this
Court disauthorized the bank from raising the interest rate on the borrowers loan from
12% to 17% despite an escalation clause in the loan agreement signed by the debtors
authorizing Banco Filipino to correspondingly increase the interest rate stipulated in
this contract without advance notice to me/us in the event a law should be enacted
increasing the lawful rates of interest that may be charged on this particular kind of
loan. (italics supplied.)
In the Banco Filipino case, the bank relied on Section 3 of CB Circular No. 494 dated
July 1, 1976 (72 O.G. No. 3, p. 676-J) which provided that the maximum rate of
interest, including commissions premiums, fees and other charges on loans with a
maturity of more than 730 days by banking institution x x x shall be 19%.
This Court disallowed the increase for the simple reason that said Circular No. 494,
although it has the effect of law is not a law. Speaking through Mme. Justice Ameurfina
M. Herrera, this Court held:
It is now clear that from March 17, 1980, escalation clauses to be valid should
specifically provide: (1) that there can be an increase in interest if increased by law or by
the Monetary Board; and (2) in order for such stipulation to be valid, it must include a
provision for reduction of the stipulated interest in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board. (p. 111, Rollo.)
In the present case, the PNB relied on its own Board Resolution No. 681 (Exh. 10), PNB
Circular No. 40-79-84 (Exh. 13), and PNB Circular No. 40-129-84 (Exh. 15), but those
resolution and circulars are neither laws nor resolutions of the Monetary Board.
CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest
rates

x x x increases in interest rates are not subject to any ceiling prescribed by the Usury
Law.
but it did not authorize the PNB, or any bank for that matter, to unilaterally and
successively increase the agreed interest rates from 18% to 48% within a span of four (4)
months, in violation of P.D. 116 which limits such changes to once every twelve
months.
Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate
on the private respondents loan, violated the mutuality of contracts ordained in Article
1308 of the Civil Code:
ART. 1308. The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is void (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.
PNBs successive increases of the interest rate on the private respondents loan, over the
latters protest, were arbitrary as they violated an express provision of the Credit
Agreement (Exh. 1) Section 9.01 that its terms may be amended only by an instrument
in writing signed by the party to be bound as burdened by such amendment. The
increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides
that no interest shall be due unless it has been expressly stipulated in writing.
The debtor herein never agreed in writing to pay the interest increases fixed by the PNB
beyond 24% per annum, hence, he is not bound to pay a higher rate than that.
That an increase in the interest rate from 18% to 48% within a period of four (4) months
is excessive, as found by the Court of Appeals, is indisputable.
WHEREFORE, finding no reversible error in the decision of the Court of Appeals in CA-
G.R. CV No. 09791, the Court resolved to deny the petition for review for lack of merit,
with costs against the petitioner.
SO ORDERED.
G.R. No. 76101-02 September 30, 1991

TIO KHE CHIO, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and EASTERN ASSURANCE AND
SURETY CORPORATION,respondents.

Rodolfo M. Morelos for petitioner.

Ferrer, Mariano, Sangalang & Gatdula for private respondent.

FERNAN, C.J.:p

The issue in this petition for certiorari and prohibition is the legal rate of interest to be
imposed in actions for damages arising from unpaid insurance claims. Petitioner Tio
Khe Chio claims that it should be twelve (12%) per cent pursuant to Articles 243 and 244
of the Insurance Code while private respondent Eastern Assurance and Surety
Corporation (EASCO) claims that it should be six (6%) per cent under Article 2209 of
the Civil Code.

The facts are as follows: On December 18, 1978, petitioner Tio Khe Chio imported one
thousand (1,000) bags of fishmeal valued at $36,000.30 from Agro Impex, U.S.A.
Dallas, Texas, U.S.A. The goods were insured with respondent EASCO and shipped on
board the M/V Peskov, a vessel owned by Far Eastern Shipping Company. When the
goods reached Manila on January 28, 1979, they were found to have been damaged by
sea water which rendered the fishmeal useless. Petitioner filed a claim with EASCO and
Far Eastern Shipping. Both refused to pay. Whereupon, petitioner sued them before the
then Court of First Instance of Cebu, Branch II for damages. EASCO, as the insurer, filed
a counterclaim against the petitioner for the recovery of P18,387.86 representing the
unpaid insurance premiums.

On June 30, 1982, the trial court rendered judgment ordering EASCO and Far Eastern
Shipping to pay petitioner solidarily the sum of P105,986.68 less the amount of
P18,387.86 for unpaid premiums with interest at the legal rate from the filing of the
complaint, the sum of P15,000.00 as attorney's fees and the costs. 1

The judgment became final as to EASCO but the shipping company appealed to the
Court of Appeals and was absolved from liability by the said court in AC-G.R. No. 00161,
entitled "Tio Khe Chio vs. Eastern Assurance and Surety Corporation."

The trial court, upon motion by petitioner, issued a writ of execution against EASCO.
The sheriff enforcing the writ reportedly fixed the legal rate of interest at twelve (12%).
Respondent EASCO moved to quash the writ alleging that the legal interest to be
computed should be six (6%) per cent per annum in accordance with Article 2209 of the
Civil Code and not twelve (12%) per cent as insisted upon by petitioner's counsel. In its
order of July 30, 1986, the trial court denied EASCO's motion. EASCO then filed a
petition for certiorari and prohibition before the Court of Appeals.

On July 30, 1986, the Appellate Court rendered the assailed judgment, the dispositive
part of which states:

WHEREFORE, the order dated July 30, 1986 is hereby SET ASIDE in so far as it fixes
the interest at 12% on the principal amount of P87,598.82 from the date of filing of the
complaint until the full payment of the amount, and the interest that the private
respondent is entitled to collect from the petitioner is hereby reduced to 6% per annum.

No pronouncement as to costs. 2

In disputing the aforesaid decision of the Court of Appeals, petitioner maintains that not
only is it unjust and unfair but it is also contrary to the correct interpretation of the
fixing of interest rates under Sections 243 and 244 of the Insurance Code. And since
petitioner's claims is based on an insurance contract, then it is the Insurance Code
which must govern and not the Civil Code.

We rule for respondent EASCO. The legal rate of interest in the case at bar is six (6%)
per annum as correctly held by the Appellate Court.

Section 243 of the Insurance Code provides:

The amount of any loss or damage for which an insurer may be liable,
under any policy other than life insurance policy, shall be paid within
thirty days after proof of loss is received by the insurer and ascertainment
of the loss or damage is made either by agreement between the insured
and the insurer or by arbitration; but if such ascertainment is not had or
made within sixty days after such receipt by the insurer of the proof of
loss, then the loss or damage shall be paid within ninety days after such
receipt. Refusal or failure to pay the loss or damage within the time
prescribed herein will entitle the assured to collect interest on the
proceeds of the policy for the duration of the delay at the rate of twice the
ceiling prescribed by the Monetary Board, unless such failure or refusal to
pay is based on the ground that the claim is fraudulent.

Section 244 of the aforementioned Code also provides:

In case of any litigation for the enforcement of any policy or contract of

insurance, it shall be the duty of the Commissioner or the Court, as the
case may be, to make a finding as to whether the payment of the claim of
the insured has been unreasonably denied or withheld; and in the
affirmative case, the insurance company shall be adjudged to pay damages
which shall consist of attorney's fees and other expenses incurred by the
insured person by reason of such undeniable denial or withholding of
payment plus interest of twice the ceiling prescribed by the Monetary
 Board of the amount of the claim due the insured, from the date following
the time prescribed in section two hundred forty-two or in section two
hundred forty-three, as the case may be, until the claim is fully satisfied;
Provided, That the failure to pay any such claim within the time prescribed
in said sections shall be considered prima facie evidence of unreasonable
delay in payment.

In the case at bar, the Court of Appeals made no finding that there was an unjustified
refusal or withholding of payment on petitioner's claim. In fact, respondent court had
this to say on EASCO's refusal to settle the claim of petitioner:

... EASCO's refusal to settle the claim to Tio Khe Chio was based on some
ground which, while not sufficient to free it from liability under its policy,
nevertheless is sufficient to negate any assertion that in refusing to pay, it
acted unjustifiably.

xxx xxx xxx

The case posed some genuine issues of interpretation of the terms of the
policy as to which persons may honestly differ. This is the reason the trial
court did not say EASCO's refusal was unjustified. 3

Simply put, the aforecited sections of the Insurance Code are not pertinent to the instant
case. They apply only when the court finds an unreasonable delay or refusal in the
payment of the claims.

Neither does Circular No. 416 of the Central Bank which took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of
interest from six (6%) to twelve (12%) per cent apply to the case at bar as by the
petitioner. The adjusted rate mentioned in the circular refers only to loans or
forbearances of money, goods or credits and court judgments thereon but not to court
judgments for damages arising from injury to persons and loss of property which does
not involve a loan. 4

In the case of Philippine Rabbit Bus Lines, Inc. vs. Cruz, G.R. No. 71017, July 28, 1986,
143 SCRA 158, the Court declared that the legal rate of interest is six (6%) per cent per
annum, and not twelve (12%) per cent, where a judgment award is based on an action
for damages for personal injury, not use or forbearance of money, goods or credit. In the
same vein, the Court held in GSIS vs. Court of Appeals, G.R. No. 52478, October 30,
1986, 145 SCRA 311, that the rates under the Usury Law (amended by P.D. 116) are
applicable only to interest by way of compensation for the use or forbearance of money,
interest by way of damages is governed by Article 2209 of the Civil Code.

Clearly, the applicable law is Article 2209 of the Civil Code which reads:

If the obligation consists in the payment of a sum of money and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to
 the contrary, shall be the payment of interest agreed upon, and in the
absence of stipulation, the legal interest which is six per cent per annum.

And in the light of the fact that the contending parties did not allege the rate of interest
stipulated in the insurance contract, the legal interest was properly pegged by the
Appellate Court at six (6%) per cent.

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit.

SO ORDERED.
G.R. No. 97873 August 12, 1993

PILIPINAS BANK, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, and LILIA R.
ECHAUS, respondents.

Gella, Reyes, Danguilan and Associates for the petitioner.

Manuel L. Melotindos for the respondents.

QUIASON, J.:

This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the
Resolution of the Court of Appeals in CA-G.R. CV No. 06017 promulgated on March 14,
1991. The Resolution was rendered in response to private respondent's motion for
clarification of the decision of the Court of Appeals in CA-G.R. No. 06017. The matters
sought to be clarified arose in the course of the execution of the decision of the Regional
Trial Court, Branch 71, Antipolo, Rizal in Civil Case No. 239-A, as modified by the
decision of the Court of Appeals in CA-G.R. CV No. 06017.

In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its
president, Constantino Bautista, for collection of a sum of money. The complaint
alleged: (1) that petitioner and Greatland Realty Corporation (Greatland) executed a
"Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of land in
consideration of the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00
out of the total consideration of the Dacion en Pago, in favor of private respondent; and
(3) that notwithstanding her demand for payment, petitioner in bad faith, refused and
failed to pay the said amount assigned to her.

Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its
former president had no authority to enter into such agreement; (2) that it never ratified
the same; and (3) that assuming arguendo that the agreement was binding, the
conditions stipulated therein were never fulfilled.

Dismissing petitioner's defense as unmeritorious, the trial court ruled in favor of private
respondent. The trial court ordered petitioner and its co-defendant, jointly and
severally, to pay private respondent as follows:

1) P2,300,000.00 the total amount assigned by Greatland in her favor out

of the P2,300,000.00 liability of defendant Pilipinas to Greatland plus
legal interest from the dates of assignments until fully paid;

2) P3,217,707.00 representing the total actual damages suffered by the

plaintiff plus legal interest until fully paid;
 3) P1,000,000.00 in moral damages to partially assuage the extreme
moral sufferings of plaintiff inflicted upon her person considering the bad
faith on the part of the defendants and their failure to act with justice, and
to give what is lawfully due her and observe honesty and good faith;

4) P100,000.00 exemplary and nominal damages to vindicate plaintiff's

violated rights;

5) Attorney's fees equivalent to 15% of the total award in favor of the

plaintiff;

6) Costs of suit (Rollo, p. 78).

On March 22, 1985, petitioner appealed the decision of the trial court to the Court of
Appeals, which docketed the appeal as CA-G.R. No. 06017. On the same day, private
respondent filed a motion for Immediate Execution Pending Appeal. The trial court
granted the motion for execution pending appeal in an Order dated April 3, 1985.
Petitioner challenged the Order dated April 3, 1985 before the Court of Appeals in CA-
G.R. No. SP No. 05909.

On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by
limiting the execution pending appeal against petitioner to P5,517.707.00 and deferring
the execution of the award for moral, exemplary and nominal damages to await the final
judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the Supreme Court
in G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals.

On July 1, 1988, the trial court granted the new motion for execution pending appeal
filed by private respondent pursuant to the Resolution of the Supreme Court dated June
17, 1987, upon the filing of the required bond. Petitioner complied with the writ of
execution pending appeal by issuing two manager's checks in the total amount of
P5,517,707.00 (one for P4,965,936.30 payable to private respondent and another for
P551,770.70 payable to the Clerk of Court, RTC, Antipolo, Rizal).

The check payable to private respondent was encashed on July 15, 1988.

On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017,
which modified the judgment of the trial court as follows:

1. The defendant-appellant Pilipinas Bank, formerly known as Filipinas

Manufacturers Bank is ordered to pay the plaintiff-appellee the following:

(a) The sum of Two Million Three Hundred Thousand

(2,300,000,00) Pesos, representing the total amount
assigned by Greatland to her, with interest at the legal rate
starting July 24, 1981, date when demand was first made
(Exh. "F" and "G");
 (b) The sum of One Hundred Thousand (P100,000.00)
Pesos in moral damages, to assuage moral sufferings and
embarrassment of plaintiff-appellee as a consequence of
appellant-bank's unwarranted acts;

(c) The sum of Twenty Five Thousand (P25,000.00) Pesos,

as exemplary damages to serve as an example or correction
for the public good;

(d) The sum equivalent to ten (10) percent of the principal

claim awarded, representing attorney's fees; and

2. Constantino Bautista is absolved of personal liability (Rollo, pp. 31-32).

Petitioner filed a motion for extension of time to file a Petition for Review
on Certiorari with the Supreme Court, which however was withdrawn on July 23,1990.
Private respondent, on her part, filed a motion for reconsideration of the decision of the
Court of Appeals in CA-G.R. No. 06017, which likewise was withdrawn on August 13,
1990.

Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final
and executory.

On September 4, 1990, petitioner filed a motion in the trial court praying that private
respondent and Standard Insurance Co. (which furnished the bond required in the
advance execution of the decision of the trial court) to refund to her the excess payment
of P1,898,623.67 with interests at 6% (Rollo, pp. 83-84).

It must be recalled that while private respondent was able to collect P5,517,707.00 from
petitioner pursuant to the writ of advance execution allowed in CA-G.R. No. SP No.
05909, the final judgment in the main case (CA-G.R. No. 06017) awarded to private
respondent damages in the total amount of only P2,655,000.00 (P2,300,000.00
representing the amount assigned by Greatland to private respondent, P100,000.00 as
moral damages; P25,000.00 as exemplary damages and attorney's fees equivalent to
10% of the P2,300,000.00), together "with interest on the amount of P2,300,000.00 at
the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and
"G")."

Private respondent opposed the motion of petitioner with respect to the rate of interest
to be charged on the amount of P2,300,000.00. According to private respondent, the
legal interest on the principal amount of P2,300,000.00 due her should be 12% per
annum pursuant to CB Circular No. 416 and not 6% per annum as computed by
petitioner.

On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess
payment, fixed the interest rate due on the amount of P2,300.000.00 at 12% per
annum as proposed by private respondent, instead of 6% per annum as proposed by
petitioner.

On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990
of the trail court, which however could not be acted upon because on October 23, 1990,
private respondent filed a Motion for Clarification with the Court of Appeals in CA-G.R.
CV No. 06017, regarding the following matters:

a) The "legal rate" of interest on the principal award of P2,300,000.00

from July 24, 1981 (as per decision) up to July 14, 1988 (date of actual
payment made by defendant-appellant to plaintiff-appellee per execution
pending appeal);

b) The imposition of such "legal rate" of interest on the accrued interest'

from July 24, 1981 up to July 14, 1988;

c) The amount of the costs of suit will include premium on surety bond;

d) The discharged of the surety bond whether total or partial, depending

on the computation of the interest;

e) The award of attorney's fees equivalent to 10% of the principal award,

whether this should totally go to plaintiff-appellee's former counsel or to
be shared on the basis of quantum meruit with the undersigned counsel;
and

f) Aside from this final award of 10% attorney's fees chargeable against
defendant-appellant, whether or not former counsel of plaintiff-appellee
can still collect from her the balance of 15% out of the 25% attorney's fees
under Exh. "N" (Rollo, p.32).

In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that:

a) The legal rate of interest on the principal award of P2,300,000.00

should be 12% per annum in accordance with Circular No. 416 dated July
29, 1974 of the Central Bank.

b) The computation of compounding interest annually has no basis,

therefore, not allowed in the instant case;

c) The payment of premium on the bond in the sum of P259,813.50 as

cost, being without legal and factual basis, is denied;

d) The surety bond posted by plaintiff-appellee may be released after

satisfaction of the decision; and
 e) Payment/distribution of attorney's fees may/shall be litigated in a
separate proceeding if the parties cannot settle their differences amicably.

SO ORDERED (Rollo, p. 35-36).

In this appeal, petitioner claims that the Court of Appeals erred:

(1) In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to
be paid by petitioner to private respondent is 12% per annum.

(2) In not holding that the refund to which petitioner is entitled should earn interest at
the rate of 12% per annum.

(3) In not holding that the surety bond should only be released after actual refund
(Rollo, p. 18).

The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by
private respondent against petitioner "involves forbearance of money, as the principal
award to plaintiff-appellee (private respondent) in the amount of P2,300.000.00 was
the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a
simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the
defendant bank, the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank
Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per
annum.

Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the
Central Bank Circular No. 416. Said Article 2209 provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per
cent per annum.

Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum
rate or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits and amended the Usury Law (Act No. 2655) for that purpose.

As amended, the Usury Law now provides:

Sec. The rate of interest for the loan or forbearance of any money, goods,
or credits and the rate allowed in judgments, in the absence of express
contract as to such rate of interest, shall be six per centum per annum or
such rate as may be prescribed by the Monetary Board of the Central Bank
of the Philippines for that purpose in accordance with the authority hereby
granted.
 Sec. 1-a. The Monetary Board is hereby authorized to prescribe the
maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to charge such rate or
rates whenever warranted by prevailing economic and social
conditions: Provided, That such changes shall not be made oftener that
once every twelve months.

In the exercise of the authority herein granted, the Monetary Board may
prescribe higher maximum rates for consumer loans or renewals thereof
as well as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these
institutions need not necessarily be uniform.

Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the
Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides:

By virtue of the authority granted to it under Section 1 of Act 2655, as

amended, otherwise known as the "Usury Law" the Monetary Board in its
Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of
interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to
such rate of interest, shall be twelve (12%) per cent per annum. This
Circular shall take effect immediately. (italics supplied)

Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1)
loans; (2) forbearance of any money, goods or credit; and
(3) judgments.

In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments
spoken of and referred to in Circular No. 416 are "judgments in litigation involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with nor involving loans or forbearance of any money, goods or
credits does not fall within the coverage of the said law for it is not, within the ambit of
the authority granted to the Central Bank."

Reformina was affirmed in Philippines Virginia Tobacco Administration v. Tensuan,

188 SCRA 628 [1990], which emphasized that the "judgments" contemplated in Circular
No. 417 "are judgments involving said loans or forbearance only and not in judgments in
litigation that have nothing to do with loans . . . ."

We held that Circular No. 416 does not apply to judgments involving damages
(Reformina v. Tomol, Jr., supra; Philippine Virginia Tobacco Administration v.
Tensuan, supra) and compensation in expropriation proceedings (National Power
Corporation v. Angas, 208 SCRA 542 [1992]). We also held that payment of
unliquidated cash advances to an employee by his employer (Villarica v. Court of
Appeals, 123 SCRA 259 [1983]) and the return of money paid by a buyer of a leasehold
right but which contract was voided due to the fault of the seller (Buisier v. Court of
Appeals, 154 SCRA 438 [1987]).

What then is the nature of the judgment ordering petitioner to pay private respondent
the amount of P2,300,000.00?

The said amount was a portion of the P7,776,335.69 which petitioner was obligated to
pay Greatland as consideration for the sale of several parcels of land by Greatland to
petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private
respondent. The said obligation therefore arose from a contract of purchase and sale
and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6%
per annum as provided in Article 2209 of the Civil Code of the Philippines and not the
rate of 12% per annum as provided in Circular No. 416.

Petitioner next contends that, consistent with its thesis that Circular No. 416 applies
only to judgments involving the payment of loans or forbearance of money, goods and
credit, the Court of Appeals should have ordered private respondent to pay interest at
the rate of 12% on the overpayment collected by her pursuant to the advance execution
of the judgment.

Again, we sustain petitioner's contention as correct.

Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to

the order for the execution pending appeal of the judgment of the trial court. On
appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a
balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an
execution pending appeal, funds are advanced by the losing party to the prevailing
party with the implied obligation of the latter to repay former, in case the appellate
court cancels or reduces the monetary award.

Under Section 5 of Rule 39 of the Revised Rules of Court where "the judgment executed
is reversed totally or partially on appeal, the trial court, on motion, after the case is
remanded to it, may issue such orders of restitution, as equity and justice may warrant
under the circumstances." It was to guarantee the restitution contemplated by Section 5
of Rule 39 of the Revised Rules of Court that private respondent was required by the
trial court to post a bond before the writ of advance execution was issued.

In the case before us, the excess amount ordered to refunded by private respondent falls
within the ruling inViloria and Buiser that Circular No. 416 applies to cases where
money is transferred from one person to another and the obligation to return the same
or a portion thereof is subsequently adjudged.

Finally, petitioner questions as vague the ruling of the Court of Appeals that the surety
bond given to secure the advance execution may be discharged "upon the finality and
satisfaction of the decision." We believe that this ruling of the Court of Appeals is clear
enough in ordering that the surety bond shall be released only after private respondent
has fully refunded the overpayment to petitioner.
WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals
appealed from is MODIFIED in that (1) the amount of P2,300,000.00 adjudged to be
paid by petitioner to private respondent shall earn interest of 6% per annum and (2) the
amount of P1,898,623.67 to be refunded by private respondent to petitioner shall earn
interest of 12% per annum. Costs against private respondent.

SO ORDERED.
G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the
spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit
accommodations totaling P18.0 Million pesos payable in a period of six years at an
interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real
Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with
the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro
Manila. A credit agreement embodying the terms and conditions of the loan was
executed between the parties. Pertinent portions of the said agreement are quoted
below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent
(21%) per annum, payable semi-annually in arrears, the first interest
payment to become due and payable six (6) months from date of initial
release of the loan. The loan shall likewise be subject to the appropriate
service charge and a penalty charge of three per cent (30%) per annum to
be imposed on any amount remaining unpaid or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) 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/these accommodations 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 of the maximum
interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On
March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate
to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate
thereupon increased from an initial 21% to a high of 68% between March of 1984 to
September, 1986. 4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to
mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory
relief with prayer for a writ of preliminary injunction and temporary restraining order
with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said
petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the
spouses sought clarification as to whether or not the PNB could unilaterally raise
interest rates on the loan, pursuant to the credit agreement's escalation clause, and in
relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on
March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National
Bank from enforcing an interest rate above the 21% stipulated in the credit agreement.
By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the
PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged
properties and scheduled an auction sale for March 14, 1989. Upon motion by
petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of
preliminary injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court
dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for
reconsideration. In the interim, respondent bank once more set a new date for the
foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date,
however, petitioners tendered to respondent bank the amount of P40,142,518.00,
consisting of the principal (P18,000,000.00) and accrued interest calculated at the
originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990,

formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil
Case No. 90-663. They prayed therein for a writ of preliminary injunction with a
temporary restraining order. The case was raffled to Branch 147, presided by Judge
Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the
writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza"
scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for
reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by
Judge Eriberto Rosario who issued an order consolidating said case with Civil Case
18871 presided by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30,
1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with
respondent Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of
preliminary injunction restraining the foreclosure sale of Mavin Plaza set
on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying

respondent bank's motion to lift the writ of injunction issued by Judge
Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's

subsequent motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent

bank's motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed
orders and upholding respondent bank's right to foreclose the mortgaged property
pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration
and Supplemental Motion for Reconsideration, dated September 15, 1993 and October
28, 1993, respectively, were denied by respondent court in its resolution dated January
10, 1994.

Hence the instant petition.

This appeal by certiorari from the respondent court's decision dated August 27, 1993
raises two principal issues namely: 1) Whether or not respondent bank was authorized
to raise its interest rates from 21% to as high as 68% under the credit agreement; and 2)
Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza
under the mandatory foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the
increases in the interest rates were illegal, unilateral, excessive and arbitrary, it
argues that the escalated rates of interest it imposed was based on the agreement of
the parties. Respondent bank further contends that it had a right to foreclose the
mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their
loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

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. 6 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. The interest provision states:

(c) interest and Charges

(1) 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/these
accommodations 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 of
the maximum interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent

bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%,
41% and 48% partly because the aforestated increases violated the principle of mutuality
of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the

Usury Law ceiling on interest rates

. . . increases in interest rates are not subject to any ceiling

prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to
unilaterally and successively increase the agreed interest rates from 18% to
48% within a span of four (4) months, in violation of P.D. 116 which limits
such changes to once every twelve months.
 Besides violating P.D. 116, the unilateral action of the PNB in increasing
the interest rate on the private respondent's loan, violated the mutuality of
contracts ordained in Article 1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (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 lease 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.

PNB's successive increases of the interest rate on the private respondent's

loan, over the latter's protest, were arbitrary as they violated an express
provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may
be amended only by an instrument in writing signed by the party to be
bound as burdened by such amendment." The increases imposed by PNB
also contravene Art. 1956 of the Civil Code which provides that "no
interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases
fixed by the PNB beyond 24%per annum, hence, he is not bound to pay a
higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of
four (4) months is excessive, as found by the Court of Appeals, is
indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on

petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not
authorize the bank, or any lending institution for that matter, to progressively increase
interest rates on borrowings to an extent which would have made it virtually impossible
for debtors to comply with their own obligations. True, escalation clauses in credit
agreements are perfectly valid and do not contravene public policy. Such clauses,
however, (as are stipulations in other contracts) are nonetheless still subject to laws and
provisions governing agreements between parties, which agreements while they may
be the law between the contracting parties implicitly incorporate provisions of
existing law. Consequently, while 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. Borrowing
represents a transfusion of capital from lending institutions to industries and businesses
in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral
and lopsided policy regarding the interest rates of petitioners' borrowings in the instant
case.

Apart from violating the principle of mutuality of contracts, there is authority for
disallowing the interest rates imposed by respondent bank, for the credit agreement
specifically requires that the increase be "within the limits allowed by law". In the case
of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular
No. 905 could not be properly invoked to justify the escalation clauses of such contracts,
not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be
made "within the limits allowed by law," obviously referring specifically to legislative
enactments not administrative circulars. Note that the phrase "limits imposed by law,"
refers only to the escalation clause. However, the same agreement allows reduction on
the basis of law or the Monetary Board. Had the parties intended the word "law" to refer
to both legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between "law or the
Monetary Board Circulars" in referring to mutually agreed upon reductions in interest
rates. This distinction was the subject of the Court's disquisition in the case of Banco
Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the

interest rate on the LOAN from 12% to 17% per annum under the
Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance notice to

me/us in the event.

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate
may be increased "in the event a law should be enacted increasing the
lawful rate of interest that may be charged on this particular kind of loan."
The Escalation Clause was dependent on an increase of rate made by "law"
alone.

CIRCULAR No. 494, although it has the effect of law, is not a law.
"Although a circular duly issued is not strictly a statute or a law, it has,
however, the force and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has the force and effect
of law." "That administrative rules and regulations have the force of law
can no longer be questioned."

The distinction between a law and an administrative regulation is

recognized in the Monetary Board guidelines quoted in the latter to the
BORROWER of Ms. Paderes of September 24, 1976 (supra). According to
the guidelines, for a loan's interest to be subject to the increases provided
in CIRCULAR No. 494, there must be an Escalation Clause allowing the
increase "in the event that any law or Central Bank regulation is
promulgated increasing the maximum rate for loans." The guidelines thus
presuppose that a Central Bank regulation is not within the term "any
law."

The distinction is again recognized by P.D. No. 1684, promulgated on

March 17, 1980, adding section 7-a to the Usury Law, providing that
parties to an agreement pertaining to a loan could stipulate that the rate of
interest agreed upon may be increased in the event that the applicable
maximum rate of interest is increased "by law or by the Monetary Board."
To quote:

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

forbearance of money, goods or credits may stipulate that the
rate of interest agreed upon may be increased in the event
that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is

also a stipulation in the agreement that the rate of interest
agreed upon shall be reduced in the event that the applicable
maximum rate of interest is reduced by law or by the
Monetary Board;
 Provided, further, That the adjustment in the rate of interest
agreed upon shall take effect on or after the effectivity of the
increase or decrease in the maximum rate of interest.'
(Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid
should specifically provide: (1) that there can be an increase in interest if
increased by law or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board."

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. 9 Here, as clearly
demonstrated above, not only 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.

We go now to respondent bank's claim that the principal issue in the case at bench
involves its right to foreclose petitioners' properties under P.D. 385. We find
respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government
financial institutions would not be denied substantial cash inflows necessary to finance
the government's development projects all over the country by large borrowers who
resort to litigation to prevent or delay the government's collection of their debts or
loans.10 In facilitating collection of debts through its automatic foreclosure provisions,
the government is however, not exempted from observing basic principles of law, and
ordinary fairness and decency under the due process clause of the Constitution.11

In the first place, because of the dispute regarding the interest rate increases, an issue
which was never settled on merit in the courts below, the exact amount of petitioner's
obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could
be validly invoked by respondent only after settlement of the question involving the
interest rate on the loan, and only after the spouses refused to meet their obligations
following such determination. In Filipinas Marble Corporation v. Intermediate
Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held
that:
 We cannot, at this point, conclude that respondent DBP together with the
Bancom people actually misappropriated and misspent the $5 million loan
in whole or in part although the trial court found that there is "persuasive"
evidence that such acts were committed by the respondent. This matter
should rightfully be litigated below in the main action. Pending the
outcome of such litigation, P.D. 385 cannot automatically be applied for if
it is really proven that respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then the foreclosure of
the petitioner's properties under the provisions of P.D. 385 to satisfy the
whole amount of the loan would be a gross mistake. It would unduly
prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the
loan which was applied wisely or not, for the benefit of the petitioner be
determined. Consequently, the extent of the loan where there was no
failure of consideration and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation of evidence
in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in
Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a
scandal in the sugar industry during the Marcos Martial Law years. This
we can not allow to happen. For the benefit of future generations, all the
dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be
exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to

proceed with dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in
compliance with the letter of the Credit Agreement, honestly believed to be the real
amount of their remaining obligations with the respondent bank. The latter could not
therefore claim that there was no honest-to-goodness attempt on the part of the spouse
to settle their obligations. Respondent's rush to inequitably invoke the foreclosure
provisions of P.D. 385 through its legal machinations in the courts below, in spite of the
unsettled differences in interpretation of the credit agreement was obviously made in
bad faith, to gain the upper hand over petitioners.

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.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated

August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED
AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further
proceedings.

SO ORDERED.
G.R. Nos. 150773 & 153599 September 30, 2005

SPOUSES DAVID B. CARPO & and RECHILDA S. CARPO, Petitioners,

vs.
ELEANOR CHUA and ELMA DY NG, Respondent.

DECISION

Tinga, J.:

Before this Court are two consolidated petitions for review. The first, docketed as G.R.
No. 150773, assails theDecision1 of the Regional Trial Court (RTC), Branch 26 of Naga
City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B.
Montenegro dismissed the complaint2 for annulment of real estate mortgage and
consequent foreclosure proceedings filed by the spouses David B. Carpo and Rechilda S.
Carpo (petitioners).

The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals Decision3 dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals
Third Division annulled and set aside the orders of Judge Corazon A. Tordilla to
suspend the sheriffs enforcement of the writ of possession.

The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months
with an interest rate of six percent (6%) per month. To secure the payment of the loan,
petitioners mortgaged their residential house and lot situated at San Francisco,
Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No.
23180. Petitioners failed to pay the loan upon demand. Consequently, the real estate
mortgage was extrajudicially foreclosed and the mortgaged property sold at a public
auction on 8 July 1996. The house and lot was awarded to respondents, who were the
only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four Hundred
Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of sale was
issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled
and in its stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said house and lot,
prompting respondents to file a petition for writ of possession with the RTC docketed as
Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel
issued an Order4 for the issuance of a writ of possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and
the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of the RTC.
Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand One Hundred
Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion
on 3 August 1999, enjoining the enforcement of the writ of possession. In
an Order5 dated 6 January 2000, the RTC suspended the enforcement of the writ of
possession pending the final disposition of Civil Case No. 99-4376. Against this Order,
respondents filed a petition for certiorari and mandamus before the Court of Appeals,
docketed as CA-G.R. SP No. 57297.

During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it
was filed out of time and barred by laches. The RTC proceeded from the premise that
the complaint was one for annulment of a voidable contract and thus barred by the four-
year prescriptive period. Hence, the first petition for review now under consideration
was filed with this Court, assailing the dismissal of the complaint.

The second petition for review was filed with the Court after the Court of Appeals on 30
April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the ground that
it was the ministerial duty of the lower court to issue the writ of possession when title
over the mortgaged property had been consolidated in the mortgagee.

This Court ordered the consolidation of the two cases, on motion of petitioners.

In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court
of Appeals6 the rate of interest stipulated in the principal loan agreement is clearly null
and void. Consequently, they also argue that the nullity of the agreed interest rate affects
the validity of the real estate mortgage. Notably, while petitioners were silent in their
petition on the issues of prescription and laches on which the RTC grounded the
dismissal of the complaint, they belatedly raised the matters in their Memorandum.
Nonetheless, these points warrant brief comment.

On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit
any grave abuse of discretion when it issued the orders dated 3 August 1999 and 6
January 2000, and that these orders could not have been "the proper subjects of a
petition for certiorari and mandamus". More accurately, the justiciable issues before us
are whether the Court of Appeals could properly entertain the petition for certiorari
from the timeliness aspect, and whether the appellate court correctly concluded that the
writ of possession could no longer be stayed.

We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum
is so excessive, iniquitous, unconscionable and exorbitant that it should have been
declared null and void. Instead of dismissing their complaint, they aver that the lower
court should have declared them liable to respondents for the original amount of the
loan plus 12% interest per annum and 1% monthly penalty charge as liquidated
damages,7 in view of the ruling in Medel v. Court of Appeals.8
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per
annum was so iniquitous or unconscionable as to render the stipulation void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated
upon by the parties in the promissory note iniquitous or unconscionable, and, hence,
contrary to morals ("contra bonos mores"), if not against the law. The stipulation is
void. The Court shall reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.9

In a long line of cases, this Court has invalidated similar stipulations on interest rates
for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v.
Salazar,10 we annulled the stipulation of 6% per month or 72% per annum interest on
a P60,000.00 loan. In Imperial v. Jaucian,11 we reduced the interest rate from 16% to
1.167% per month or 14% per annum. In Ruiz v. Court of Appeals,12 we equitably
reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12%
per annum interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan
were reduced to 12% per annum in Cuaton v. Salud.13 Recently, this Court, inArrofo v.
Quino,14 reduced the 7% interest per month on a P15,000.00 loan amounting to 84%
interest per annum to 18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or public policy. In the
ordinary course, the codal provision may be invoked to annul the excessive stipulated
interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set in the above-cited cases, this stipulation is similarly invalid. However,
the RTC refused to apply the principle cited and employed in Medel on the ground
that Medel did not pertain to the annulment of a real estate mortgage,15 as it was a case
for annulment of the loan contract itself. The question thus sensibly arises whether the
invalidity of the stipulation on interest carries with it the invalidity of the principal
obligation.

The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of
the mortgage contract is the same as that of the principal contract from which it receives
life, and without which it cannot exist as an independent contract. Being a mere
accessory contract, the validity of the mortgage contract would depend on the validity of
the loan secured by it.16

Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the
more reasonable rate of 12% per annum. The same remedial approach to the wrongful
interest rates involved was employed or affirmed by the Court
in Solangon,Imperial, Ruiz, Cuaton, and Arrofo.

The Courts ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is congruent
with the rule that a usurious loan transaction is not a complete nullity but defective only
with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious
loan is wholly null and void both as to the loan and as to the usurious
interest.17 However, this Court adopted the contrary rule,as comprehensively discussed
in Briones v. Cammayo:18

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any
event, the debtor in a usurious contract of loan should pay the creditor the amount
which he justly owes him, citing in support of this ruling its previous decisions in Go
Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona,
44 Phil. 739.

....

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the
standing jurisprudence of this Court on the question under consideration was clearly to
the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his
right to recover from the borrower the money actually loaned to and enjoyed by the
latter. This Court went further to say that the Usury Law did not provide for the
forfeiture of the capital in favor of the debtor in usurious contracts, and that while the
forfeiture might appear to be convenient as a drastic measure to eradicate the evil of
usury, the legal question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua
vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly
held that when a contract is found to be tainted with usury "the only right of the
respondent (creditor) . . . was merely to collect the amount of the loan, plus interest due
thereon."

The view has been expressed, however, that the ruling thus consistently adhered to
should now be abandoned because Article 1957 of the new Civil Code a subsequent
law provides that contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury, shall be void, and that in such cases "the
borrower may recover in accordance with the laws on usury." From this the conclusion
is drawn that the whole contract is void and that, therefore, the creditor has no right to
recover not even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated,
and the view referred to in the preceding paragraph is adequately answered, in Angel
Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of
whether a creditor in a usurious contract may or may not recover the principal of the
loan, and, in the affirmative, whether or not he may also recover interest thereon at the
legal rate, We said the following:

". . . .

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with
usurious interest, may the creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?"

Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .

Since, according to the appellants, a usurious loan is void due to illegality of cause or
object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither
party can bring action against each other. Said rule, however, appellants add, is
modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code),
allowing the borrower to recover interest paid in excess of the interest allowed by the
Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover
on the contract. So they continue the New Civil Code provisions must be upheld as
against the Usury Law, under which a loan with usurious interest is not totally void,
because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be
governed by the Usury Law and other special laws, so far as they are not inconsistent
with this Code."

We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is
the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant
for departing from previous interpretation that, as provided in the Usury Law (Act No.
2655, as amended), a loan with usurious interest is not totally void only as to the
interest.

. . . [a]ppellants fail to consider that a contract of loan with usurious

interest consists of principal and accessory stipulations; the principal one is
to pay the debt; the accessory stipulation is to pay interest thereon.

And said two stipulations are divisible in the sense that the former can still
stand without the latter. Article 1273, Civil Code, attests to this: "The
renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force."

The question therefore to resolve is whether the illegal terms as to payment

of interest likewise renders a nullity the legal terms as to payments of the
principal debt. Article 1420 of the New Civil Code provides in this regard:
"In case of a divisible contract, if the illegal terms can be separated from the
legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of the

debtor to pay the principal debt, which is the cause of the contract (Article
1350, Civil Code), is not illegal. The illegality lies only as to the prestation to
pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.

....

The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in delay,
the debt earns interest from the date of the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for there was none, the same being
void. Rather, it is due to the general provision of law that in obligations to pay money,
where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209,
Civil Code). The court a quo therefore, did not err in ordering defendants to pay the
principal debt with interest thereon at the legal rate, from the date of filing of the
complaint."19

The Courts wholehearted affirmation of the rule that the principal obligation subsists
despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited
above, in all of which the main obligation was upheld and the offending interest rate
merely corrected. Hence, it is clear and settled that the principal loan obligation still
stands and remains valid. By the same token, since the mortgage contract derives its
vitality from the validity of the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary mortgage contract.

It should be noted that had the Court declared the loan and mortgage agreements void
for being contrary to public policy, no prescriptive period could have run.20 Such benefit
is obviously not available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article 1391 of the Civil Code, which governs voidable contracts. This
conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the
rule in this case. We are hard put to conclude in this case that there was any undue
influence in the first place.

There is ultimately no showing that petitioners consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners may
have motivated them to contract with respondents, but undue influence cannot be
attributed to respondents simply because they had lent money. Article 1391, in relation
to Article 1390 of the Civil Code, grants the aggrieved party the right to obtain the
annulment of contract on account of factors which vitiate consent. Article 1337 defines
the concept of undue influence, as follows:

There is undue influence when a person takes improper advantage of his power over the
will of another, depriving the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties or the fact that the person alleged to have been unduly influenced
was suffering from mental weakness, or was ignorant or in financial distress.

While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the
influence exerted must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than
his own.21 The alleged lingering financial woes of petitioners per se cannot be equated
with the presence of undue influence.

The RTC had likewise concluded that petitioners were barred by laches from assailing
the validity of the real estate mortgage. We wholeheartedly agree. If indeed petitioners
unwillingly gave their consent to the agreement, they should have raised this issue as
early as in the foreclosure proceedings. It was only when the writ of possession was
issued did petitioners challenge the stipulations in the loan contract in their action for
annulment of mortgage. Evidently, petitioners slept on their rights. The Court of
Appeals succinctly made the following observations:

In all these proceedings starting from the foreclosure, followed by the issuance of a
provisional certificate of sale; then the definite certificate of sale; then the issuance of
TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the
writ of possession in favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. It was only after the issuance of the writ of
possession in favor of the defendants, that plaintiffs allegedly tendered to the
defendants the amount of P260,000.00 which the defendants refused. In all these
proceedings, why did plaintiffs sleep on their rights?22

Clearly then, with the absence of undue influence, petitioners have no cause of action.
Even assuming undue influence vitiated their consent to the loan contract, their action
would already be barred by prescription when they filed it. Moreover, petitioners had
clearly slept on their rights as they failed to timely assail the validity of the mortgage
agreement. The denial of the petition in G.R. No. 150773 is warranted.

We now resolve the petition in G.R. No. 153599.

Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000
could no longer be questioned in a special civil action for certiorari and mandamus as
the reglementary period for such action had already elapsed.

It must be noted that the Order dated 3 August 1999 suspending the enforcement of the
writ of possession had a period of effectivity of only twenty (20) days from 3 August
1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)-day period,
the said Order became functus officio. Thus, there is really no sense in assailing the
validity of this Order, mooted as it was. For the same reason, the validity of the order
need not have been assailed by respondents in their special civil action before the Court
of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. It may be properly assailed by way of
the special civil action for certiorari, as it is interlocutory in nature.

As a rule, the special civil action for certiorari under Rule 65 must be filed not later than
sixty (60) days from notice of the judgment or order.23 Petitioners argue that the 3
August 1999 Order could no longer be assailed by respondents in a special civil action
for certiorari before the Court of Appeals, as the petition was filed beyond sixty (60)
days following respondents receipt of the Order. Considering that the 3 August
1999 Order had becomefunctus officio in the first place, this argument deserves scant
consideration.

Petitioners further claim that the 6 January 2000 Order could not have likewise been
the subject of a special civil action for certiorari, as it is according to them a final order,
as opposed to an interlocutory order. That the 6 January 2000 Order is interlocutory in
nature should be beyond doubt. An order is interlocutory if its effects would only be
provisional in character and would still leave substantial proceedings to be further had
by the issuing court in order to put the controversy to rest.24 The injunctive relief
granted by the order is definitely final, but merely provisional, its effectivity hinging on
the ultimate outcome of the then pending action for annulment of real estate mortgage.
Indeed, an interlocutory order hardly puts to a close, or disposes of, a case or a disputed
issue leaving nothing else to be done by the court in respect thereto, as is characteristic
of a final order.

Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature,
we cannot agree with petitioners who insist that it may be assailed only through an
appeal perfected within fifteen (15) days from receipt thereof by respondents. It is
axiomatic that an interlocutory order cannot be challenged by an appeal,

but is susceptible to review only through the special civil action of certiorari.25 The sixty
(60)-day reglementary period for special civil actions under Rule 65 applies, and
respondents petition was filed with the Court of Appeals well within the period.

Accordingly, no error can be attributed to the Court of Appeals in granting the petition
for certiorari and mandamus. As pointed out by respondents, the remedy of mandamus
lies to compel the performance of a ministerial duty. The issuance of a writ of possession
to a purchaser in an extrajudicial foreclosure is merely a ministerial function.26

Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining
the enforcement of the writ of possession.27 The purchaser in a foreclosure sale is
entitled as a matter of right to a writ of possession, regardless of whether or not there is
a pending suit for annulment of the mortgage or the foreclosure proceedings. An
injunction to prohibit the issuance or enforcement of the writ is entirely out of place.28

One final note. The issue on the validity of the stipulated interest rates, regrettably for
petitioners, was not raised at the earliest possible opportunity. It should be pointed out
though that since an excessive stipulated interest rate may be void for being contrary to
public policy, an action to annul said interest rate does not prescribe. Such indeed is the
remedy; it is not the action for annulment of the ancillary real estate mortgage. Despite
the nullity of the stipulated interest rate, the principal loan obligation subsists, and
along with it the mortgage that serves as collateral security for it.

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.

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
97-00366-6 P 700,000 30.17% 32.786% P 795,294.72
(7 days) (102 days)
97-00368-2 P 1,300,000 28% 30.41% P 1,462,124.54
(2 days) (102 days)
98-00002-4 P 150,000 33% 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 ofP1,560,308.00.5

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:

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

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE 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

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE 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

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE
TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF THE
TRUTH IN LENDING ACT

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE 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:

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.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 and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or (3)
the resulting profitability to the LENDER (UCPB) after due consideration of all dealings
with the BORROWER (the spouses Beluso). Again, as in the case of the interest rate
provision, there is no fixed margin above or below these considerations.

In view of the foregoing, the Separability Clause cannot save either of the two options of
UCPB as to the interest to be imposed, as both options violate the principle of mutuality
of contracts.

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 toP763,693.00 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."38 Furthermore, 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
exceedP2,000.00 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. L-66826 August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank
and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980,
the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST
through a corporate merger, and was substituted as party to the case.

Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First
Instance of Rizal Caloocan City a complaint against COMTRUST alleging four causes
of action. Except for the third cause of action, the CFI ruled in favor of Zshornack. The
bank appealed to the Intermediate Appellate Court which modified the CFI decision
absolving the bank from liability on the fourth cause of action. The pertinent portions of
the judgment, as modified, read:

IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

1. Ordering the defendant COMTRUST to restore to the dollar savings

account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of
October 27, 1975 to earn interest together with the remaining balance of
the said account at the rate fixed by the bank for dollar deposits under
Central Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount of

U.S. $3,000.00 immediately upon the finality of this decision, without
interest for the reason that the said amount was merely held in custody for
safekeeping, but was not actually deposited with the defendant
COMTRUST because being cash currency, it cannot by law be deposited
with plaintiffs dollar account and defendant's only obligation is to return
the same to plaintiff upon demand;

xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of

P8,000.00 as damages in the concept of litigation expenses and attorney's
fees suffered by plaintiff as a result of the failure of the defendant bank to
 restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to
return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.

Costs against defendant COMTRUST.

SO ORDERED. [Rollo, pp. 47-48.]

Undaunted, the bank comes to this Court praying that it be totally absolved from any
liability to Zshornack. The latter not having appealed the Court of Appeals decision, the
issues facing this Court are limited to the bank's liability with regard to the first and
second causes of action and its liability for damages.

1. We first consider the first cause of action, On the dates material to this case, Rizaldy
Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City
Branch, a dollar savings account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V.
Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated
that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and
others totalling P17.46 were to be charged to Current Acct. No. 210465-29, again, the
current account of the Zshornacks. There was no indication of the name of the
purchaser of the dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V.
Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of US
$1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was
to be charged to Dollar Savings Acct. No. 25-4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he

demanded an explanation from the bank. In answer, COMTRUST claimed that the peso
value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on
October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the
ruling of both the trial court and the Appellate Court on the first cause of action.
Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from
private respondent's dollar account.

In its desperate attempt to justify its act of withdrawing from its depositor's savings
account, the bank has adopted inconsistent theories. First, it still maintains that the
peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the
latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that
the withdrawal was made pursuant to an agreement where Zshornack allegedly
authorized the bank to withdraw from his dollar savings account such amount which,
when converted to pesos, would be needed to fund his peso current account. If indeed
the peso equivalent of the amount withdrawn from the dollar account was credited to
the peso current account, why did the bank still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation,
petitioner bank has not shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in favor of Dizon financed by the
withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be
considered payment to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement, the
evidence do not show that the withdrawal was made pursuant to it. Instead, the record
reveals that the amount withdrawn was used to finance a dollar draft in favor of
Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no
proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the
peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings
Account No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that
on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US
$3,000.00 cash (popularly known as greenbacks) forsafekeeping, and that the
agreement was embodied in a document, a copy of which was attached to and made part
of the complaint. The document reads:

Makati Cable Address:

Philippines "COMTRUST"

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines

Quezon City Branch

D
e
c
e
m
b
e
r

8
,
 1
9
7
5

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:

We acknowledged (sic) having received from you today the

sum of US DOLLARS: THREE THOUSAND ONLY
(US$3,000.00) for safekeeping.

Receiv
ed by:

(Sgd.)
VIRGI
LIO V.
GARC
IA

It was also alleged in the complaint that despite demands, the bank refused to return the
money.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso
current account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.

During trial, it was established that on December 8, 1975 Zshornack indeed delivered to
the bank US $3,000 for safekeeping. When he requested the return of the money on
May 10, 1976, COMTRUST explained that the sum was disposed of in this manner:
US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip
accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and
the peso proceeds amounting to P8,350.00 were deposited to his current account per
deposit slip also accomplished by Garcia.

Aside from asserting that the US$3,000.00 was properly credited to Zshornack's
current account at prevailing conversion rates, BPI now posits another ground to defeat
private respondent's claim. It now argues that the contract embodied in the document is
the contract of depositum (as defined in Article 1962, New Civil Code), which banks do
not enter into. The bank alleges that Garcia exceeded his powers when he entered into
the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and
the obligation is purely personal to Garcia.

Before we go into the nature of the contract entered into, an important point which
arises on the pleadings, must be considered.

The second cause of action is based on a document purporting to be signed by

COMTRUST, a copy of which document was attached to the complaint. In short, the
second cause of action was based on an actionable document. It was therefore
incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314
(1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to
enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not
only Garcia's authority, but also the bank's power, to enter into the contract in question.

In the past, this Court had occasion to explain the reason behind this procedural
requirement.

The reason for the rule enunciated in the foregoing authorities will, we
think, be readily appreciated. In dealing with corporations the public at
large is bound to rely to a large extent upon outward appearances. If a man
is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had permitted the agent
to exercise that authority and thereby held him out as a person competent
to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be
bound, notwithstanding the actual authority may never have been granted

... Whether a particular officer actually possesses the authority which he

assumes to exercise is frequently known to very few, and the proof of it
usually is not readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority exercised by some of
the corporate officers. It is therefore reasonable, in a case where an officer
of a corporation has made a contract in its name, that the corporation
should be required, if it denies his authority, to state such defense in its
answer. By this means the plaintiff is apprised of the fact that the agent's
authority is contested; and he is given an opportunity to adduce evidence
showing either that the authority existed or that the contract was ratified
and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634,
645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of
absolving a corporation from liability every time an officer enters into a contract which
is beyond corporate powers, even without the proper allegation or proof that the
corporation has not authorized nor ratified the officer's act, is to cast corporations in so
perfect a mold that transgressions and wrongs by such artificial beings become
impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a very plain
truism but to say that such bodies have no power or capacity to err is to impute to them
an excellence which does not belong to any created existence with which we are
acquainted. The distinction between power and right is no more to be lost sight of in
respect to artificial than in respect to natural persons." [Ibid.]

Having determined that Garcia's act of entering into the contract binds the corporation,
we now determine the correct nature of the contract, and its legal consequences,
including its enforceability.

The document which embodies the contract states that the US$3,000.00 was received
by the bank for safekeeping. The subsequent acts of the parties also show that the intent
of the parties was really for the bank to safely keep the dollars and to return it to
Zshornack at a later time, Thus, Zshornack demanded the return of the money on May
10, 1976, or over five months later.

The above arrangement is that contract defined under Article 1962, New Civil Code,
which reads:

Art. 1962. A deposit is constituted from the moment a person receives a

thing belonging to another, with the obligation of safely keeping it and of
returning the same. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other
contract.

Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9,
1949, which was in force at the time the parties entered into the transaction involved in
this case. The circular provides:

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them of

whatever nature, including, where applicable their exportation and
importation, shall NOT be effected, except with respect to deposit accounts
included in sub-paragraphs (b) and (c) of this paragraph, when such
deposit accounts are owned by and in the name of, banks.

(a) Any and all assets, provided they are held through, in, or
with banks or banking institutions located in the Philippines,
 including money, checks, drafts, bullions bank drafts,
deposit accounts (demand, time and savings), all debts,
indebtedness or obligations, financial brokers and
investment houses, notes, debentures, stocks, bonds,
coupons, bank acceptances, mortgages, pledges, liens or
other rights in the nature of security, expressed in foreign
currencies, or if payable abroad, irrespective of the currency
in which they are expressed, and belonging to any person,
firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation
residing or located within the Philippines;

(b) Any and all assets of the kinds included and/or described
in subparagraph (a) above, whether or not held through, in,
or with banks or banking institutions, and existent within the
Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation not residing or located
within the Philippines;

(c) Any and all assets existent within the Philippines

including money, checks, drafts, bullions, bank drafts, all
debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment
houses, notes, debentures, stock, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other rights in the
nature of security expressed in foreign currencies, or if
payable abroad, irrespective of the currency in which they
are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or
other unincorporated body or corporation residing or located
within the Philippines.

xxx xxx xxx

4. (a) All receipts of foreign exchange shall be sold daily to the Central
Bank by those authorized to deal in foreign exchange. All receipts of
foreign exchange by any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or corporation shall
be sold to the authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign exchange.
Any person, firm, partnership, association, branch office, agency, company
or other unincorporated body or corporation, residing or located within
the Philippines, who acquires on and after the date of this Circular foreign
exchange shall not, unless licensed by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full value,
nor delay taking ownership thereof except as such delay is customary;
 Provided, further, That within one day upon taking ownership, or
receiving payment, of foreign exchange the aforementioned persons and
entities shall sell such foreign exchange to designated agents of the Central
Bank.

xxx xxx xxx

8. Strict observance of the provisions of this Circular is enjoined; and any

person, firm or corporation, foreign or domestic, who being bound to the
observance thereof, or of such other rules, regulations or directives as may
hereafter be issued in implementation of this Circular, shall fail or refuse
to comply with, or abide by, or shall violate the same, shall be subject to
the penal sanctions provided in the Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281,
Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its
coverage to Philippine residents only. Section 6 provides:

SEC. 6. All receipts of foreign exchange by any resident person, firm,

company or corporation shall be sold to authorized agents of the Central
Bank by the recipients within one business day following the receipt of
such foreign exchange. Any resident person, firm, company or
corporation residing or located within the Philippines, who acquires
foreign exchange shall not, unless authorized by the Central Bank, dispose
of such foreign exchange in whole or in part, nor receive less than its full
value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking
ownership or receiving payment of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to the authorized
agents of the Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack,
who alleged in his complaint that he is a Philippine resident. The parties did not
intended to sell the US dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls under the general class of
prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having
been executed against the provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of action against the other. "When
the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no
cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is
one on behalf of the State to prosecute the parties for violating the law.

We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept
of litigation expenses and attorney's fees to be reasonable. The award is sustained.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered

to restore to the dollar savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for
dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent are
ordered dismissed.

SO ORDERED.
G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of
rent of a safety deposit box with respect to its contents placed by the latter one of bailor
and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased from
the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount,
P75,725.00 was paid as downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the
lots shall be transferred to the petitioner upon full payment of the purchase price and
that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title
(TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank.
The same could be withdrawn only upon the joint signatures of a representative of the
petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through
Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private
respondent Security Bank and Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank. For this purpose, both signed a contract
of lease (Exhibit "2") which contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters one
to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for
the guard key and the other for the renter's key, and can be opened only with the use of
both keys. Petitioner claims that the certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two
(2) lots at a price of P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00
for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979
to open the safety deposit box and get the certificates of title. However, when opened in
the presence of the Bank's representative, the box yielded no such certificates. Because
of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to
purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the
expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint 2 for damages against the respondent Bank with the Court of First Instance
(now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil
Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no
cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2");
corollarily, loss of any of the items or articles contained in the box could not give rise to
an action against it. It then interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to
the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court
(RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8
December 1986, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered

dismissing plaintiff's complaint.

On defendant's counterclaim, judgment is hereby rendered ordering

plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00)
PESOS as attorney's fees.

With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13
and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of
title. The court declared that the said provisions are binding on the parties.

Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as CA-
G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged
decision because the trial court erred in (a) absolving the respondent Bank from liability
from the loss, (b) not declaring as null and void, for being contrary to law, public order
and public policy, the provisions in the contract for lease of the safety deposit box
absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction,
as well as under American jurisprudence, the liability of the Bank is settled and (d)
awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal
and exemplary damages and attorney's fees. 8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of which
the petitioner and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither the
possession nor control over it and its contents. As such, the contract is governed by
Article 1643 of the Civil Code 10 which provides:

Art. 1643. In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain, and for a period
which may be definite or indefinite. However, no lease for more than
ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 which held that the owner of the property
loses his control over the property leased during the period of the contract and
Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or

instruments which earn interest shall be bound to collect the latter when it
becomes due, and to take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them
according to law.

The above provision shall not apply to contracts for the rent of safety
deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty
to maintain the contents of the box. The stipulation absolving the defendant-
appellee from liability is in accordance with the nature of the contract of lease
and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the
safety deposit box, respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter into the vault area or
when the rented box is forced open. Thus, as expressly provided for in stipulation
number 8 of the contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the Rules
of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner
avers that both the respondent Court and the trial court (a) did not properly and legally
apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of
jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by decisions of this Court and
precepts in American jurisprudence adopted in the Philippines. It reiterates the
arguments it had raised in its motion to reconsider the trial court's decision, the brief
submitted to the respondent Court and the motion to reconsider the latter's decision. In
a nutshell, petitioner maintains that regardless of nomenclature, the contract for the
rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by
Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of
the certificates of title pursuant to Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return
it, when required, to the depositor, or to his heirs and successors, or to the
person who may have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in

determining the degree of care that the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is

supposed to expound on the prevailing rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company leases

a safe-deposit box or safe and the lessee takes possession of the box or safe
and places therein his securities or other valuables, the relation of bailee
and bail or is created between the parties to the transaction as to such
securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it
shall know, the character or description of the property which is deposited
in such safe-deposit box or safe does not change that relation. That access
to the contents of the safe-deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or one to be used in
connection with one retained by the lessor) does not operate to alter the
foregoing rule. The argument that there is not, in such a case, a delivery of
exclusive possession and control to the deposit company, and that
therefore the situation is entirely different from that of ordinary bailment,
has been generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company, it should
reasonably be considered as in the latter rather than in the former, since
the company is, by the nature of the contract, given absolute control of
access to the property, and the depositor cannot gain access thereto
 without the consent and active participation of the company. . . . (citations
omitted).

and a segment from Words and Phrases 18 which states that a contract for the
rental of a bank safety deposit box in consideration of a fixed amount at stated
periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order or
public policy.

After the respondent Bank filed its comment, this Court gave due course to the petition
and required the parties to simultaneously submit their respective Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on
deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the joint
renters the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the
other hand, the respondent Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was made so that both renters could
have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as an
argument against the deposit theory. Obviously, the first paragraph of such provision
cannot apply to a depositary of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit box. It is clear that the
depositary cannot open the box without the renter being present.

We observe, however, that the deposit theory itself does not altogether find unanimous
support even in American jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view
because:
 There is, however, some support for the view that the relationship in
question might be more properly characterized as that of landlord and
tenant, or lessor and lessee. It has also been suggested that it should be
characterized as that of licensor and licensee. The relation between a bank,
safe-deposit company, or storage company, and the renter of a safe-
deposit box therein, is often described as contractual, express or implied,
oral or written, in whole or in part. But there is apparently no jurisdiction
in which any rule other than that applicable to bailments governs
questions of the liability and rights of the parties in respect of loss of the
contents of safe-deposit boxes. 22 (citations omitted)

In the context of our laws which authorize banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking Act 23pertinently provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in

this Act, banking institutions other than building and loan associations
may perform the following services:

(a) Receive in custody funds, documents, and valuable

objects, and rent safety deposit boxes for the safeguarding of
such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section asdepositories or as agents. . . . 24 (emphasis
supplied)

Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable objects
for safekeeping. The renting out of the safety deposit boxes is not independent from, but
related to or in conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the
parties thereto may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility for the safekeeping of the
objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In
the absence of any stipulation prescribing the degree of diligence required, that of a
good father of a family is to be observed. 27Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law and public policy. In
the instant case, petitioner maintains that conditions 13 and 14 of the questioned
contract of lease of the safety deposit box, which read:
 13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith. 28

are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with
the respondent Bank's responsibility as a depositary under Section 72(a) of the
General Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the

actual practice of the Bank. It is not correct to assert that the Bank has neither the
possession nor control of the contents of the box since in fact, the safety deposit
box itself is located in its premises and is under its absolute control; moreover,
the respondent Bank keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and ineffective. It has
been said:

With respect to property deposited in a safe-deposit box by a customer of a

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

Since, however, the petitioner cannot be blamed for the filing of the complaint and no
bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
(dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-
G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on
the nature of the relationship between the parties in a contract of lease of safety deposit
boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant
Petition for Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.

SO ORDERED.
.R. No. 160544 (Triple-V Food Services, Inc. vs. Filipino Merchants Insurance
Company, Inc.)

Assailed in this petition for review on certiorari is the decision[1]cralaw dated October
21, 2003 of the Court of Appeals in CA-G.R. CV No. 71223, affirming an earlier decision
of the Regional Trial Court at Makati City, Branch 148, in its Civil Case No. 98-838, an
action for damages thereat filed by respondent Filipino Merchants Insurance, Company,
Inc., against the herein petitioner, Triple-V Food Services, Inc.

On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary Jo-Anne De
Asis (De Asis) dined at petitioner's Kamayan Restaurant at 15 West Avenue, Quezon
City. De Asis was using a Mitsubishi Galant Super Saloon Model 1995 with plate number
UBU 955, assigned to her by her employer Crispa Textile Inc. (Crispa). On said date, De
Asis availed of the valet parking service of petitioner and entrusted her car key to
petitioner's valet counter. A corresponding parking ticket was issued as receipt for the
car. The car was then parked by petitioner's valet attendant, a certain Madridano, at the
designated parking area. Few minutes later, Madridano noticed that the car was not in
its parking slot and its key no longer in the box where valet attendants usually keep the
keys of cars entrusted to them. The car was never recovered. Thereafter, Crispa filed a
claim against its insurer, herein respondent Filipino Merchants Insurance Company,
Inc. (FMICI). Having indemnified Crispa in the amount of P669.500 for the loss of the
subject vehicle, FMICI, as subrogee to Crispa's rights, filed with the RTC at Makati City
an action for damages against petitioner Triple-V Food Services, Inc., thereat docketed
as Civil Case No. 98-838 which was raffled to Branch 148.

In its answer, petitioner argued that the complaint failed to aver facts to support the
allegations of recklessness and negligence committed in the safekeeping and custody of
the subject vehicle, claiming that it and its employees wasted no time in ascertaining the
loss of the car and in informing De Asis of the discovery of the loss. Petitioner further
argued that in accepting the complimentary valet parking service, De Asis received a
parking ticket whereunder it is so provided that "[Management and staff will not be
responsible for any loss of or damage incurred on the vehicle nor of valuables contained
therein", a provision which, to petitioner's mind, is an explicit waiver of any right to
claim indemnity for the loss of the car; and that De Asis knowingly assumed the risk of
loss when she allowed petitioner to park her vehicle, adding that its valet parking service
did not include extending a contract of insurance or warranty for the loss of the vehicle.

During trial, petitioner challenged FMICI's subrogation to Crispa's right to file a claim
for the loss of the car, arguing that theft is not a risk insured against under FMICI's
Insurance Policy No. PC-5975 for the subject vehicle.

In a decision dated June 22, 2001, the trial court rendered judgment for respondent
FMICI, thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff (FMICI) and against the defendant Triple V (herein petitioner) and the latter is
hereby ordered to pay plaintiff the following:
1. The amount of P669,500.00, representing actual damages plus compounded (sic);

2. The amount of P30,000.00 as acceptance fee plus the amount equal to 25% of the
total amount due as attorney's fees;

3. The amount of P50,000.00 as exemplary damages;

4. Plus, cost of suit.

Defendant Triple V is not therefore precluded from taking appropriate action against
defendant Armando Madridano.

SO ORDERED.

Obviously displeased, petitioner appealed to the Court of Appeals reiterating its

argument that it was not a depositary of the subject car and that it exercised due
diligence and prudence in the safe keeping of the vehicle, in handling the car-napping
incident and in the supervision of its employees. It further argued that there was no
valid subrogation of rights between Crispa and respondent FMICI.

In a decision dated October 21, 2003,[2]cralaw the Court of Appeals dismissed

petitioner's appeal and affirmed the appealed decision of the trial court, thus:

WHEREFORE, based on the foregoing premises, the instant appeal is hereby

DISMISSED. Accordingly, the assailed June 22, 2001 Decision of the RTC of Makati City
- Branch 148 in Civil Case No. 98-838 is AFFIRMED.

SO ORDERED.

In so dismissing the appeal and affirming the appealed decision, the appellate court
agreed with the findings and conclusions of the trial court that: (a) petitioner was a
depositary of the subject vehicle; (b) petitioner was negligent in its duties as a depositary
thereof and as an employer of the valet attendant; and (c) there was a valid subrogation
of rights between Crispa and respondent FMICI.

Hence, petitioner's present recourse.

We agree with the two (2) courts below.

When De Asis entrusted the car in question to petitioners valet attendant while eating at
petitioner'sKamayan Restaurant, the former expected the car's safe return at the end of
her meal. Thus, petitioner was constituted as a depositary of the same car. Petitioner
cannot evade liability by arguing that neither a contract of deposit nor that of insurance,
guaranty or surety for the loss of the car was constituted when De Asis availed of its free
valet parking service.
In a contract of deposit, a person receives an object belonging to another with the
obligation of safely keeping it and returning the same.[3]cralaw A deposit may be
constituted even without any consideration. It is not necessary that the depositary
receives a fee before it becomes obligated to keep the item entrusted for safekeeping and
to return it later to the depositor.

Specious is petitioner's insistence that the valet parking claim stub it issued to De Asis
contains a clear exclusion of its liability and operates as an explicit waiver by the
customer of any right to claim indemnity for any loss of or damage to the vehicle.

The parking claim stub embodying the terms and conditions of the parking, including
that of relieving petitioner from any loss or damage to the car, is essentially a contract of
adhesion, drafted and prepared as it is by the petitioner alone with no participation
whatsoever on the part of the customers, like De Asis, who merely adheres to the printed
stipulations therein appearing. While contracts of adhesion are not void in themselves,
yet this Court will not hesitate to rule out blind adherence thereto if they prove to be
one-sided under the attendant facts and circumstances.[4]cralaw

Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be allowed
to use its parking claim stub's exclusionary stipulation as a shield from any
responsibility for any loss or damage to vehicles or to the valuables contained therein.
Here, it is evident that De Asis deposited the car in question with the petitioner as part
of the latter's enticement for customers by providing them a safe parking space within
the vicinity of its restaurant. In a very real sense, a safe parking space is an added
attraction to petitioner's restaurant business because customers are thereby somehow
assured that their vehicle are safely kept, rather than parking them elsewhere at their
own risk. Having entrusted the subject car to petitioner's valet attendant, customer De
Asis, like all of petitioner's customers, fully expects the security of her car while at
petitioner's premises/designated parking areas and its safe return at the end of her visit
at petitioner's restaurant.

Petitioner's argument that there was no valid subrogation of rights between Crispa and
FMICI because theft was not a risk insured against under FMICI's Insurance Policy No.
PC-5975 holds no water.

Insurance Policy No. PC-5975 which respondent FMICI issued to Crispa contains,
among others things, the following item: "Insured's Estimate of Value of Scheduled
Vehicle- P800.000".[5]cralaw On the basis of such item, the trial court concluded that
the coverage includes a full comprehensive insurance of the vehicle in case of damage or
loss. Besides, Crispa paid a premium of P10,304 to cover theft. This is clearly shown in
the breakdown of premiums in the same policy.[6]cralaw Thus, having indemnified
CRISPA for the stolen car, FMICI, as correctly ruled by the trial court and the Court of
Appeals, was properly subrogated to Crispa's rights against petitioner, pursuant
to Article 2207 of the New Civil Code[7].

Anent the trial court's findings of negligence on the part of the petitioner, which findings
were affirmed by the appellate court, we have consistently ruled that findings of facts of
trial courts, more so when affirmed, as here, by the Court of Appeals, are conclusive on
this Court unless the trial court itself ignored, overlooked or misconstrued facts and
circumstances which, if considered, warrant a reversal of the outcome of the
case.[8]cralaw This is not so in the case at bar. For, we have ourselves reviewed the
records and find no justification to deviate from the trial court's findings.

WHEREFORE, petition is hereby DENIED DUE COURSE.

SO ORDERED.
G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,

vs.
COURT OF APPEALS and SECURITY BANK and TRUST
COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737,

promulgated on 21 August 1991, 1reversing and setting aside the Decision, dated 19
February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil Case
No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is
challenged in this petition for review on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of
the stamp collection of the plaintiff (petitioner herein) contained in Safety Deposit Box
No. 54 which had been rented from the defendant pursuant to a contract denominated
as a Lease Agreement. 3 Judgment therein was rendered in favor of the dispositive
portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor

of the plaintiff and against the defendant, Security Bank & Trust Company,
ordering the defendant bank to pay the plaintiff the sum of

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual

damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as

moral damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's

fees and legal expenses.

The counterclaim set up by the defendant are hereby dismissed for lack of
merit.

No costs.

SO ORDERED. 4
The antecedent facts of the present controversy are summarized by the public
respondent in its challenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of
the defendant bank at its Binondo Branch located at the Fookien Times
Building, Soler St., Binondo, Manila wherein he placed his collection of
stamps. The said safety deposit box leased by the plaintiff was at the
bottom or at the lowest level of the safety deposit boxes of the defendant
bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered
into the defendant bank's premises, seeped into the safety deposit box
leased by the plaintiff and caused, according to the plaintiff, damage to his
stamps collection. The defendant bank rejected the plaintiff's claim for
compensation for his damaged stamps collection, so, the plaintiff
instituted an action for damages against the defendant bank.

The defendant bank denied liability for the damaged stamps collection of
the plaintiff on the basis of the "Rules and Regulations Governing the
Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs
9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the exercise
of the diligence to prevent the opening of the safe by any person other than
the Renter, his authorized agent or legal representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the plaintiff over
safety deposit box No. 54 was one of lease and not of deposit and,
therefore, governed by the lease agreement (Exhs. "A", "L") which should
be the applicable law; that the destruction of the plaintiff's stamps
collection was due to a calamity beyond obligation on its part to notify the
plaintiff about the floodwaters that inundated its premises at Binondo
branch which allegedly seeped into the safety deposit box leased to the
plaintiff.

The trial court then directed that an ocular inspection on (sic) the contents
of the safety deposit box be conducted, which was done on December 8,
1988 by its clerk of court in the presence of the parties and their counsels.
A report thereon was then submitted on December 12, 1988 (Records, p.
 98-A) and confirmed in open court by both parties thru counsel during the
hearing on the same date (Ibid., p. 102) stating:

"That the Safety Box Deposit No. 54 was opened by both

plaintiff Luzan Sia and the Acting Branch Manager Jimmy B.
Ynion in the presence of the undersigned, plaintiff's and
defendant's counsel. Said Safety Box when opened contains
two albums of different sizes and thickness, length and width
and a tin box with printed word 'Tai Ping Shiang Roast Pork
in pieces with Chinese designs and character."

Condition of the above-stated Items

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width and
3/4 in thick. The leaves of the album are attached to every page and cannot
be lifted without destroying it, hence the stamps contained therein are no
longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch
thick. Some of its pages can still be lifted. The stamps therein can still be
distinguished but beyond restoration. Others have lost its original form.

3. The tin box is rusty inside. It contains an album with several pieces of
papers stuck up to the cover of the box. The condition of the album is the
second abovementioned album." 5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC,

appealed the trial court's decision to the public respondent Court of Appeals. The appeal
was docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC
contended that the latter erred in (a) holding that the lease agreement is a contract of
adhesion; (b) finding that the defendant had failed to exercise the required diligence
expected of a bank in maintaining the safety deposit box; (c) awarding to the plaintiff
actual damages in the amount of P20,000.00, moral damages in the amount of
P100,000.00 and attorney's fees and legal expenses in the amount of P5,000.00; and
(d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion of
which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and

instead the appellee's complaint is hereby DISMISSED. The appellant
bank's counterclaim is likewise DISMISSED. No costs.6
In reversing the trial court's decision and absolving SBTC from liability, the public
respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms
and conditions of the contract of lease which the appellee (now petitioner) had
voluntarily and knowingly executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a
contract of deposit wherein the bank became a depositary of the subject stamp
collection; hence, as contended by SBTC, the provisions of Book IV, Title XII of the Civil
Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box
limiting SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the exercise
of the diligence to prevent the opening of the Safe by any person other
than the Renter, his authorized agent or legal representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever in said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public
order or public policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required
diligence in maintaining the safety deposit box; what was proven was that the floods of
1985 and 1986, which were beyond the control of SBTC, caused the damage to the stamp
collection; said floods were fortuitous events which SBTC should not be held liable for
since it was not shown to have participated in the aggravation of the damage to the
stamp collection; on the contrary, it offered its services to secure the assistance of an
expert in order to save most of the stamps, but the appellee refused; appellee must then
bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public
respondent, 7 petitioner filed the instant petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE

PART OF THE RESPONDENT COURT WHEN IT RULED THAT
RESPONDENT SBTC DID NOT FAIL TO EXERCISE THE REQUIRED
DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF THE
 PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST
(sic) PROVING THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING

PRIVATE RESPONDENT FROM ANY LIABILITY WHATSOEVER BY
REASON OF THE PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE
AGREEMENT (EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING

THE AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL
DAMAGES, INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES,
IN FAVOR OF THE PETITIONER. 8

We subsequently gave due course the petition and required both parties to submit their
respective memoranda, which they complied with. 9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the
required diligence expected of a bank maintaining such safety deposit box . . . in the
light of the environmental circumstance of said safety deposit box after the floods of
1985 and 1986." He argues that such a conclusion is supported by the evidence on
record, to wit: SBTC was fully cognizant of the exact location of the safety deposit box in
question; it knew that the premises were inundated by floodwaters in 1985 and 1986
and considering that the bank is guarded twenty-four (24) hours a day , it is safe to
conclude that it was also aware of the inundation of the premises where the safety
deposit box was located; despite such knowledge, however, it never bothered to inform
the petitioner of the flooding or take any appropriate measures to insure the safety and
good maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of
facts of the Court of Appeals, when supported by substantial exidence, are not
reviewable on appeal by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a
disparity between the factual findings and conclusions of the Court of Appeals and the
trial court. 11 Such a disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the
"Lease Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that
a contract of lease and not a contract of deposit, and that paragraphs 9 and 13 thereof,
which expressly limit the bank's liability as follows:
 9. The liability of the bank by reason of the lease, is limited to the exercise
of the diligence to prevent the opening of the Safe by any person other
than the Renter, his autliorized agent or legal representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has
neither the possession nor the control of the same. The Bank has no
interest whatsoever said contents, except as herein provided, and it
assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public
respondent further avers that even without such a limitation of liability, SBTC should
still be absolved from any responsibility for the damage sustained by the petitioner as it
appears that such damage was occasioned by a fortuitous event and that the respondent
bank was free from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the
petition to be impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this
Court explicitly rejected the contention that a contract for the use of a safety deposit box
is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor did We fully
subscribe to the view that it is a contract of deposit to be strictly governed by the Civil
Code provision on deposit; 14 it is, as We declared, a special kind of deposit. The
prevailing rule in American jurisprudence that the relation between a bank renting
out safe deposit boxes and its customer with respect to the contents of the box is that of
a bailor and bailee, the bailment for hire and mutual benefit 15 has been adopted in
this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out
safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule
in the United States has been adopted. Section 72 of the General Banking
Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized elsewhere in

this Act, banking institutions other than building and loan associations
may perform the following services:

(a) Receive in custody funds, documents, and valuable

objects, and rent safety deposit boxes for the safequarding of
such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section asdepositories or as agents. . . ."(emphasis supplied)
Note that the primary function is still found within the parameters of a
contract of deposit, i.e., the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting out of the safety
deposit boxes is not independent from, but related to or in conjunction
with, this principal function. A contract of deposit may be entered into
orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of
the Civil Code, the parties thereto may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in
the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or contravention of the tenor
of the agreement [Art. 1170, id.]. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a
family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting
the depositary from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay would be void for being
contrary to law and public policy. In the instant case, petitioner maintains
that conditions 13 and l4 of the questioned contract of lease of the safety
deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither
the possession nor control of the same.

"14. The bank has no interest whatsoever in said contents, except as herein
expressly provided, and it assumes absolutely no liability in connection
therewith."

are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are
inconsistent with the respondent Bank's responsibility as a depositary
under Section 72 (a) of the General Banking Act. Both exempt the latter
from any liability except as contemplated in condition 8 thereof which
limits its duty to exercise reasonable diligence only with respect to who
shall be admitted to any rented safe, to wit:

"8. The Bank shall use due diligence that no unauthorized

person shall be admitted to any rented safe and beyond this,
the Bank will not be responsible for the contents of any safe
rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to

the actual practice of the Bank. It is not correct to assert that the Bank has
neither the possession nor control of the contents of the box since in fact,
the safety deposit box itself is located in its premises and is under its
absolute control; moreover, the respondent Bank keeps the guard key to
 the said box. As stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in the contract in
question are void and ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by

a customer of a safe-deposit company, the parties, since the
relation is a contractual one, may by special contract define
their respective duties or provide for increasing or limiting
the liability of the deposit company, provided such contract
is not in violation of law or public policy. It must clearly
appear that there actually was such a special contract,
however, in order to vary the ordinary obligations implied by
law from the relationship of the parties; liability of the
deposit company will not be enlarged or restricted by words
of doubtful meaning. The company, in renting safe-deposit
boxes, cannot exempt itself from liability for loss of the
contents by its own fraud or negligence or that, of its agents
or servants, and if a provision of the contract may be
construed as an attempt to do so, it will be held ineffective
for the purpose. Although it has been held that the lessor of a
safe-deposit box cannot limit its liability for loss of the
contents thereof through its own negligence, the view has
been taken that such a lessor may limit its liability to some
extent by agreement or stipulation ."[10 AM JUR 2d., 466].
(citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety
Deposit Box in CA Agro-Industrial Development Corp. are strikingly similar to
condition No. 13 in the instant case. On the other hand, both condition No. 8 in CA
Agro-Industrial Development Corp. and condition No. 9 in the present case limit the
scope of the exercise of due diligence by the banks involved to merely seeing to it that
only the renter, his authorized agent or his legal representative should open or have
access to the safety deposit box. In short, in all other situations, it would seem that SBTC
is not bound to exercise diligence of any kind at all. Assayed in the light of Our
aforementioned pronouncements in CA Agro-lndustrial Development Corp., it is not at
all difficult to conclude that both conditions No. 9 and No. 13 of the "Lease Agreement"
covering the safety deposit box in question (Exhibits "A" and "1") must be stricken down
for being contrary to law and public policy as they are meant to exempt SBTC from any
liability for damage, loss or destruction of the contents of the safety deposit box which
may arise from its own or its agents' fraud, negligence or delay. Accordingly, SBTC
cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the
destruction or loss of the stamp collection because the flooding was a fortuitous event
and there was no showing of SBTC's participation in the aggravation of the loss or
injury. It states:
 Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it is

otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia

Jurisdicada Espaola 17 says: "In a legal sense and, consequently, also in
relation to contracts, a "caso fortuito" prevents (sic) 18 the following
essential characteristics: (1) the cause of the unforeseen ands unexpected
occurrence, or of the failure of the debtor to comply with his obligation,
must be independent of the human will; (2) it must be impossible to
foresee the event which constitutes the "caso fortuito," or if it can be
foreseen, it must be impossible to avoid; (3) the occurrence must be such
as to render it impossible for one debtor to fulfill his obligation in a normal
manner; and (4) the obligor must be free from any participation in the
aggravation of the injury resulting to the creditor." (cited in
Servando vs.Phil., Steam Navigation Co., supra). 19

Here, the unforeseen or unexpected inundating floods were independent

of the will of the appellant bank and the latter was not shown to have
participated in aggravating damage (sic) to the stamps collection of the
appellee. In fact, the appellant bank offered its services to secure the
assistance of an expert to save most of the then good stamps but the
appelle refused and let (sic) these recoverable stamps inside the safety
deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation.
Unfortunately, however, the public respondent failed to consider that in the instant
case, as correctly held by the trial court, SBTC was guilty of negligence. The facts
constituting negligence are enumerated in the petition and have been summarized in
this ponencia. SBTC's negligenceaggravated the injury or damage to the stamp
collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the
floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view
thereof, it should have lost no time in notifying the petitioner in order that the box could
have been opened to retrieve the stamps, thus saving the same from further
deterioration and loss. In this respect, it failed to exercise the reasonable care and
prudence expected of a good father of a family, thereby becoming a party to the
aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic
of a fortuitous event is absent Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud,

negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages,
thus comes to the succor of the petitioner. The destruction or loss of the stamp
collection which was, in the language of the trial court, the "product of 27 years of
patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must be
compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages.
Since the relationship between the petitioner and SBTC is based on a contract, either of
them may be held liable for moral damages for breach thereof only if said party had
acted fraudulently or in bad faith. 22 There is here no proof of fraud or bad faith on the
part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and
Resolution of the public respondent Court of Appeals of 21 August 1991 and 21
November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and the
Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila in Civil
Case No. 87-42601 is hereby REINSTATED in full, except as to the award of moral
damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.
G.R. No. L-30511 February 14, 1980

MANUEL M. SERRANO, petitioner,

vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA;
EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR.,
JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B.
RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA
RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents.

Rene Diokno for petitioner.

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.

Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent

Overseas Bank of Manila.

Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the
establishment of joint and solidary liability to the amount of Three Hundred Fifty
Thousand Pesos, with interest, against respondent Central Bank of the Philippines and
Overseas Bank of Manila and its stockholders, on the alleged failure of the Overseas
Bank of Manila to return the time deposits made by petitioner and assigned to him, on
the ground that respondent Central Bank failed in its duty to exercise strict supervision
over respondent Overseas Bank of Manila to protect depositors and the general
public. 1 Petitioner also prays that both respondent banks be ordered to execute the
proper and necessary documents to constitute all properties fisted in Annex "7" of the
Answer of respondent Central Bank of the Philippines in G.R. No. L-29352,
entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust fund
in favor of petitioner and all other depositors of respondent Overseas Bank of Manila. It
is also prayed that the respondents be prohibited permanently from honoring,
implementing, or doing any act predicated upon the validity or efficacy of the deeds of
mortgage, assignment. and/or conveyance or transfer of whatever nature of the
properties listed in Annex "7" of the Answer of respondent Central Bank in G.R. No.
29352. 2

A sought for ex-parte preliminary injunction against both respondent banks was not
given by this Court.

Undisputed pertinent facts are:

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one
year with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the
respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit,
for one year with 6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos
(P200,000.00) with the same respondent Overseas Bank of Manila. 4

On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned

and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with
respondent Overseas Bank of Manila. 5

Notwithstanding series of demands for encashment of the aforementioned time deposits

from the respondent Overseas Bank of Manila, dating from December 6, 1967 up to
March 4, 1968, not a single one of the time deposit certificates was honored by
respondent Overseas Bank of Manila. 6

Respondent Central Bank admits that it is charged with the duty of administering the
banking system of the Republic and it exercises supervision over all doing business in
the Philippines, but denies the petitioner's allegation that the Central Bank has the duty
to exercise a most rigid and stringent supervision of banks, implying that respondent
Central Bank has to watch every move or activity of all banks, including respondent
Overseas Bank of Manila. Respondent Central Bank claims that as of March 12, 1965,
the Overseas Bank of Manila, while operating, was only on a limited degree of banking
operations since the Monetary Board decided in its Resolution No. 322, dated March 12,
1965, to prohibit the Overseas Bank of Manila from making new loans and investments
in view of its chronic reserve deficiencies against its deposit liabilities. This limited
operation of respondent Overseas Bank of Manila continued up to 1968. 7

Respondent Central Bank also denied that it is guarantor of the permanent solvency of
any banking institution as claimed by petitioner. It claims that neither the law nor
sound banking supervision requires respondent Central Bank to advertise or represent
to the public any remedial measures it may impose upon chronic delinquent banks as
such action may inevitably result to panic or bank "runs". In the years 1966-1967, there
were no findings to declare the respondent Overseas Bank of Manila as insolvent. 8

Respondent Central Bank likewise denied that a constructive trust was created in favor
of petitioner and his predecessor in interest Concepcion Maneja when their time
deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila as
during that time the latter was not an insolvent bank and its operation as a banking
institution was being salvaged by the respondent Central Bank. 9

Respondent Central Bank avers no knowledge of petitioner's claim that the properties
given by respondent Overseas Bank of Manila as additional collaterals to respondent
Central Bank of the Philippines for the former's overdrafts and emergency loans were
acquired through the use of depositors' money, including that of the petitioner and
Concepcion Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the
Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas
Bank of Manila sought to prevent respondent Central Bank from closing, declaring the
former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed
on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground that
Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the
matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed
petitioner Manuel Serrano's motion to intervene in that case, on the ground that his
claim as depositor of the Overseas Bank of Manila should properly be ventilated in the
Court of First Instance, and if this Court were to allow Serrano to intervene as depositor
in G.R. No. L-29352, thousands of other depositors would follow and thus cause an
avalanche of cases in this Court. In the resolution dated October 4, 1968, this Court
denied Serrano's, motion to intervene. The contents of said motion to intervene are
substantially the same as those of the present petition. 11

This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became
final and executory on March 3, 1972, favorable to the respondent Overseas Bank of
Manila, with the dispositive portion to wit:

WHEREFORE, the writs prayed for in the petition are hereby granted and
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that
prohibit the Overseas Bank of Manila to participate in clearing, direct the
suspension of its operation, and ordering the liquidation of said bank) are
hereby annulled and set aside; and said respondent Central Bank of the
Philippines is directed to comply with its obligations under the Voting
Trust Agreement, and to desist from taking action in violation therefor.
Costs against respondent Central Bank of the Philippines. 12

Because of the above decision, petitioner in this case filed a motion for judgment in this
case, praying for a decision on the merits, adjudging respondent Central Bank jointly
and severally liable with respondent Overseas Bank of Manila to the petitioner for the
P350,000 time deposit made with the latter bank, with all interests due therein; and
declaring all assets assigned or mortgaged by the respondents Overseas Bank of Manila
and the Ramos groups in favor of the Central Bank as trust funds for the benefit of
petitioner and other depositors. 13

By the very nature of the claims and causes of action against respondents, they in reality
are recovery of time deposits plus interest from respondent Overseas Bank of Manila,
and recovery of damages against respondent Central Bank for its alleged failure to
strictly supervise the acts of the other respondent Bank and protect the interests of its
depositors by virtue of the constructive trust created when respondent Central Bank
required the other respondent to increase its collaterals for its overdrafts said
emergency loans, said collaterals allegedly acquired through the use of depositors
money. These claims shoud be ventilated in the Court of First Instance of proper
jurisdiction as We already pointed out when this Court denied petitioner's motion to
intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for
mandamus and prohibition as there is no shown clear abuse of discretion by the Central
Bank in its exercise of supervision over the other respondent Overseas Bank of Manila,
and if there was, petitioner here is not the proper party to raise that question, but rather
the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there anything to
prohibit in this case, since the questioned acts of the respondent Central Bank (the acts
of dissolving and liquidating the Overseas Bank of Manila), which petitioner here
intends to use as his basis for claims of damages against respondent Central Bank, had
been accomplished a long time ago.

Furthermore, both parties overlooked one fundamental principle in the nature of bank
deposits when the petitioner claimed that there should be created a constructive trust in
his favor when the respondent Overseas Bank of Manila increased its collaterals in favor
of respondent Central Bank for the former's overdrafts and emergency loans, since these
collaterals were acquired by the use of depositors' money.

Bank deposits are in the nature of irregular deposits. They are really loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans. 14 Current and savings
deposit are loans to a bank because it can use the same. The petitioner here in making
time deposits that earn interests with respondent Overseas Bank of Manila was in reality
a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn
a debtor of petitioner. Failure of he respondent Bank to honor the time deposit is failure
to pay s obligation as a debtor and not a breach of trust arising from depositary's failure
to return the subject matter of the deposit

WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.

SO ORDERED.
G.R. No. L-32974 July 30, 1979

BARTOLOME ORTIZ, petitioner,

vs.
HON. UNION C. KAYANAN, in his capacity as Judge of the Court of First
Instance of Quezon, Branch IV; ELEUTERIO ZAMORA, QUIRINO
COMINTAN, VICENTE FERRO, AND GREGORIO PAMISARAN, respondents.

Salonga, Ordo;ez, Yap, Sicat & Associates and Salvador, Ulgado & Carbon for
petitioner.

Jose A. Cusi for private respondents.

ANTONIO, J.:1wph1.t

Petition for certiorari and Prohibition with Preliminary Injunction to nullify the Order
of respondent Judge directing the execution of the final judgment in Civil Case No. C-
90, entitled "Bartolome Ortiz vs. Secretary of Agriculture and Natural Resources, et
al.," and the Writ of Execution issued to implement said Order, allegedly for being
inconsistent with the judgment sought to be enforced.

Civil Case No. C-90 was filed by Bartolome Ortiz who sought the review and/or
annulment of the decision of the Secretary of Agriculture and Natural Resources, giving
preference to the sales applications of private respondents Quirino Comintan and
Eleuterio Zamora over Lot No. 5785, PLS-45, located at Barrio Cabuluan, Calauag,
Quezon.

The factual background of the case, as found by respondent Court, is as

follows:t.hqw

... The lot in controversy was formerly the subject of Homestead

Application No. 122417 of Martin Dolorico II, plaintiff's ward who died on
August 20, 1931; that since then it was plaintiff who continued the
cultivation and possession of the property, without however filing any
application to acquire title thereon; that in the Homestead Application No.
122417, Martin Dolorico II named his uncle, Martin Dolorico I as his heir
and successor in interest, so that in 1951 Martin Dolorico I executed an
affidavit relinquishing his rights over the property in favor of defendants
Quirino Comintan and Eleuterio Zamora, his grandson and son-in-law,
respectively, and requested the Director of Lands to cancel the homestead
application; that on the strength of the affidavit, Homestead Application
No. 122417 was cancelled and thereafter, defendants Comintan and
Zamora filed their respective sales applications Nos. 8433 and 9258; that
 plaintiff filed his protest on November 26, 1951 alleging that he should be
given preference to purchase the lot inasmuch as he is the actual occupant
and has been in continuous possession of the same since 1931; and inspite
of plaintiff's opposition, "Portion A" of the property was sold at public
auction wherein defendant Comintan was the only bidder; that on June 8,
1957, investigation was conducted on plaintiff's protest by Assistant Public
Lands Inspector Serapion Bauzon who submitted his report to the
Regional Land Officer, and who in turn rendered a decision on April 9,
1958, dismissing plaintiff's claim and giving due course to defendants'
sales applications on the ground that the relinquishment of the homestead
rights of Martin Dolorico I in favor of Comintan and Zamora is proper, the
former having been designated as successor in interest of the original
homestead applicant and that because plaintiff failed to participate in the
public auction, he is forever barred to claim the property; that plaintiff
filed a motion for reconsideration of this decision which was denied by the
Director of Lands in his order dated June 10, 1959; that, finally, on appeal
to the Secretary of Agriculture and Natural Resources, the decision
rendered by the Regional Land Officer was affirmed in toto. 1

On March 22, 1966, respondent Court rendered judgment in the afore-mentioned civil
case, the dispositive portion of which reads as follows:t.hqw

IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby

rendered awarding Lot No. 5785-A of PLS-45, (Calauag Public Land
Subdivision) one-half portion of the property in litigation located at Bo.
Cabuluan, Calauag, Quezon, in favor of defendant QUIRINO COMINTAN,
being the successful bidder in the public auction conducted by the bureau
of Lands on April 18, 1955, and hereby giving due course to the Sales
Application No. 9258 of defendant Eleuterio Zamora over the other half,
Lot No. 5785-B of PLS-45, Calauag, without prejudice to the right of
plaintiff BARTOLOME ORTIZ to participate in the public bidding of the
same to be announced by the Bureau of Lands, Manila. However, should
plaintiff Bartolome Ortiz be not declared the successful bidder thereof,
defendants Quirino Comintan and Eleuterio Zamora are ordered to
reimburse jointly said plaintiff the improvements he has introduced on
the whole property in the amount of THIRTEEN THOUSAND SIX
HUNDRED THIRTY-TWO (P13,632.00) PESOS, the latter having the
right to retain the property until after he has been fully paid therefor,
without interest since he enjoys the fruits of the property in question, with
prejudice and with costs again the plaintiff. 2

Plaintiff appealed the decision to the Court of Appeals.

Two (2) years after the rendition of the judgment by the court a quo, while the case was
pending appeal and upon petition of private respondents Quirino Comintan and
Eleuterio Zamora, respondent Court appointed respondent Vicente Ferro, Clerk of
Court, as Receiver to collect tolls on a portion of the property used as a diversion road.
On August 19, 1969, the Court of Appeals issued a Resolution annulling the Order
appointing the Receiver. Subsequently, on February 19, 1970, the Appellate Court
affirmed the decision of the trial court. A petition for review on certiorari of the decision
of the Court of Appeals was denied by this Court on April 6, 1970. At this point, private
respondents filed a petition for appointment of a new receiver with the court a quo. This
petition was granted and the receiver was reappointed. Petitioner sought the annulment
of this Order with the Court of Appeals, but said Court ruled that its decision had
already become final and that the records of the case were to be remanded to the trial
court.

Not satisfied with such denial, petitioner filed a petitioner for certiorari, prohibition and
mandamus with preliminary injunction before this Court, 3 praying for the annulment
of the Order reappointing the Receiver. On July 13, 1970, the petition was dismissed by
this Court on the ground of insufficient showing of grave abuse of discretion.

II

The judgment having become final and executory private respondents filed a motion for
the execution of the same, praying as follows:t.hqw

WHEREFORE, it is respectfully prayed of this Honorable Court to order

the issuance of a writ of execution in accordance with the judgment of this
Honorable Court, confirmed by the Court of Appeals and the Supreme
Court, commanding any lawful officer to deliver to defendants Comintan
and Zamora the land subject of the decision in this case but allowing
defendants to file a bond in such amount as this Honorable Court may fix,
in lieu of the P13,632.00 required to be paid to plaintiff, conditioned that
after the accounting of the tools collected by plaintiff, there is still an
amount due and payable to said plaintiff, then if such amount is not paid
on demand, including the legal interests, said bond shall be held
answerable.

Ordering further the plaintiff to render an accounting of the tolls he

collected from March of 1967 to December 31, 1968 and from September
1969 to March 31, 1970, and deliver said tolls collected to the receiver and
if judgment is already executed, then to Quirino Comintan and Eleuterio
Zamora; and,

Finally, to condemn plaintiff to pay moral damages for withholding the

tools which belong to your movant in an amount this Court may deem just
in the premises. 4

Acting upon the foregoing motion, respondent Judge issued an Order, dated September
23, 1970, stating, among others, the following: t.hqw

The records further disclosed that from March 1967 to December 31, 1968,
piaintiff Bartolome Ortiz collected tolls on a portion of the propertv in
question wherein he has not introduced anv improvement particularlv on
Lot No. 5785-A; PLS-45 awarded to defendant Quirino Comintan, thru
which vehicular traffic was detoured or diverted, and again from
September 1969 to March 31, 1970, the plaintiff resumed the collection of
tools on the same portion without rendering any accounting on said tolls
to the Receiver, who, was reappointed after submitting the required bond
and specifically authorized only to collect tolls leaving the harvesting of the
improvements to the plaintiff.

xxx xxx xxx

ln virtue of he findings of this Court as contained in the dispositive portion

of its decision, the defendants are jointly obligated to pay the plaintiff in
the amount of P13,632.00 as reasonable value of the improvements he
introduced on the whole property in question, and that he has the right of
retention until fully paid. It can be gleaned from the motion of the
defendants that if plaintiff submits an accounting of the tolls he collected
during the periods above alluded to, their damages of about P25,000.00
can more than offset their obligation of P13,362.00 in favor of the plaintiff,
thereafter the possession of the land be delivered to the defendants since
the decision of the Supreme Court has already become final and executory,
but in the interregnum pending such accounting and recovery by the
Receiver of the tolls collected by the plaintiff, the defendants pray that
they allowed to put up a bond in lieu of the said P13,632.00 to answer for
damages of the former, if any.

On the other hand, plaintiff contends in his opposition, admitting that the
decision of the Supreme Court has become final and executory; (1) the
offer of a bond in lieu of payment of P13,632.00 does not, and cannot,
satisfy the condition imposed in the decision of this Court which was
affirmed in toto;(2) the public sale of Portion "B" of the land has still to
take place as ordained before the decision could be executed; and, (3) that
whatever sums plaintiff may derive from the property cannot be set off
against what is due him for the improvements he made, for which he has
to be reimbursed as ordered.

xxx xxx xxx

Let it be known that plaintiff does not dispute his having collected tolls
during the periods from March 1967 to December 31, 1968 and from
September 1969 to March 31, 1970. The Supreme Court affirmed the
decision of this Court its findings that said tolls belong to the defendant,
considering that the same were collected on a portion of the land question
where the plaintiff did not introduce any improvement. The
reimbursement to the plaintiff pertains only to the value of the
improvements, like coconut trees and other plants which he introduced on
the whole property. The tolls collected by the plaintiff on an unimproved
 portion naturally belong to the defendants, following the doctrine on
accretion. Further, the reappointment of a Receiver by this Court was
upheld by the Supreme Court when it denied the petition for certiorari
filed by the plaintiff, bolstering the legal claim of defendants over said
tolls. Thus, the decision of the Supreme Court rendered the decision of this
Court retroactive from March 22, 1966 although pending accounting of the
tolls collected by the plaintiff is justified and will not prejudice anybody,
but certainly would substantially satisfy the conditions imposed in the
decision. However, insofar as the one-half portion "B" of the property, the
decision may be executed only after public sale by the Bureau of Lands
shall be accomplished.

WHEREFORE, finding the Motion for Execution filed by the defendants to

be meritorious, the same is granted; provided, however, that they put up a
bond equal the adjudicated amount of P13,632.00 accruing in favor of the
plaintiff, from a reputable or recognized bonding or surety company,
conditioned that after an accounting of the tolls collected by the plaintiff
should there be found out any balance due and payable to him after
reckoning said obligation of P13,632.00 the bond shall be held answerable
therefor. 5

Accordingly, a Writ of Execution was issued after private respondent Quirino Comintan
had filed the required bond. The writ directed the Sheriff to enforce the decision of the
Court, and stated, part in, the following:t.hqw

But should there be found any amount collectible after accounting and
deducting the amount of P3,632.00, you are hereby ordered that of the
goods and chattels of Bartolome Ortiz of Bo. Kabuluan, Calauag, Quezon,
be caused to be made any excess in the above-metioned amount together
with your lawful fees and that you render same to defendant Quirino
Comintan. If sufficient personal property cannot be found thereof to
satisfy this execution and lawful fees thereon, then you are commanded
that of the lands and buildings of the said BARTOLOME ORTIZ you make
the said excess amount in the manner required by the Rules of Court, and
make return of your proceedings within this Court within sixty (60) days
from date of service.

You are also ordered to cause Bartolome Ortiz to vacate the property
within fifteen (15) days after service thereof the defendant Quirino
Comintan having filed the required bond in the amount of THIRTEEN
THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00) PESOS. 6

On October 12, 1970, petitioner filed a Motion for Reconsideration of the aforesaid
Order and Writ of Execution, alleging:t.hqw

(a) That the respondent judge has no authority to place respondents in

possession of the property;
 (b) That the Supreme Court has never affirmed any decision of the trial
court that tolls collected from the diversionary road on the property, which
is public land, belong to said respondents;

(c) That to assess petitioner a P25,000.00 liability for damages is purely

punitive imposition without factual or legal justification.

The foregoing Motion for Reconsideration was denied by respondent Judge per Order
dated November 18, 1970. Saod Order states, in part:t.hqw

It goes without saying that defendant Comintan is entitled to be placed in

possession of lot No. 5785-A of PLS-45 (Calauag Public Land Subdivision)
and enjoyment of the tolls from March, 1967 to March, 1968 and from
September, 1969 to March 31, l970 which were received by plaintiff
Bartolome Ortiz, collected from the property by reason of the diversion
road where vehicular traffic was detoured. To defendant Comintan belongs
the tolls thus collected from a portion of the land awarded to him used as a
diversionary road by the doctrine of accretion and his right over the same
is ipso jure, there being no need of any action to possess said addition. It is
so because as consistently maintained by the Supreme Court, an applicant
who has complied with all the terms and conditions which entitle him to a
patent for a particular tract of publlic land, acquires a vested right therein
and is to be regarded as equitable owner thereof so that even without a
patent, a perfected homestead or sales application is a property right in the
fullest sense, unaffectcd by the fact that the paramount title is still in the
Government and no subsequent law can deprive him of that vested right
The question of the actual damages suffered by defendant Comintan by
reason of the unaccounted tolls received by plaintiff had already been fully
discussed in the order of September 23, 1970 and the Court is honestly
convinced and believes it to be proper and regular under the
circumstances.

Incidentally, the Court stands to correct itself when in the same order, it
directed the execution of he decision with respect to the one-half portion
"B" of the property only after the public sale by the Bureau of Lands, the
same being an oversight, it appearing that the Sales Application of
defendant Eleuterio Zamora had already been recognized and full
confirmed by the Supreme Court.

In view thereof, finding the motion filed by plaintiff to be without merit,

the Court hereby denies the same and the order of September 23, 1970
shall remain in full force subject to the amendment that the execution of
the decision with respect to the one-half portion "B" shall not be
conditioned to the public sale by the Bureau of Lands.

SO ORDERED. 7
III

Petitioner thus filed the instant petition, contending that in having issued the Order and
Writ of Execution, respondent Court "acted without or in excess of jurisdiction, and/or
with grave abuse of discretion, because the said order and writ in effect vary the terms of
the judgment they purportedly seek to enforce." He argued that since said judgment
declared the petitioner a possessor in good faith, he is entitled to the payment of the
value of the improvements introduced by him on the whole property, with right to retain
the land until he has been fully paid such value. He likewise averred that no payment for
improvements has been made and, instead, a bond therefor had been filed by
defendants (private respondents), which, according to petitioner, is not the payment
envisaged in the decision which would entitle private respondents to the possession of
the property. Furthermore, with respect to portion "B", petitioner alleges that, under the
decision, he has the right to retain the same until after he has participated and lost in
the public bidding of the land to be conducted by the Bureau of Lands. It is claimed that
it is only in the event that he loses in the bidding that he can be legally dispossessed
thereof.

It is the position of petitioner that all the fruits of the property, including the tolls
collected by him from the passing vehicles, which according to the trial court amounts to
P25,000.00, belongs to petitioner and not to defendant/private respondent Quirino
Comintan, in accordance with the decision itself, which decreed that the fruits of the
property shall be in lieu of interest on the amount to be paid to petitioner as
reimbursement for improvements. Any contrary opinion, in his view, would be
tantamount to an amendment of a decision which has long become final and executory
and, therefore, cannot be lawfully done.

Petitioner, therefore, prayed that: (1) a Writ of Preliminary Injunction be issued

enjoining the enforcement of the Orders of September 23, 1970 and November 18, 1970,
and the Writ of Execution issued thereto, or restoring to petitioner the possession of the
property if the private respondents had been placed in possession thereof; (2) annulling
said Orders as well as the Writ of Execution, dissolving the receivership established over
the property; and (3) ordering private respondents to account to petitioner all the fruits
they may have gathered or collected from the property in question from the time of
petitioiier's illegal dispossession thereof.

On January 29, 1971, this Court issued the Writ of Preliminary Injunction. On January
30, 1971, private respondents filed a Motion for Reconsideration and/or Modification of
the Order dated January 29, 1971. This was followed by a Supplemental Motion for
Reconsideration and Manifestation on February 3, 1971. In the latter motion, private
respondents manifested that the amount of P14,040.96, representing the amount
decreed in the judgment as reimbursement to petitioner for the improvements, plus
interest for six months, has already been deposited by them in court, "with the
understanding that said amount shall be turned over to the plaintiff after the court a
quo shall have determined the improvement on Lot 5785-A, and subsequently the
remaining balance of the deposit shall be delivered to the petitioner (plaintiff therein) in
the event he loses the bid for Lot 5785-B in favor of private respondent Eleuterio
Zamora." 8 The deposit is evidenced by a certification made by the Clerk of the Court a
quo. 9 Contending that said deposit was a faithful compliance with the judgment of the
trial court, private respondent Quirino Comintan prayed for the dissolution of the Writ
of Injunction.

It appears that as a consequence of the deposit made by private respondents, the

Deputy, Sheriff of Calauag, Quezon ousted petitioner's representative from the land in
question and put private respondents in possession thereof. 10

On March 10, 1971, petitioner filed a "Comment on Respondents' 'Motion for

Reconsideration' dated January 29, 1971' and 'Supplemental Motion for Reconsideration
and Manifestation,'" contending that the tender of deposit mentioned in the
Suplemental Motion was not really and officially made, "inasmuch as the same
is not supported by any official receipt from the lower court, or from its clerk or cashier,
as required by law;" that said deposit does not constitute sufficient compliance with the
judgment sought to be enforced, neither was it legally and validly made because the
requisites for consignation had not been complied with; that the tender of legal interest
for six months cannot substitute petitioner's enjoyment of the fruits of the property as
long as the judgment in Civil Case No. C-90 has not been implemented in the manner
decreed therein; that contrary to the allegations of private respondents, the value of the
improvements on the whole property had been determined by the lower court, and the
segregation of the improvements for each lot should have been raised by them at the
opportune moment by asking for the modification of the decision before it became final
and executory; and that the tolls on the property constituted "civil fruits" to which the
petitioner is entitled under the terms of the decision.

IV

The issue decisive of the controvery isafter the rendition by the trial court of its
judgment in Civil Case No. C-90 on March 22, 1966 confirming the award of one-half of
the property to Quirino Comintanwhether or not petitioner is still entitled to retain for
his own exclusive benefit all the fruits of the property, such as the tolls collected by him
from March 1967 to December 1968, and September 1969 to March 31, 1970, amounting
to about P25,000.00. In other words, petitioner contends that so long as the aforesaid
amount of P13,632,00 decreed in the judgment representing the expenses for clearing
the land and the value of the coconuts and fruit trees planted by him remains unpaid, he
can appropriate for his exclusive benefit all the fruits which he may derive from the
property, without any obligation to apply any portion thereof to the payment of the
interest and the principal of the debt.

We find this contention untenable.

There is no question that a possessor in good faith is entitled to the fruits received
before the possession is legally interrupted. 11 Possession in good faith ceases or is
legally interrupted from the moment defects in the title are made known to the
possessor, by extraneous evidence or by the filing of an action in court by the true owner
for the recovery of the property. 12 Hence, all the fruits that the possessor may receive
from the time he is summoned in court, or when he answers the complaint, must be
delivered and paid by him to the owner or lawful possessor. 13

However, even after his good faith ceases, the possessor in fact can still retain the
property, pursuant to Article 546 of the New Civil Code, until he has been fully
reimbursed for all the necessary and useful expenses made by him on the property. This
right of retention has been considered as one of the conglomerate of measures devised
by the law for the protection of the possessor in good faith. Its object is to guarantee the
reimbursement of the expenses, such as those for the preservation of the property, 14 or
for the enhancement of its utility or productivity. 15It permits the actual possessor to
remain in possession while he has not been reimbursed by the person who defeated him
in the possession for those necessary expenses and useful improvements made by him
on the thing possessed. The principal characteristic of the right of retention is its
accessory character. It is accessory to a principal obligation. Considering that the right
of the possessor to receive the fruits terminates when his good faith ceases, it is
necessary, in order that this right to retain may be useful, to concede to the creditor the
right to secure reimbursement from the fruits of the property by utilizing its proceeds
for the payment of the interest as well as the principal of the debt while he remains in
possession. This right of retention of the property by the creditor, according to Scaevola,
in the light of the provisions of Article 502 of the Spanish Civil Code, 16 is considered not
a coercive measure to oblige the debtor to pay, depriving him temporarily of the
enjoyment of the fruits of his property, but as a means of obtainitig compensation for
the debt. The right of retention in this case is analogous to a contract of antichresis and
it cati be considered as a means of extinguishing the obligation, inasmuch as the right to
retain the thing lasts only for the period necessary to enable the creditor to be
reimbursed from the fruits for the necessary and useful expenses. 17

According to Manresa, the right of retention is, therefore, analogous to that of a pledge,
if the property retained is a movable, and to that of antichresis, if the property held is
immovable. 18 This construction appears to be in harmony with similar provisions of the
civil law which employs the right of retention as a means or device by which a creditor is
able to obtain the payment of a debt. Thus, under Article 1731 of the New Civil Code, any
person who has performed work upon a movable has a right to retain it by way of pledge
until he is paid. Similarly, under Article 1914 of the same Code, the agent may retain in
pledge the things which are the object of the agency until the principal effects
reimbursement of the funds advanced by the former for the execution of the agency, or
he is indemnified for all damages which he may have suffered as a consequence of the
execution of the agency, provided he is free from fault. To the same effect, the
depositary, under Article 1994 of the same Code, may retain the thing in pledge until the
full payment of what may be due him by reason of the deposit. The usufructuary,
pursuant to Article 612 of the same Code, may retain the property until he is reimbursed
for the amount paid for taxes levied on the capital (Article 597) and tor extraordinary
repairs (Article 594).

In all of these cases, the right of retention is used as a means of extinguishing the
obligation. As amply observed by Manresa: "El derecho de retencion, lo hemos dicho, es
el derecho de prenda o el de anticresis constituido por la ley con independencia de las
partes." 19 In a pledge, if the thing pledged earns or produces fruits, income, dividends
or interests, the creditor shall compensate what he receives with those which are owing
him. 20 In the same manner, in a contract of antichresis, the creditor acquires the right
to receive the fruits of an immovable of his debtor with the obligation to apply them to
payment of the interest, if owing, and thereafter to the principal of his credit. 21 The
debtor can not reacquire enjoyment of the immovable until he has actually paid what he
owes the creditor. 22

Applying the afore-cited principles to the case at bar, petitioner cannot appropriate for
his own exclusive benefit the tolls which he collected from the property retained by him.
It was his duty under the law, after deducting the necessary expenses for his
administration, to apply such amount collected to the payment of the interest, and the
balance to the payment of the obligation.

We hold, therefore, that the disputed tolls, after deducting petitioner's expenses for
administration, belong to Quirino Comintan, owner of the land through which the toll
road passed, further considering that the same was on portions of the property on which
petitioner had not introduced any improvement. The trial court itself clarified this
matter when it placed the toll road under receivership. The omission of any mention of
the tolls in the decision itself may be attributed to the fact that the tolls appear to have
been collected after the rendition of the judgment of the trial court.

The records further reveal that earnest efforts have been made by private respondents to
have the judgment executed in the most practicable manner. They deposited in court the
amount of the judgment in the sum of P13,632.00 in cash, subject only to the accounting
of the tolls collected by the petitioner so that whatever is due from him may be set off
with the amount of reimbursement. This is just and proper under the circumstances
and, under the law, compensation or set off may take place, either totally or partially.
Considering that petitioner is the creditor with respect to the judgment obligation and
the debtor with respect to the tolls collected, Comintan being the owner thereof, the trial
court's order for an accounting and compensation is in accord with law. 23

With respect to the amount of reimbursement to be paid by Comintan, it appears that

the dispositive portion of the decision was lacking in specificity, as it merely provided
that Comintan and Zamora are jointly liable therefor. When two persons are liable
under a contract or under a judgment, and no words appear in the contract or judgment
to make each liable for the entire obligation, the presumption is that their obligation is
joint or mancomunada, and each debtor is liable only for a proportionate part of the
obligation. 24 The judgment debt of P13,632.00 should, therefore, be pro-rated in equal
shares to Comintan and Zamora.

Regarding Lot 5785-B, it appears that no public sale has yet been conducted by the
Bureau of Lands and, therefore, petitioner is entitled to remain in possession thereof.
This is not disputed by respondent Eleuterio Zamora. 25 After public sale is had and in
the event that Ortiz is not declared the successful bidder, then he should be reimbursed
by respondent Zamora in the corresponding amount for the improvements on Lot 5785-
B.
WHEREFORE, in view hereof, the Order of respondent Court of November 18, 1970 is
hereby modified to conform to the foregoing judgment. The Writ of Preliminary
Injunction, dated January 29, 1971, is hereby dissolved. Without special pronouncement
as to costs.
G.R. No. L-21069 October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,

vs.
RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee.

Rodolfo R. Velayo for and in his own behalf as defendant-appellant.

REYES, J.B.L., J.:

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No.
49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity
Co., Inc. the sum of P2,565.00 with interest at 12-% per annum from July 13, 1954;
P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees
in an amount equivalent to 15% of the total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the
Civil Code of the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of
Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of
attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the
Court of First Instance of Manila. Velayo undertook to pay the surety company an
annual premium of P112.00; to indemnify the Company for any damage and loss of
whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for
all money it should pay or become liable to pay under the bond including costs and
attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry
to the Surety Company "for the latter's further protection", with power to sell the same
in case the surety paid or become obligated to pay any amount of money in connection
with said bond, applying the proceeds to the payment of any amounts it paid or will be
liable to pay, and turning the balance, if any, to the persons entitled thereto, after
deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo
Velayo, and execution having been returned unsatisfied, the surety company was forced
to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure
to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net
product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the
surety company brought suit in the Municipal Court. Velayo countered with a claim that
the sale of the pledged jewelry extinguished any further liability on his part under
Article 2115 of the 1950 Civil Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation,
whether or not the proceeds of the sale are equal to the amount of the principal
 obligation, interest and expenses in a proper case. If the price of the sale is more
than said amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him.
Appealed to the Court of First Instance, the defense was once more overruled, and the
case decided in the terms set down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-
72):

It is thus crystal clear that the main agreement between the parties is the
Indemnity Agreement and if the pieces of jewelry mentioned by the defendant
were delivered to the plaintiff, it was merely as an added protection to the latter.
There was no understanding that, should the same be sold at public auction and
the value thereof should be short of the undertaking, the defendant would have
no further liability to the plaintiff. On the contrary, the last portion of the said
agreement specifies that in case the said collateral should diminish in value, the
plaintiff may demand additional securities. This stipulation is incompatible with
the idea of pledge as a principal agreement. In this case, the status of the pledge is
nothing more nor less than that of a mortgage given as a collateral for the
principal obligation in which the creditor is entitled to a deficiency judgment for
the balance should the collateral not command the price equal to the
undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to
secure this obligation has already been sold for only the amount of P235.00, the
liability of the defendant should be limited to the difference between the amounts
of P2,800.00 and P235.00 or P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is
unsound. The accessory character is of the essence of pledge and mortgage. As stated in
Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they
be constituted to secure the fulfillment of a principal obligation, which in the present
case is Velayo's undertaking to indemnify the surety company for any disbursements
made on account of its attachment counterbond. Hence, the fact that the pledge is not
the principal agreement is of no significance nor is it an obstacle to the application of
Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the
pledged chattels must be derived from stipulation. This is incorrect, because Article
2115, in its last portion, clearly establishes that the extinction of the principal obligation
supervenes by operation of imperative law that the parties cannot override:
 If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to
sell the articles pledged, instead of suing on the principal obligation, the creditor has
waived any other remedy, and must abide by the results of the sale. No deficiency is
recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an
extension of the legal prescription contained in Article 1484(3) of the same Code,
concerning the effect of a foreclosure of a chattel mortgage constituted to secure the
price of the personal property sold in installments, and which originated in Act 4110
promulgated by the Philippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from
the complaint, except as to his liability for the 1954 premium in the sum of P120.93, and
interest at 12-1/2% per annum from June 13, 1954. In this respect the decision of the
Court below is affirmed. No costs. So ordered.

G.R. No. 98334 May 8, 1992

MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY

SAVINGS BANK (formerly Cebu City Savings and Loan Association, Inc.)
and TEOTIMO ABELLANA, petitioners,
vs.
COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA
DOLINO, respondents.

Gines N. Abellana for petitioners.

Dionisio U. Flores for private respondents.

REGALADO, J.:

The core issue in this case is whether or not a mortgagor, whose property has been
extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly
execute a mortgage contract over the same property in favor of a third party during the
period of redemption.

The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in
CA-G.R. CV No. 12678 where it answered the question posed by the foregoing issue in
the negative and modified the decision 2 of the then Court of First Instance of Cebu in
Civil Case No. R-18616 wherein the validity of said subsequent mortgage was assumed
and the case was otherwise disposed of on other grounds.
The facts which gave rise to the institution of the aforesaid civil case in the trial court, as
found by respondent Court of Appeals, are as follows:

On October 10, 1974 plaintiff spouses, alarmed of losing their right of

redemption over lot 4731 of the Cebu City Cadastre and embraced under
TCT No. 14272 from Mr. Juan Gandioncho, purchaser of the aforesaid lot
at the foreclosure sale of the previous mortgage in favor of Cebu City
Development Bank, went to Teotimo Abellana, president of defendant
Association, to obtain a loan of P30,000.00. Prior thereto or on October 3,
1974, their son Teofredo Dolino filed a similar loan application for Twenty-
Five Thousand (P25,000.00) Pesos with lot No. 4731 offered as security
for the Thirty Thousand (P30,000.00) Pesos loan from defendant
association. Subsequently, they executed a promissory note in favor of
defendant association. Both documents indicated that the principal
obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year
with interest at twelve (12%) percent per annum.

When the loan became due and demandable without plaintiff paying the
same, defendant association caused the extrajudicial foreclosure of the
mortgage on March 16, 1976. After the posting and publication
requirements were complied with, the land was sold at public auction on
April 19, 1976 to defendant association being the highest bidder. The
certificate of sale was issued on April 20, 1976 and registered on May 10,
1976 with the Register of Deeds of Cebu.

On May 24, 1971 (sic, 1977), no redemption having been effected by

plaintiff, TCT No. 14272 was cancelled and in lieu thereof TCT No. 68041
was issued in the name of defendant association. 3

xxx xxx xxx

On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in
the court a quo for the annulment of the sale at public auction conducted on April 19,
1976, as well as the corresponding certificate of sale issued pursuant thereto.

In their complaint, private respondents, as plaintiffs therein, assailed the validity of the
extrajudicial foreclosure sale of their property, claiming that the same was held in
violation of Act No. 3135, as amended, and prayed, inter alia, for the cancellation of
Transfer Certificate of Title No. 68041 issued in favor of therein defendant City Savings
and Loan Association, Inc., now known as City Savings Bank and one of the petitioners
herein.

In its answer, the defendant association therein denied the material allegations of the
complaint and averred, among others, that the present private respondent spouses may
still avail of their right of redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment
upholding the validity of the loan and the real estate mortgage, but annulling the
extrajudicial foreclosure sale inasmuch as the same failed to comply with the notice
requirements in Act No. 3135, as amended, under the following dispositive part:

WHEREFORE, the foregoing premises considered and upon the view

taken by the Court of this case, judgment is hereby rendered, as follows:

1. Declaring ineffective the extrajudicial foreclosure of the mortgage over

Lot No. 4731 of the Cadastral Survey of Cebu;

2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of

the Registry of Deeds of the City of Cebu in the name of defendant Cebu
City Savings and Loan Association, Inc. the corresponding issuance of a
new transfer certificate to contain all the annotations made in TCT No.
14272 of the plaintiffs Pascuala Sabellano, married to Andres Dolino;

3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City

Savings and Loan Association, Inc. the unpaid balance of the loan, plus
interest; and reimbursing said defendant the value of any necessary and
useful expenditures on the property after deducting any income derived by
said defendant from the property.

For this purpose, defendant Association is given 15 days from receipt

hereof within which to submit its statement of the amount due it from the
plaintiffs Dolino, with notice to them. The payment to be made by the
plaintiffs shall be within ninety (90) days from their receipt of the order
approving the amount due the defendant Cebu City Savings and Loan
Association, Inc.

No award of damages or costs to either party.

SO ORDERED. 4

Not satisfied therewith, herein private respondents interposed a partial appeal to

respondent court with respect to the second and third paragraphs of the aforequoted
decretal portion, contending that the lower court erred in (1) declaring that the
mortgage executed by the therein plaintiff spouses Dolino is valid; (2) permitting
therein Cebu City Savings and Loan Association, Inc. to collect interest after the same
foreclosure proceedings and auction sale which are null and void from the beginning;
(3) not ordering the forfeiture of the capital or balance of the loan with usurious
interest; and (4) not sentencing therein defendant to pay damages and attorney's fees to
plaintiffs. 5

On September 28, 1990, respondent Court of Appeals promulgated its decision

modifying the decision of the lower court, with this adjudication:
 WHEREFORE, PREMISES CONSIDERED, the decision appealed from is
hereby MODIFIED declaring as void and ineffective the real estate
mortgage executed by plaintiffs in favor of defendant association. With
this modification, the decision is AFFIRMED in other respects. 6

Herein petitioners then filed a motion for reconsideration which was denied by
respondent court in its resolution dated March 5, 1991, hence the present petition
which, in synthesis, postulates that respondent court erred in declaring the real estate
mortgage void, and also impugns the judgment of the trial court declaring ineffective the
extrajudicial foreclosure of said mortgage and ordering the cancellation of Transfer
Certificate of Title No. 68041 issued in favor of the predecessor of petitioner bank. 7

The first submission assailing the judgment of respondent Court of Appeals is

meritorious.

Said respondent court declared the real estate mortgage in question null and void for the
reason that the mortgagor spouses, at the time when the said mortgage was executed,
were no longer the owners of the lot, having supposedly lost the same when the lot was
sold to a purchaser in the foreclosure sale under the prior mortgage. This holding cannot
be sustained.

Preliminarily, the issue of ownership of the mortgaged property was never alleged in the
complaint nor was the same raised during the trial, hence that issue should not have
been taken cognizance of by the Court of Appeals. An issue which was neither averred in
the complaint nor ventilated during the trial in the court below cannot be raised for the
first time on appeal as it would be offensive to the basic rule of fair play, justice and due
process. 8

Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its
modificatory judgment on its ratiocination of that issue, we are inclined to liberalize the
rule so that we can in turn pass upon the correctness of its conclusion. We may consider
such procedure as analogous to the rule that an unassigned error closely related to an
error properly assigned, or upon which the determination of the question properly
assigned is dependent, may be considered by an appellate court. 9 We adopt this
approach since, after all, both lower courts agreed upon the invalidity of the
extrajudicial foreclosure but differed only on the matter of the validity of the real estate
mortgage upon which the extrajudicial foreclosure was based.

In arriving at its conclusion, respondent court placed full reliance on what obviously is
an obiter dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al.
which we shall analyze. 10 For, as explicitly stated therein by the Court, "(t)he basic issue
to be resolved in this case is whether the 'Deed of Sale with Assumption of Mortgage'
and the 'Option to Purchase Real Estate,' two instruments executed by and between
petitioner Jose P. Dizon and Alfredo G. Gaborro (defendant below) on the same day,
October 6, 1959, constitute in truth and in fact an absolute sale of the three parcels of
land therein described or merely an equitable mortgage or conveyance thereof by way of
security for reimbursement or repayment by petitioner Jose P. Dizon of any and all
sums which may have been paid to the Development Bank of the Philippines and the
Philippine National Bank by Alfredo G. Gaborro . . . ." Said documents were executed by
the parties and the payments were made by Gaborro for the debt of Dizon to said banks
after the Development Bank of the Philippines had foreclosed the mortgage executed by
Dizon and during the period of redemption after the foreclosure sale of the mortgaged
property to said creditor bank.

The trial court held that the true agreement between the parties therein was that
Gaborro would assume and pay the indebtedness of Dizon to the banks and, in
consideration thereof, Gaborro was given the possession and enjoyment of the
properties in question until Dizon shall have reimbursed him for the amount paid to the
creditor banks. Accordingly, the trial court ordered the reformation of the documents to
the extent indicated and such particular relief was affirmed by the Court of Appeals.
This Court held that the agreement between the parties is one of those innominate
contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and to
do" certain rights and obligations, but partaking of the nature of antichresis.

Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was
affirmed but with the following pronouncements:

The two instruments sought to be reformed in this case appear to stipulate

rights and obligations between the parties thereto pertaining to and
involving parcels of land that had already been foreclosed and sold
extrajudicially, and purchased by the mortgage creditor, a third party. It
becomes, therefore, necessary, to determine the legality of said rights and
obligations arising from the foreclosure and sale proceedings not only
between the two contracting parties to the instruments executed between
them but also in so far as the agreement affects the rights of the third
party, the purchaser Bank.

xxx xxx xxx

Under the Revised Rules of Court, Rule 39, Section 33, the judgment
debtor remains in possession of the property foreclosed and sold, during
the period of redemption. If the judgment debtor is in possession of the
property sold, he is entitled to retain it, and receive the fruits, the
purchaser not being entitled to such possession. (Riosa vs. Verzosa, 26
Phil. 86; Velasco vs. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco, 43
Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-12735,
Oct. 30, 1959).

xxx xxx xxx

Upon foreclosure and sale, the purchaser is entitled to a certificate of sale

executed by the sheriff. (Section 27, Revised Rules of Court). After the
termination of the period of redemption and no redemption having been
made, the purchaser is entitled to a deed of conveyance and to the
 possession of the properties. (Section 35, Revised Rules of Court). The
weight of authority is to the effect that the purchaser of land sold at
public auction under a writ of execution has only an inchoate right to the
property, subject to be defeated and terminated within the period of 12
months from the date of sale, by a redemption on the part of the
owner. Therefore, the judgment debtor in possession of the property is
entitled to remain therein during the period for redemption. (Riosa vs.
Verzosa, 26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).

In the case before Us, after the extrajudicial foreclosure and sale of his
properties, petitioner Dizon retained the right to redeem the lands, the
possession, use and enjoyment of the same during the period of
redemption. And these are the only rights that Dizon could
legally transfer, cede and conveyunto respondent Gaborro under the
instrument captioned Deed of Sale with Assumption of Mortgage (Exh. A-
Stipulation), likewise the same rights that said respondent could acquire in
consideration of the latter's promise to pay and assume the loan of
petitioner Dizon with DBP and PNB.

Such an instrument cannot be legally considered a real and unconditional

sale of the parcels of land, firstly, because there was absolutely no money
consideration therefor, as admittedly stipulated, the sum of P131,831.91
mentioned in the document as the consideration "receipt of which was
acknowledged" was not actually paid; and, secondly, because the
properties had already been previously sold by the sheriff at the
foreclosure sale, thereby divesting the petitioner of his full right as owner
thereof to dispose and sell the lands. (Emphasis ours.)

It was apparently the second reason stated by the Court in said case which was relied
upon by respondent court in the present case on which to premise its conclusion. Yet, as
demonstrated by the relevant excerpts above quoted, not only was that obiter therein
unnecessary since evidently no sale was concluded, but even inaccurate, if not
inconsistent, when considered in the context of the discussion in its entirety. If, as
admitted, the purchaser at the foreclosure sale merely acquired an inchoate right to the
property which could ripen into ownership only upon the lapse of the redemption period
without his credit having been discharged, it is illogical to hold that during that same
period of twelve months the mortgagor was "divested" of his ownership, since the
absurd result would be that the land will consequently be without an owner although it
remains registered in the name of the mortgagor.

That is why the discussion in said case carefully and felicitously states that what is
divested from the mortgagor is only his "full right as owner thereof to dispose (of) and
sell the lands," in effect, merely clarifying that the mortgagor does not have the
unconditional power to absolutely sell the land since the same is encumbered by a lien
of a third person which, if unsatisfied, could result in a consolidation of ownership in the
lienholder but only after the lapse of the period of redemption. Even on that score, it
may plausibly be argued that what is delimited is not the mortgagor's jus dispodendi, as
an attribute of ownership, but merely the rights conferred by such act of disposal which
may correspondingly be restricted.

At any rate, even the foregoing considerations and arguments would have no application
in the case at bar and need not here be resolved since what is presently involved is a
mortgage, not a sale, to petitioner bank. Such mortgage does not involve a transfer,
cession or conveyance of the property but only constitutes a lien thereon. There is no
obstacle to the legal creation of such a lien even after the auction sale of the property but
during the redemption period, since no distinction is made between a mortgage
constituted over the property before or after the auction sale thereof.

Thus, a redemptioner is defined as a creditor having a lien by attachment,

judgment or mortgage on the property sold, or on some part thereof, subsequent to the
judgment under which the property was sold. 11 Of course, while in extrajudicial
foreclosure the sale contemplated is not under a judgment but the proceeding pursuant
to which the mortgaged property was sold, a subsequent mortgage could nevertheless be
legally constituted thereafter with the subsequent mortgagee becoming and acquiring
the rights of a redemptioner, aside from his right against the mortgagor.

In either case, what bears attention is that since the mortgagor remains as the absolute
owner of the property during the redemption period and has the free disposal of his
property, there would be compliance with the requisites of Article 2085 of the Civil Code
for the constitution of another mortgage on the property. To hold otherwise would
create the inequitable situation wherein the mortgagor would be deprived of the
opportunity, which may be his last recourse, to raise funds wherewith to timely redeem
his property through another mortgage thereon.

Coming back to the present controversy, it is undisputed that the real estate mortgage in
favor of petitioner bank was executed by respondent spouses during the period of
redemption. We reiterate that during said period it cannot be said that the mortgagor is
no longer the owner of the foreclosed property since the rule up to now is that the right
of a purchaser at a foreclosure sale is merely inchoate until after the period of
redemption has expired without the right being exercised. 12 The title to land sold under
mortgage foreclosure remains in the mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's deed. 13 To repeat, the rule has
always been that it is only upon the expiration of the redemption period, without the
judgment debtor having made use of his right of redemption, that the ownership of the
land sold becomes consolidated in the purchaser. 14

Parenthetically, therefore, what actually is effected where redemption is seasonably

exercised by the judgment or mortgage debtor is not the recovery of ownership of his
land, which ownership he never lost, but the elimination from his title thereto of the lien
created by the levy on attachment or judgment or the registration of a mortgage thereon.
The American rule is similarly to the effect that the redemption of property sold under a
foreclosure sale defeats the inchoate right of the purchaser and restores the property to
the same condition as if no sale had been attempted. Further, it does not give to the
mortgagor a new title, but merely restores to him the title freed of the encumbrance of
the lien foreclosed. 15

We cannot rule on the plaint of petitioners that the trial court erred in declaring
ineffective the extrajudicial foreclosure and the sale of the property to petitioner bank.
The court below spelled out at length in its decision the facts which it considered as
violative of the provisions of Act No. 3135, as amended, by reason of which it nullified
the extrajudicial foreclosure proceeding and its effects. Such findings and ruling of the
trial court are already final and binding on petitioners and can no longer be modified,
petitioners having failed to appeal therefrom.

An appellee who has not himself appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the decision of the court below. 16 He
cannot impugn the correctness of a judgment not appealed from by him. He cannot
assign such errors as are designed to have the judgment modified. All that said appellee
can do is to make a counter-assignment of errors or to argue on issues raised at the trial
only for the purpose of sustaining the judgment in his favor, even on grounds not
included in the decision of the court a quo nor raised in the appellant's assignment of
errors or arguments. 17

WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the

judgment of the trial court, is REVERSED and SET ASIDE. The judgment of said trial
court in Civil Case No. R-18616, dated January 12, 1983, is hereby REINSTATED.

SO ORDERED.
G.R. No. 138053 May 31, 2000

CORNELIO M. ISAGUIRRE, petitioner,

vs.

FELICITAS DE LARA, respondent.

GONZAGA-REYES, J.:

In this petition for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil
Procedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998 decision1 of the
Court of Appeals2 and its Resolution promulgated on March 5, 1999.

The antecedent facts of the present case are as follows:

Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales

Application over a parcel of land identified as portion of Lot 502, Guianga Cadastre,
filed with the Bureau of Lands on January 17, 1942 and with an area of 2,324 square
meters. Upon his death, Alejandro de Lara was succeeded by his wife respondent
Felicitas de Lara, as claimant. On November 19, 1954, the Undersecretary of Agriculture
and Natural Resources amended the sales application to cover only 1,600 square meters.
Then, on November 3, 1961, by virtue of a decision rendered by the Secretary of
Agriculture and Natural Resources dated November 19, 1954, a subdivision survey was
made and the area was further reduced to 1,000 square meters. On this lot stands a two-
story residential-commercial apartment declared for taxation purposes under TD 43927
in the name of respondent's sons Apolonio and Rodolfo, both surnamed de Lara.

Sometime in 1953, respondent obtained several loans from the Philippine National
Bank. When she encountered financial difficulties, respondent approached petitioner
Cornelio M. Isaguirre, who was married to her niece, for assistance. On February 10,
1960, a document denominated as "Deed of Sale and Special Cession of Rights and
Interests" was executed by respondent and petitioner, whereby the former sold a 250
square meter portion of Lot No. 502, together with the two-story commercial and
residential structure standing thereon, in favor of petitioner, for and in consideration of
the sum of P5,000.

Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against
petitioner for recovery of ownership and possession of the two-story
building.3 However, the case was dismissed for lack of jurisdiction.

On August 21, 1969, petitioner filed a sales application over the subject property on the
basis of the deed of sale. His application was approved on January 17, 1984, resulting in
the issuance of Original Certificate of Title No. P-11566 on February 13, 1984, in the
name of petitioner. Meanwhile, the sales application of respondent over the entire 1,000
square meters of subject property (including the 250 square meter portion claimed by
petitioner) was also given due course, resulting in the issuance of Original Certificate of
Title No. P-13038 on June 19, 1989, in the name of respondent.4

Due to the overlapping of titles, petitioner filed an action for quieting of title and
damages with the Regional Trial Court of Davao City against respondent on May 17,
1990. The case was docketed as Civil Case No. 20124-90. After trial on the merits, the
trial court rendered judgment on October 19, 1992, in favor of petitioner, declaring him
to be the lawful owner of the disputed property. However, the Court of Appeals reversed
the trial court's decision, holding that the transaction entered into by the parties, as
evidenced by their contract, was an equitable mortgage, not a sale.5 The appellate court's
decision was based on the inadequacy of the consideration agreed upon by the parties,
on its finding that the payment of a large portion of the "purchase price" was made after
the execution of the deed of sale in several installments of minimal amounts; and finally,
on the fact that petitioner did not take steps to confirm his rights or to obtain title over
the property for several years after the execution of the deed of sale. As a consequence of
its decision, the appellate court also declared Original Certificate of Title No. P-11566
issued in favor of petitioner to be null and void. On July 8, 1996, in a case docketed as
G.R. No. 120832, this Court affirmed the decision of the Court of Appeals and on
September 11, 1996, we denied petitioner's motion for reconsideration.

On May 5, 1997, respondent filed a motion for execution with the trial court, praying for
the immediate delivery of possession of the subject property, which motion was granted
on August 18, 1997. On February 3, 1998, respondent moved for a writ of possession,
invoking our ruling in G.R. No. 120832. Petitioner opposed the motion, asserting that he
had the right of retention over the property until payment of the loan and the value of
the improvements he had introduced on the property. On March 12, 1998, the trial court
granted respondent's motion for writ of possession. Petitioner's motion for
reconsideration was denied by the trial court on May 21, 1998. Consequently, a writ of
possession dated June 16, 1998, together with the Sheriff's Notice to Vacate dated July
7, 1998, were served upon petitioner.

Petitioner filed with the Court of Appeals a special civil action for certiorari and
prohibition with prayer for a temporary restraining order or preliminary injunction to
annul and set aside the March 12, 1998 and May 21, 1998 orders of the trial court,
including the writ of possession dated June 16, 1998 and the sheriff's notice to vacate
dated July 7, 1998.6

The appellate court summarized the issues involved in the case as follows: (1) whether
or not the mortgagee in an equitable mortgage has the right to retain possession of the
property pending actual payment to him of the amount of indebtedness by the
mortgagor; and (b) whether or not petitioner can be considered a builder in good faith
with respect to the improvements he made on the property before the transaction was
declared to be an equitable mortgage.

The Court of Appeals held that petitioner was not entitled to retain possession of the
subject property. It said that
 . . . the mortgagee merely has to annotate his claim at the back of the
certificate of title in order to protect his rights against third persons and
thereby secure the debt. There is therefore no necessity for him to actually
possess the property. Neither should a mortgagee in an equitable
mortgage fear that the contract relied upon is not registered and hence,
may not operate as a mortgage to justify its foreclosure. In Feliza Zubiri
v. Lucio Quijano, 74 Phil 47, it was ruled "that when a contract . . . is held
as an equitable mortgage, the same shall be given effect as if it had
complied with the formal requisites of mortgage. . . . by its very nature the
lien thereby created ought not to be defeated by requiring compliance with
the formalities necessary to the validity of a voluntary real estate
mortgage, as long as the land remains in the hands of the petitioner
(mortgagor) and the rights of innocent parties are not affected.

Proceeding from the foregoing, petitioner's imagined fears that his lien
would be lost by surrendering possession are unfounded.

In the same vein, there is nothing to stop the mortgagor de Lara from
acquiring possession of the property pending actual payment of the
indebtedness to petitioner. This does not in anyway endanger the
petitioner's right to security since, as pointed out by private respondents,
the petitioner can always have the equitable mortgage annotated in the
Certificate of Title of private respondent and pursue the legal remedies for
the collection of the alleged debt secured by the mortgage. In this case, the
remedy would be to foreclose the mortgage upon failure to pay the debt
within the required period.

It is unfortunate however, that the Court of Appeals, in declaring the

transaction to be an equitable mortgage failed to specify in its Decision the
period of time within which the private respondent could settle her
account, since such period serves as the reckoning point by which
foreclosure could ensue. As it is, petitioner is now in a dilemma as to how
he could enforce his rights as a mortgagee. . . .

Hence, this Court, once and for all resolves the matter by requiring the
trial court to determine the amount of total indebtedness and the period
within which payment shall be made.

Petitioner's claims that he was a builder in good faith and entitled to reimbursement for
the improvements he introduced upon the property were rejected by the Court of
Appeals. It held that petitioner knew, or at least had an inkling, that there was a defect
or flaw in his mode of acquisition. Nevertheless, the appellate court declared petitioner
to have the following rights:

. . . He is entitled to reimbursement for the necessary expenses which he

may have incurred over the property, in accordance with Art. 526 and Art.
452 of the Civil Code. Moreover, considering that the transaction was
 merely an equitable mortgage, then he is entitled to payment of the
amount of indebtedness plus interest, and in the event of non-payment to
foreclose the mortgage. Meanwhile, pending receipt of the total amount of
debt, private respondent is entitled to possession over the disputed
property.

The case was finally disposed of by the appellate court in the following manner:

WHERFORE, the Petition is hereby DISMISSED, and this case is ordered

remanded to the Regional Trial Court of Davao City for further
proceedings, as follows:

1) The trial court shall determine

a) The period within which the mortgagor must pay his total amount of
indebtedness.

b) The total amount of indebtedness owing the petitioner-mortgagee plus

interest computed from the time when the judgment declaring the contract
to be an equitable mortgage became final.

c) The necessary expenses incurred by petitioner over the property.7

On March 5, 1999, petitioner's motion for reconsideration was denied by the appellate
court.8 Hence, the present appeal wherein petitioner makes the following assignment of
errors:

A. THE HONORABLE COURT OF APPEALS ERRED

IN NOT RULING THAT THE RTC ACTED WITHOUT
OR IN EXCESS OF ITS JURISDICTION OR WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION IN ISSUING
A WRIT OF POSSESSION IN FAVOR OF
RESPONDENT.

A.1 The RTC patently exceeded the scope of its

authority and acted with grave abuse of
discretion in ordering the immediate delivery
of possession of the Property to respondent as
said order exceeded the parameters of the final
and executory decision and constituted a
variance thereof.

B. THE HONORABLE COURT OF APPEALS ERRED

IN HOLDING THAT PETITIONER IS NOT
ENTITLED TO THE POSSESSION OF THE
 PROPERTY PRIOR TO THE PAYMENT OF
RESPONDENT'S MORTGAGE LOAN.

C. THE HONORABLE COURT OF APPEALS ERRED

IN RULING THAT PETITIONER WAS NOT A
BUILDER IN GOOD FAITH.

D. THE HONORABLE COURT OF APPEALS ERRED

IN RULING THAT PETITIONER IS ENTITLED TO
INTEREST COMPUTED ONLY FROM THE TIME
WHEN THE JUDGMENT DECLARING THE
CONTRACT TO BE AN EQUITABLE MORTGAGE
BECAME FINAL.9

Basically, petitioner claims that he is entitled to retain possession of the subject property
until payment of the loan and the value of the necessary and useful improvements he
made upon such property. 10 According to petitioner, neither the Court of Appeals'
decision in G.R. CV No. 42065 nor this Court's decision in G.R. No. 120832 ordered
immediate delivery of possession of the subject property to respondent.

The dispositive portion of the March 31, 1995 decision of the Court of Appeals in G.R.
CV No. 42065, which was affirmed by this Court, provides that

IN VIEW OF ALL THE FOREGOING, the judgment appealed from

is REVERSED and SET ASIDE and a new one entered: (1) dismissing the
complaint; (2) declaring the "Document of Sale and Special Cession of
Rights and Interests" (Exhibit B) dated February 10, 1960, to be an
equitable mortgage not a sale; (3) upholding the validity of OCT No. P-
13038 in the name of Felicitas de Lara; and (3) declaring null and
void OCT No. P-11566 in the name of plaintiff Cornelio Isaguirre. All other
counterclaims for damages are likewise dismissed. Costs against the
appellee. 11

Petitioner argues that the abovementioned decision merely settled the following
matters: (1) that the transaction between petitioner and respondent was not a sale but
an equitable mortgage; (2) that OCT No. P-13038 in the name of respondent is valid;
and (3) that OCT No. P-11566 in the name of petitioner is null and void. Since the
aforementioned decision did not direct the immediate ouster of petitioner from the
subject property and the delivery thereof to respondent, the issuance of the writ of
possession by the trial court on June 16, 1998 constituted an unwarranted modification
or addition to the final and executory decision of this Court in G.R. No. 120832. 12

We do not agree with petitioner's contentions. On the contrary, the March 31, 1995
decision of the appellate court, which was affirmed by this Court on July 8, 1996, served
as more than adequate basis for the issuance of the writ of possession in favor of
respondent since these decisions affirmed respondent's title over the subject property.
As the sole owner, respondent has the right to enjoy her property, without any other
limitations than those established by
law. 1 Corollary to such right, respondent also has the right to exclude from the
possession of her property any other person to whom she has not transmitted such
property. 14

It is true that, in some instances, the actual possessor has some valid rights over the
property enforceable even against the owner thereof, such as in the case of a tenant or
lessee. 15 Petitioner anchors his own claim to possession upon his declared status as a
mortgagee. In his Memorandum, he argues that

4.8 It was respondent who asserted that her transfer of the Property to
petitioner was by way of an equitable mortgage and not by sale. After her
assertion was sustained by the Courts, respondent cannot now ignore or
disregard the legal effects of such judicial declaration regarding the nature
of the transaction.

xxx xxx xxx

4.13 Having delivered possession of the Property to petitioner as part of

the constitution of the equitable mortgage thereon, respondent is not
entitled to the return of the Property unless and until the mortgage loan is
discharged by full payment thereof. Petitioner's right as mortgagee to
retain possession of the Property so long as the mortgage loan remains
unpaid is further supported by the rule that a mortgage may not be
extinguished even though then mortgagor-debtor may have made partial
payments on the mortgage loan:

Art. 2089. A pledge or mortgage is indivisible, even though

the debt may be divided among the successors in interest of
the debtor or the creditor.

Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the
pledge or mortgage as long as the debt is not completely
satisfied.

Neither can the creditor's heir who has received his share of
the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.
(Emphasis supplied.)

xxx xxx xxx

4.14 To require petitioner to deliver possession of the Property to

respondent prior to the full payment of the latter's mortgage loan would be
equivalent to the cancellation of the mortgage. Such effective cancellation
 would render petitioner's rights ineffectual and nugatory and would
constitute unwarranted judicial interference.

xxx xxx xxx

4.16 The fact of the present case show that respondent delivered
possession of the Property to petitioner upon the execution of the Deed of
Absolute Sale and Special Cession of Rights and Interest dated 10
February 1960. Hence, transfer of possession of the Property to petitioner
was an essential part of whatever agreement the parties entered into,
which, in this case, the Supreme Court affirmed to be an equitable
mortgage.

xxx xxx xxx

4.19 Petitioner does not have the mistaken notion that the mortgagee must
be in actual possession of the mortgaged property in order to secure the
debt. However, in this particular case, the delivery of possession of the
Property was an integral part of the contract between petitioner and
respondent. After all, it was supposed to be a contract of sale. If delivery
was not part of the agreement entered into by the parties in 1960, why did
respondent surrender possession thereof to petitioner in the first place?

4.20 Now that the Courts have ruled that the transaction was not a sale but
a mortgage, petitioner's entitlement to the possession of the Property
should be deemed as one of the provisions of the mortgage, considering
that at the time the contract was entered into, possession of the Property
was likewise delivered to petitioner. Thus, until respondent has fully paid
her mortgage loan, petitioner should be allowed to retain possession of the
subject property. 16

Petitioner's position lacks sufficient legal and factual moorings.

A mortgage is a contract entered into in order to secure the fulfillment of a principal

obligation. 17 It is constituted by recording the document in which it appears with the
proper Registry of Property, although, even if it is not recorded, the mortgage is
nevertheless binding between the parties. 18 Thus, the only right granted by law in favor
of the mortgagee is to demand the execution and the recording of the document in
which the mortgage is formalized. 19 As a general rule, the mortgagor retains possession
of the mortgaged property since a mortgage is merely a lien and title to the property
does not pass to the mortgagee. 20 However, even though a mortgagee does not have
possession of the property, there is no impairment of his security since the mortgage
directly and immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted. 21 If the debtor is unable to pay his debt, the mortgage creditor may institute
an action to foreclose the mortgage, whether judicially or extrajudicially, whereby the
mortgaged property will then be sold at a public auction and the proceeds therefrom
given to the creditor to the extent necessary to discharge the mortgage loan. Apparently,
petitioner's contention that "[t]o require [him] . . . to deliver possession of the Property
to respondent prior to the full payment of the latter's mortgage loan would be equivalent
to the cancellation of the mortgage" is without basis. Regardless of its possessor, the
mortgaged property may still be sold, with the prescribed formalities, in the event of the
debtor's default in the payment of his loan obligation.

Moreover, this Court cannot find any justification in the records to uphold petitioner's
contention that respondent delivered possession of the subject property upon the
execution of the "Deed of Sale and Special Cession of Rights and Interests" on February
10, 1960 and that the transfer of possession to petitioner must therefore be considered
an essential part of the agreement between the parties. This self-serving assertion of
petitioner was directly contradicted by respondent in her pleadings. 22 Furthermore,
nowhere in the Court of Appeals' decisions promulgated on March 31, 1995 (G.R. CV No.
42065) and on October 5, 1998 (G.R. SP No. 48310), or in our own decision
promulgated on July 8, 1996 (G.R. No. 120832) was it ever established that the
mortgaged properties were delivered by respondent to petitioner.

In Alvano v. Batoon, 2 this Court held that "[a] simple mortgage does not give the
mortgagee a right to the possession of the property unless the mortgage should contain
some special provision to that effect." Regrettably for petitioner, he has not presented
any evidence, other than his own gratuitous statements, to prove that the real intention
of the parties was to allow him to enjoy possession of the mortgaged property until full
payment of the loan.

Therefore, we hold that the trial court correctly issued the writ of possession in favor of
respondent. Such writ was but a necessary consequence of this Court's ruling in G.R. No.
120832 affirming the validity of the original certificate of title (OCT No. P-13038) in the
name of respondent Felicitas de Lara, while at the same time nullifying the original
certificate of title (OCT No. P-11566) in the name of petitioner Cornelio Isaguirre.
Possession is an essential attribute of ownership; thus, it would be redundant for
respondent to go back to court simply to establish her right to possess subject property.
Contrary to petitioner's claims, the issuance of the writ of possession by the trial court
did not constitute an unwarranted modification of our decision in G.R. No. 120832, but
rather, was a necessary complement thereto. 24 It bears stressing that a judgment is not
confined to what appears upon the face of the decision, but also those necessarily
included therein or necessary thereto. 25

With regard to the improvements made on the mortgaged property, we confirm the
Court of Appeals' characterization of petitioner as a possessor in bad faith. Based on the
factual findings of the appellate court, it is evident that petitioner knew from the very
beginning that there was really no sale and that he held respondent's property as mere
security for the payment of the loan obligation. Therefore, petitioner may claim
reimbursement only for necessary expenses; however, he is not entitled to
reimbursement for any useful
expenses 26 which he may have incurred. 27
Finally, as correctly pointed out by the Court of Appeals, this case should be remanded
to the Regional Trial Court of Davao City for a determination of the total amount of the
loan, the necessary expenses incurred by petitioner, and the period within which
respondent must pay such amount. 28 However, no interest is due on the loan since
there has been no express stipulation in writing. 29

WHEREFORE, the assailed Decision of the Court of Appeals dated October 5, 1998 and
its Resolution dated March 5, 1999 are hereby AFFIRMED. Respondent is entitled to
delivery of possession of the subject property. This case is hereby REMANDED to the
trial court for determination of the amount of the loan, the necessary expenses incurred
by petitioner and the period within which the respondent must pay the same.

SO ORDERED.
G.R. No. 112160 February 28, 2000

OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner,

vs.
COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES
and VICENTE MAOSCA,respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking
to review and set aside the Decision1 of the Court of Appeals in CA-G.R. CV No. 25242,
which reversed the Decision2 of Branch 59 of the Regional Trial Court of Makati City in
Civil Case No. M-028; the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE
and a new one is hereby entered DISMISSING the complaint of the spouses
Osmundo and Angelina Canlas. On the counterclaim of defendant Asian Savings
Bank, the plaintiffs Canlas spouses are hereby ordered to pay the defendant Asian
Savings Bank the amount of P50,000.00 as moral and exemplary damages, plus
P15,000.00 as and for attorney's fees.

With costs against appellees.

SO ORDERED.3

The facts that matter:

Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private respondent,
Vicente Maosca, decided to venture in business and to raise the capital needed
therefor. The former then executed a Special Power of Attorney authorizing the latter to
mortgage two parcels of land situated in San Dionisio, (BF Homes) Paranaque, Metro
Manila, each lot with semi-concrete residential house existing thereon, and respectively
covered by Transfer Certificate of Title No. 54366 in his (Osmundo's) name and
Transfer Certificate of Title No. S-78498 in the name of his wife Angelina Canlas.

Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente
Maosca, for and in consideration of P850,000.00, P500,000.00 of which payable
within one week, and the balance of P350,000.00 to serve as his (Osmundo's)
investment in the business. Thus, Osmundo Canlas delivered to Vicente Maosca the
transfer certificates of title of the parcels of land involved. Vicente Maosca, as his part
of the transaction, issued two postdated checks in favor of Osmundo Canlas in the
amounts of P40,000.00 and P460,000.00, respectively, but it turned out that the check
covering the bigger amount was not sufficiently funded.4

On September 3, 1982, Vicente Maosca was able to mortgage the same parcels of land
for P100,000.00 to a certain Attorney Manuel Magno, with the help of impostors who
misrepresented themselves as the spouses, Osmundo Canlas and Angelina Canlas.5
On September 29, 1982, private respondent Vicente Maosca was granted a loan by the
respondent Asian Savings Bank (ASB) in the amount of P500,000.00, with the use of
subject parcels of land as security, and with the involvement of the same impostors who
again introduced themselves as the Canlas spouses.6 When the loan it extended was not
paid, respondent bank extrajudicially foreclosed the mortgage.

On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent bank
that the execution of subject mortgage over the two parcels of land in question was
without their (Canlas spouses) authority, and request that steps be taken to annul
and/or revoke the questioned mortgage. On January 18, 1983, petitioner Osmundo
Canlas also wrote the office of Sheriff Maximo O. Contreras, asking that the auction sale
scheduled on February 3, 1983 be cancelled or held in abeyance. But respondents
Maximo C. Contreras and Asian Savings Bank refused to heed petitioner Canlas' stance
and proceeded with the scheduled auction sale.7

Consequently, on February 3, 1983 the herein petitioners instituted the present case for
annulment of deed of real estate mortgage with prayer for the issuance of a writ of
preliminary injunction; and on May 23, 1983, the trial court issued an Order restraining
the respondent sheriff from issuing the corresponding Certificate of Sheriff's Sale.8

For failure to file his answer, despite several motions for extension of time for the filing
thereof, Vicente Maosca was declared in default.9

On June 1, 1989, the lower court a quo came out with a decision annulling subject deed
of mortgage and disposing, thus:

Premises considered, judgment is hereby rendered as follows.1wphi1.nt

1. Declaring the deed of real estate mortgage (Exhibit "L") involving the
properties of the plaintiffs as null and void;

2. Declaring the public auction sale conducted by the defendant Sheriff,

involving the same properties as illegal and without binding effect;

3. Ordering the defendants, jointly and severally, to pay the plaintiffs the
sum of P20,000.00 representing attorney's fees;

4. On defendant ASB's crossclaim: ordering the cross-defendant Vicente

Maosca to pay the defendant ASB the sum of P350,000.00, representing
the amount which he received as proceeds of the loan secured by the void
mortgage, plus interest at the legal rate, starting February 3, 1983, the date
when the original complaint was filed, until the amount is fully paid;

5. With costs against the defendants.

SO ORDERED.10
From such Decision below, Asian Savings Bank appealed to the Court of Appeals, which
handed down the assailed judgment of reversal, dated September 30, 1983, in CA-G.R.
CV No. 25242. Dissatisfied therewith, the petitioners found their way to this Court via
the present Petition; theorizing that:

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE MORTGAGE

OF THE PROPERTIES SUBJECT OF THIS CASE WAS VALID.

II

RESPONDENT COURT OF APPEALS ERRED IN HIOLDING THAT PETITIONERS

ARE NOT ENTITLED TO RELIEF BECAUSE THEY WERE NEGLIGENT AND
THEREFORE MUST BEAR THE LOSS.

III

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT

ASB EXERCISED DUE DILIGENCE IN GRANTING THE LOAN APPLICATION OF
RESPONDENT.

IV

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT

ASB DID NOT ACT WITH BAD FAITH IN PROCEEDING WITH THE FORECLOSURE
SALE OF THE PROPERTIES.

RESPONDENT COURT OF APPEALS ERRED IN AWARDING RESPONDENT ASB

MORAL DAMAGES.11

The Petition is impressed with merit.

Art. 1173 of the Civil Code, provides:

Art. 1173. The fault or negligence of the obligor consist in the omission of that
diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place. When negligence
shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply.

If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
(1104)
The degree of diligence required of banks is more than that of a good father of a
family;12 in keeping with their responsibility to exercise the necessary care and prudence
in dealing even on a registered or titled property. The business of a bank is affected with
public interest, holding in trust the money of the depositors, which bank deposits the
bank should guard against loss due to negligence or bad faith, by reason of which the
bank would be denied the protective mantle of the land registration law, accorded only
to purchasers or mortgagees for value and in good faith.13

In the case under consideration, from the evidence on hand it can be gleaned unerringly
that respondent bank did not observe the requisite diligence in ascertaining or verifying
the real identity of the couple who introduced themselves as the spouses Osmundo
Canlas and Angelina Canlas. It is worthy to note that not even a single identification
card was exhibited by the said impostors to show their true identity; and yet, the bank
acted on their representations simply on the basis of the residence certificates bearing
signatures which tended to match the signatures affixed on a previous deed of mortgage
to a certain Atty. Magno, covering the same parcels of land in question. Felizado
Mangubat, Assistant Vice President of Asian Savings Bank, thus testified inter alia:

xxx xxx xxx

Q: According to you, the basis for your having recommended for the
approval of MANASCO's (sic) loan particularly that one involving the property of
plaintiff in this case, the spouses OSMUNDO CANLAS and ANGELINA CANLAS,
the basis for such approval was that according to you all the signatures and other
things taken into account matches with that of the document previously executed
by the spouses CANLAS?

Q: That is the only basis for accepting the signature on the mortgage, the
basis for the recommendation of the approval of the loan are the financial
statement of MAOSCA?

A: Yes; among others the signature and TAX Account Number, Residence
Certificate appearing on the previous loan executed by the spouses CANLAS, I am
referring to EXHIBIT 5, mortgage to ATTY. MAGNO, those were made the basis.

A: That is just the basis of accepting the signature, because at that time the
loan have been approved already on the basis of the financial statement of the
client the Bank Statement. Wneh (sic) it was approved we have to base it on the
Financial statement of the client, the signatures were accepted only for the
purpose of signing the mortgage not for the approval, we don't (sic) approve
loans on the signature.

ATTY. CLAROS:

Would you agree that as part of ascertaining the identify of the parties
particularly the mortgage, you don't consider also the signature, the
Residence Certificate, the particular address of the parties involved.
 A: I think the question defers (sic) from what you asked a while ago.

Q: Among others?

A: We have to accept the signature on the basis of the other signatures given
to us it being a public instrument.

ATTY. CARLOS:

You mean to say the criteria of ascertaining the identity of the mortgagor
does not depend so much on the signature on the residence certificate they
have presented.

A: We have to accept that.

xxx xxx xxx

A: We accepted the signature on the basis of the mortgage in favor of ATTY.

MAGNO duly notarized which I have been reiterrting (sic) entitled to full faith
considering that it is a public instrument.

ATTY. CARLOS:

What other requirement did you take into account in ascertaining the
identification of the parties particularly the mortgagor in this case.

A: Residence Certificate.

Q: Is that all, is that the only requirement?

A: We requested for others but they could not produce, and because they
presented to us the Residence Certificate which matches on the signature on the
Residence Certificate in favor of Atty. Magno.14

Evidently, the efforts exerted by the bank to verify the identity of the couple posing as
Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank to
observe more than the diligence of a good father of a family. The negligence of
respondent bank was magnified by the fact that the previous deed of mortgage (which
was used as the basis for checking the genuineness of the signatures of the supposed
Canlas spouses) did not bear the tax account number of the spouses,15 as well as the
Community Tax Certificate of Angelina Canlas.16 But such fact notwithstanding, the
bank did not require the impostors to submit additional proof of their true identity.

Under the doctrine of last clear chance, which is applicable here, the respondent bank
must suffer the resulting loss. In essence, the doctrine of last clear chance is to the effect
that where both parties are negligent but the negligent act of one is appreciably later in
point of time than that of the other, or where it is impossible to determine whose fault or
negligence brought about the occurrence of the incident, the one who had the last clear
opportunity to avoid the impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that the antecedent
negligence of a person does not preclude recovery of damages caused by the supervening
negligence of the latter, who had the last fair chance to prevent the impending harm by
the exercise of due diligence.17

Assuming that Osmundo Canlas was negligent in giving Vicente Maosca the
opportunity to perpetrate the fraud, by entrusting to latter the owner's copy of the
transfer certificates of title of subject parcels of land, it cannot be denied that the bank
had the last clear chance to prevent the fraud, by the simple expedient of faithfully
complying with the requirements for banks to ascertain the identity of the persons
transacting with them.

For not observing the degree of diligence required of banking institutions, whose
business is impressed with public interest, respondent Asian Savings Bank has to bear
the loss sued upon.

In ruling for respondent bank, the Court of Appeals concluded that the petitioner
Osmundo Canlas was a party to the fraudulent scheme of Maosca and therefore,
estopped from impugning the validity of subject deed of mortgage; ratiocinating thus:

xxx xxx xxx

Thus, armed with the titles and the special power of attorney, Maosca went to
the defendant bank and applied for a loan. And when Maosca came over to the
bank to submit additional documents pertinent to his loan application, Osmundo
Canlas was with him, together with a certain Rogelio Viray. At that time,
Osmundo Canlas was introduced to the bank personnel as "Leonardo Rey".

When he was introduced as "Leonardo Rey" for the first time Osmundo should
have corrected Maosca right away. But he did not. Instead, he even allowed
Maosca to avail of his (Osmundo's) membership privileges at the Metropolitan
Club when Maosca invited two officers of the defendant bank to a luncheon
meeting which Osmundo also attended. And during that meeting, Osmundo did
not say who he really is, but even let Maosca introduced him again as "Leonardo
Rey", which all the more indicates that he connived with Maosca in deceiving
the defendant bank.

Finally after the loan was finally approved, Osmundo accompanied Maosca to
the bank when the loan was released. At that time, a manger's check for
P200,000.00 was issued in the name of Oscar Motorworks, which Osmundo
admits he owns and operates.

Collectively, the foregoing circumstances cannot but conjure to a single

conclusion that Osmundo active participated in the loan application of defendant
 Asian Savings Bank, which culminated in his receiving a portion of the process
thereof:18

A meticulous and painstaking scrutiny of the Records on hand, reveals, however, that
the findings arrived at by the Court of Appeals are barren of any sustainable basis. For
instance, the execution of the deeds of mortgages constituted by Maosca on subject
pieces of property of petitioners were made possible not by the Special Power of
Attorney executed by Osmundo Canlas in favor of Maosca but through the use of
impostors who misrepresented themselves as the spouses Angelina Canlas and
Osmundo Canlas. It cannot be said therefore, that the petitioners authorized Vicente
Maosca to constitute the mortgage on their parcels of land.

What is more, Osmundo Canlas was introduced as "Leonardo Rey" by Vicente Maosca,
only on the occasion of the luncheon meeting at the Metropolitan Club.19 Thereat, the
failure of Osmundo Canlas to rectify Maosca's misrepresentations could not be taken
as a fraudulent act. As well explained by the former, he just did not want to embarrass
Maosca, so that he waited for the end of the meeting to correct Maosca.20

Then, too, Osmundo Canlas recounted that during the said luncheon meeting, they did
not talk about the security or collateral for the loan of Maosca with ASB.21 So also, Mrs.
Josefina Rojo, who was the Account Officer of Asian Savings Bank when Maosca
applied for subject loan, corroborated the testimony of Osmundo Canlas, she testified:

xxx xxx xxx

QUESTION: Now could you please describe out the lunch conference at the
Metro Club in Makati?

ANSWER: Mr. Mangubat, Mr. Maosca and I did not discuss with respect
to the loan application and discuss primarily his business.

xxx xxx xxx

QUESTION: So, what is the main topic of your discussion during the
meeting?

ANSWER: The main topic war then, about his business although, Mr.
Leonardo Rey, who actually turned out as Mr. Canlas, supplier of Mr. Maosca.

QUESTION: I see . . . other than the business of Mr. Maosca, were there
any other topic discussed?

ANSWER: YES.

QUESTION: And what was the topic:

ANSWER: General Economy then.

 xxx xxx x x x22

Verily, Osmundo Canlas was left unaware of the illicit plan of Maosca, explaining thus
why he (Osmundo) did not bother to correct what Maosca misrepresented and to
assert ownership over the two parcels of land in question.

Not only that; while it is true that Osmundo Canlas was with Vicente Maosca when the
latter submitted the documents needed for his loan application, and when the check of
P200,000.00 was released, the former did not know that the collateral used by Maosca
for the said loan were their (Canlas spouses') properties. Osmundo happened to be with
Maosca at the time because he wanted to make sure that Maosca would make good
his promise to pay the balance of the purchase price of the said lots out of the proceeds
of the loan.23

The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not estop
him from assailing the validity of the mortgage because the said amount was in payment
of the parcels of land he sold to Maosca.24

What is decisively clear on record is that Maosca managed to keep Osmundo Canlas
uninformed of his (Maosca's) intention to use the parcels of land of the Canlas spouses
as security for the loan obtained from Asian Savings Bank. Since Vicente Maosca
showed Osmundo Canlas several certificates of title of lots which, according to Maosca
were the collaterals, Osmundo Canlas was confident that their (Canlases') parcels of
land were not involved in the loan transactions with the Asian Savings Bank.25 Under
the attendant facts and circumstances, Osmundo Canlas was undoubtedly negligent,
which negligence made them (petitioners) undeserving of an award of attorney's fees.

Settled is the rule that a contract of mortgage must be constituted only by the absolute
owner on the property mortgaged;26 a mortgage, constituted by an impostor is
void.27 Considering that it was established indubitably that the contract of mortgage
sued upon was entered into and signed by impostors who misrepresented themselves as
the spouses Osmundo Canlas and Angelina Canlas, the Court is of the ineluctible
conclusion and finding that subject contract of mortgage is a complete nullity.

WHEREFORE, the Petition is GRANTED and the Decision of the Court of Appeals,
dated September 30, 1993, in CA-G.R. CV No. 25242 SET ASIDE. The Decision of
Branch 59 of the Regional Trial Court of Makati City in Civil Case No. M-028 is hereby
REINSTATED. No pronouncement as to costs.

SO ORDERED.1wphi1.nt