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LOAN
Tolentino vs. Gonzalez Sy Chiam 50 Phil 558
Tolentino purchased land from Luzon Rice Mills for
Php25,000 payable in three installments.
Tolentino defaulted on the balance so the owner
sent a letter of demand to him. To pay, Tolentino
applied for loan from Gonzalez on condition that
he would execute a pacto de retro sale on the
property in favor of Gonzalez. Upon maturation of
loan, Tolentino defaulted so Gonzalez is
demanding recovery of the land. Tolentino
contends that the pacto de retro sale is a
mortgage
and
not
an
absolute
sale.
The Supreme Court held that upon its terms, the
deed of pacto de retro sale is an absolute sale
with right of repurchase and not a mortgage.
Thus, Gonzalez is the owner of the land and
Tolentino is only holding it as a tenant by virtue of
a
contract
of
lease.
**LOAN: A contract of loan signifies the giving of
a sum of money, goods or credits to another, with
a promise to repay, but not a promise to return
the same thing. It has been defined as an
advancement of money, goods, or credits upon a
contract or stipulation to repay, not to return, the
thing loaned at some future day in accordance
with the terms of the contract. The moment the
contract is completed, the money, goods or
chattels given cease to be the property of the
former owner and become the property of the
obligor to be used according to his own will,
unless the contract itself expressly provides for a
special or specific use of the same. At all events,
the money, goods or chattels, the moment the
contract is executed, cease to be the property of
the former owner and become the sole property
of the obligor.
G.R. No. L-46240

November 3, 1939

MARGARITA
QUINTOS
and
ANGEL
ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.

A.

IMPERIAL, J.:
The plaintiff brought this action to compel
the defendant to return her certain furniture
which she lent him for his use. She appealed from
the judgment of the Court of First Instance of
Manila which ordered that the defendant return to
her the three has heaters and the four electric
lamps found in the possession of the Sheriff of
said city, that she call for the other furniture from
the said sheriff of Manila at her own expense, and
that the fees which the Sheriff may charge for the
deposit of the furniture be paid pro rata by both
parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff


and as such occupied the latter's house on M. H.
del Pilar street, No. 1175. On January 14, 1936,
upon the novation of the contract of lease
between the plaintiff and the defendant, the
former gratuitously granted to the latter the use
of the furniture described in the third paragraph
of the stipulation of facts, subject to the condition
that the defendant would return them to the
plaintiff upon the latter's demand. The plaintiff
sold the property to Maria Lopez and Rosario
Lopez and on September 14, 1936, these three
notified the defendant of the conveyance, giving
him sixty days to vacate the premises under one
of the clauses of the contract of lease. There after
the plaintiff required the defendant to return all
the furniture transferred to him for them in the
house where they were found. On
November 5, 1936, the defendant, through
another person, wrote to the plaintiff reiterating
that she may call for the furniture in the ground
floor of the house. On the 7th of the same month,
the defendant wrote another letter to the plaintiff
informing her that he could not give up the three
gas heaters and the four electric lamps because
he would use them until the 15th of the same
month when the lease in due to expire. The
plaintiff refused to get the furniture in view of the
fact that the defendant had declined to make
delivery of all of them. On
November
15th, before vacating the house, the defendant
deposited with the Sheriff all the furniture
belonging to the plaintiff and they are now on
deposit in the warehouse situated at No. 1521,
Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs
contend that the trial court incorrectly applied the
law: in holding that they violated the contract by
not calling for all the furniture on November 5,
1936, when the defendant placed them at their
disposal; in not ordering the defendant to pay
them the value of the furniture in case they are
not delivered; in holding that they should get all
the furniture from the Sheriff at their expenses; in
ordering them to pay-half of the expenses
claimed by the Sheriff for the deposit of the
furniture; in ruling that both parties should pay
their respective legal expenses or the costs; and
in denying pay their respective legal expenses or
the costs; and in denying the motions for
reconsideration and new trial. To dispose of the
case, it is only necessary to decide whether the
defendant complied with his obligation to return
the furniture upon the plaintiff's demand; whether
the latter is bound to bear the deposit fees
thereof, and whether she is entitled to the costs
of litigation.lawphi1.net
The contract entered into between the
parties is one of commadatum, because under it
the plaintiff gratuitously granted the use of the

furniture to the defendant, reserving for herself


the ownership thereof; by this contract the
defendant bound himself to return the furniture to
the plaintiff, upon the latters demand (clause 7 of
the contract, Exhibit A; articles 1740, paragraph
1, and 1741 of the Civil Code). The obligation
voluntarily assumed by the defendant to return
the furniture upon the plaintiff's demand, means
that he should return all of them to the plaintiff at
the latter's residence or house. The defendant did
not comply with this obligation when he merely
placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and
the four eletric lamps. The provisions of article
1169 of the Civil Code cited by counsel for the
parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with
her obligation to get the furniture when they were
offered to her.
As the defendant had voluntarily
undertaken to return all the furniture to the
plaintiff, upon the latter's demand, the Court
could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was
the plaintiff under a duty to accept the offer to
return the furniture, because the defendant
wanted to retain the three gas heaters and the
four electric lamps.
As to the value of the furniture, we do not
believe that the plaintiff is entitled to the
payment thereof by the defendant in case of his
inability to return some of the furniture because
under paragraph 6 of the stipulation of facts, the
defendant has neither agreed to nor admitted the
correctness of the said value. Should the
defendant fail to deliver some of the furniture,
the value thereof should be latter determined by
the trial Court through evidence which the parties
may desire to present.
The costs in both instances should be
borne by the defendant because the plaintiff is
the prevailing party (section 487 of the Code of
Civil Procedure). The defendant was the one who
breached the contract ofcommodatum, and
without any reason he refused to return and
deliver all the furniture upon the plaintiff's
demand. In these circumstances, it is just and
equitable that he pay the legal expenses and
other judicial costs which the plaintiff would not
have otherwise defrayed.
The appealed judgment is modified and the
defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to
the plaintiff, in the residence or house of the
latter, all the furniture described in paragraph 3
of the stipulation of facts Exhibit A. The expenses

which may be occasioned by the delivery to and


deposit of the furniture with the Sheriff shall be
for the account of the defendant. the defendant
shall pay the costs in both instances. So ordered.
____
Republic vs Grijaldo
Facts:
Grijaldo obtained five loans from the Bank of Taiwan
in the total sum of P1,281.97 with interest at the rats
of 6% per annum compounded quarterly. These were
evidenced by five promissory notes.
These loans were crop loans and was considered to
be due one year after they were incurred.
As a security for the payment of the loans, a chattel
mortgage was executed on the standing crops of his
land.
The assets in the Bank of Taiwan were vested in the
US Govt which were subsequently transferred to the
Republic of the Philippines
RP is now demanding the payment of the account.
Justice of Peace dismisses the case on the ground of
prescription. CA rendered a decision ordering the
appellant to pay the appellee
Defendants contentions:
1 The appellee has no cause of action against appellant
since the transaction was with Taiwan Bank.
2 That if the appellee has a cause of action at all, it had
prescribed
3 The lower court erred in ordering the appellant to pay
P2,377.23
Issue:
Can RP still collect from Grijaldo?
Held: Yes
Ratio: The obligation of the contract was not to deliver a
determinate thing, it was a generic thing the amount of
money representing the total sum of his loans. The destruction
of anything of the same kind does not extinguish the
obligation. The loss of the crops did not extinguish his
obligation to pay because the account could still be paid from
other sources aside from the mortgaged crops. Also,
prescription does not run against the State.
***
Frias vs San Diego-Sison
Facts:
Frias is the owner of a house acquired from Island
Masters Realty and Development Corp. She entered
into a MOA with respondent San Diego-Sison.
In the MOA
o they had agreed that the petitioner would
receive from respondent P3M
o that respondent has a period of 6 months
from the date of execution of the contract to
notify petitioner of her intention to purchase
the parcel of land at the price of 6.4M Upon
notice, there is another six months to pay the
remaining balance.
o Prior to the six months given to the
respondent, petitioner may still offer the
property to other persons provided that the

first P3M be returned to respondent


including interest based on prevailing
compounded bank interest plus amount of
sale in excess of P7M
o In case there are no other buyers, no interest
shall be charged by the respondent on the
P3M, but in the event that on the 6 th month,
respondent would decide not to purchase,
the petitioner has a period of another 6
months to pay P3M provided that the said
amount shall earn compounded bank interest
for the last six months only.
Petitioner received P2M in cash and P1M in a postdated check dated February 28, 1990 instead of 1991
which rendered the check stale.
Defendant decided not to purchase the property so
what happened was that the P3M would be
considered as a loan payable within six months.
Petitioner failed to pay the P2M
Defendant filed with the RTC a complaint for sum of
money.
RTC rules in favor or defendant. Orders the payment
of P2M plus interest at 32% interest per annum
Petitioner appeals to CA, CA affirms RTC decision
with modification with regard to the interest from
32% to 25% starting from June 7, 1991
Issue: Was the CA correct in awarding a 25% per annum on
the P2M loan even beyond the second six months stipulated
period? Yes
Ratio:
The phrase for the last six months only should be taken in
the context of the entire agreement. In the agreement, there
were two periods of 6 months each. The first six months was
for the respondent to make up her mind WON she would
purchase the property. The second 6 months was for the
petitioner to pay the P2M in the event that respondent decide
not to buy the property, in which case interest will be charged
for the last six months only So that means, no interest shall
be charged for the first six month period while appellee was
making up her mind whether to buy the property.
***
Angel Jose Warehousing vs Chelda Enterprises
Plaintiff filed a case in the CFI against partnership
Chelda and David Syjueco for the recovery of unpaid
loans in the total amount of P20,880 with legal
interest from the filing of the complaint.
Defendants averred that they obtained four loans
totaling P26,500. Out of this 5,620 had been paid
leaving a balance of P20,880 and that plaintiff
charged and deducted from the loan usurious interest
at rates of 2% and 2.5% per month, hence the
plaintiff had no cause of action and should not be
permitted to recover.
Plaintiff denies the usury.
CFI finds that the unpaid principal amount was
P20,287.50 and that P1,048.15 had been deducted in
advance by plaintiff. Thus it should be deducted from
the principal leaving a balance of P19,247.35 still
payable to the plaintiff. It also ruled that
notwithstanding the usurious interest rate, such does
not bar the payment of the principal amount.

Respondents contentions:
A usurious loan is void due to illegality of cause or object, the
rule of pari delicto bars the action that can be brought about by
both parties based on Article 1411.
Issue: In a loan with usurious interest, may the creditor
recover the principal of the loan?
Held: Yes
Ratio:
A contract of loan with a usurious interest consists of principal
and accessory stipulations. The principal is to pay the debt and
the accessory is to pay interest.
The stipulations are divisible in the sense that the former can
still stand without the latter. In case of a divisible contract, if
the illegal terms can be separated from the legal ones, the
latter may be enforced. 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.
***
Cu Unjieng e Hijos vs Mabalacat Sugar Co.
Facts:
Cu Unjieng instituted an action for the recovery of
P163,000 with interest from the Mabalacat Sugar and
to foreclose a mortgage.
The mortgage executed by Mabalacat Sugar contains
a provision to the effect that non-compliance on their
part will cause the entire debt to become due and give
occasion for the foreclosure of the mortgage. Also,
there was a stipulation placing the interest at 12% per
annum and that it is to be computed upon the still
unpaid capital of the loan, shall be paid monthly, at
the end of each month
Issue:
1. Should the interest be compounded? Generally the
interest can be compounded but not in this case
2. Does the voluntary payment of the interest bind the
debtor? No
Ratio:
1. The provision merely requires the debtor to pay
interest monthly at the end of each month, such
interest to be computed upon the capital of the loan
already paid. It does not justify the charging of
compound interest accruing upon the capital monthly.
2. The interest is improperly charged at an unlawful
rate. The voluntary payment is not binding since it is
usurious
***
INTEREST
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE
INSURANCE COMPANY, INC., respondents.
The issues, albeit not completely novel, are: (a)
whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and
several, liability of the common carrier, the

arrastre operator and the customs broker; (b)


whether the payment of legal interest on an
award for loss or damage is to be computed from
the time the complaint is filed or from the date
the decision appealed from is rendered; and (c)
whether the applicable rate of interest, referred
to above, is twelve percent (12%) or six percent
(6%).
The findings of the court a quo, adopted by the
Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy
are hereunder reproduced:
This is an action against defendants shipping
company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in
defendants' custody, filed by the insurersubrogee who paid the consignee the value of
such losses/damages.
On December 4, 1981, two fiber drums of
riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by
defendant Eastern Shipping Lines under Bill of
Lading
No. YMA-8 (Exh. B). The shipment was insured
under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on
December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The
latter excepted to one drum, said to be in bad
order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from
defendant Metro Port Service, Inc., one drum
opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied
Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The
latter excepted to one drum which contained
spillages, while the rest of the contents was
adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and
negligence of defendants. Claims were presented
against defendants who failed and refused to pay
the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained,
plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine

insurance policy, so that it became subrogated to


all the rights of action of said consignee against
defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp.
85-86, Rollo.)
There were, to be sure, other factual issues that
confronted both courts. Here, the appellate court
said:
Defendants filed their respective answers,
traversing the material allegations of the
complaint contending that: As for defendant
Eastern Shipping it alleged that the shipment was
discharged in good order from the vessel unto the
custody of Metro Port Service so that any
damage/losses incurred after the shipment was
incurred after the shipment was turned over to
the latter, is no longer its liability (p. 17, Record);
Metroport averred that although subject shipment
was discharged unto its custody, portion of the
same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no
cause of action against it, not having negligent or
at fault for the shipment was already in damage
and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care
and diligence in the handling/delivery of the
cargo to consignee in the same condition
shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained
losses/damages;
2. Whether or not these losses/damages were
sustained while in the custody of defendants (in
whose respective custody, if determinable);
3. Whether or not defendant(s) should be held
liable for the losses/damages (see plaintiff's preTrial Brief, Records, p. 34; Allied's pre-Trial Brief,
adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that
the shipment sustained losses/damages. The two
drums were shipped in good order and condition,
as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any
damages drum that was shipped (Exhs. B and C).
But when on December 12, 1981 the shipment
was delivered to defendant Metro Port Service,
Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows
that the losses/damages were sustained while in

the respective and/or successive custody and


possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the
Marine Cargo Survey Report (Exh. G), with its
"Additional Survey Notes", are considered. In the
latter notes, it is stated that when the shipment
was "landed on vessel" to dock of Pier # 15,
South Harbor, Manila on December 12, 1981, it
was observed that "one (1) fiber drum (was) in
damaged condition, covered by the vessel's
Agent's Bad Order Tally Sheet No. 86427." The
report further states that when defendant Allied
Brokerage withdrew the shipment from defendant
arrastre operator's custody on January 7, 1982,
one drum was found opened without seal, cello
bag partly torn but contents intact. Net
unrecovered spillages was
15 kgs. The report went on to state that when the
drums reached the consignee, one drum was
found with adulterated/faked contents. It is
obvious, therefore, that these losses/damages
occurred before the shipment reached the
consignee while under the successive custodies
of defendants. Under Art. 1737 of the New Civil
Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods
remains in full force and effect even if the goods
are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of
destination, until the consignee has been advised
and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant
Eastern Shipping's own exhibit, the "Turn-Over
Survey of Bad Order Cargoes" (Exhs. 3-Eastern)
states that on December 12, 1981 one drum was
found "open".

3. Costs.

and thus held:

II. IT HELD THAT THE GRANT OF INTEREST ON THE


CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF
THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE
DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER
ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

W
THEREFORE, PREMISES CONSIDERED, judgment is
hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and
severally:
1. The amount of P19,032.95, with the present
legal interest of 12% per annum from October 1,
1982, the date of filing of this complaints, until
fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case
or the CIF value of the loss, whichever is lesser,
while the liability of defendant Metro Port Service,
Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in
no case to exceed P5,000.00 each, pursuant to
Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and

B. Dismissing the counterclaims and crossclaim of


defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record.
We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the
shipment sustained damage while in the
successive possession of appellants, and
therefore they are liable to the appellee, as
subrogee for the amount it paid to the consignee.
(pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the
judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the
common carrier, attributes error and grave abuse
of discretion on the part of the appellate court
when
I. IT HELD PETITIONER CARRIER JOINTLY AND
SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE
CLAIM OF PRIVATE RESPONDENT AS GRANTED IN
THE QUESTIONED DECISION;

The petition is, in part, granted.


In this decision, we have begun by saying that
the questions raised by petitioner carrier are not
all that novel. Indeed, we do have a fairly good
number of previous decisions this Court can
merely tack to.
The common carrier's duty to observe the
requisite diligence in the shipment of goods lasts
from the time the articles are surrendered to or
unconditionally placed in the possession of, and
received by, the carrier for transportation until

delivered to, or until the lapse of a reasonable


time for their acceptance by, the person entitled
to receive them (Arts. 1736-1738, Civil Code;
Ganzon vs. Court of Appeals, 161 SCRA 646; Kui
Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive
in damaged condition, a presumption arises
against the carrier of its failure to observe that
diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735,
Civil Code; Philippine National Railways vs. Court
of Appeals, 139 SCRA 87; Metro Port Service vs.
Court of Appeals, 131 SCRA 365). There are, of
course, exceptional cases when such
presumption of fault is not observed but these
cases, enumerated in Article 1734 1 of the Civil
Code, are exclusive, not one of which can be
applied to this case.
The question of charging both the carrier and the
arrastre operator with the obligation of properly
delivering the goods to the consignee has, too,
been passed upon by the Court. In Fireman's
Fund Insurance vs. Metro Port Services (182 SCRA
455), we have explained, in holding the carrier
and the arrastre operator liable in solidum,thus:
The legal relationship between the consignee and
the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad
Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar
to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107
Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that
are in its custody and to deliver them in good
condition to the consignee, such responsibility
also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore
charged with the obligation to deliver the goods
in good condition to the consignee.
We do not, of course, imply by the above
pronouncement that the arrastre operator and
the customs broker are themselves always and
necessarily liable solidarily with the carrier,
or vice-versa, nor that attendant facts in a given
case may not vary the rule. The instant petition
has been brought solely by Eastern Shipping
Lines, which, being the carrier and not having
been able to rebut the presumption of fault, is, in
any event, to be held liable in this particular case.
A factual finding of both the court a quo and the
appellate court, we take note, is that "there is
sufficient evidence that the shipment sustained
damage while in the successive possession of
appellants" (the herein petitioner among them).
Accordingly, the liability imposed on Eastern
Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are

others solidarily liable with it.


It is over the issue of legal interest adjudged by
the appellate court that deserves more than just
a passing remark.
Let us first see a chronological recitation of the
major rulings of this Court:
The early case of Malayan Insurance Co., Inc.,
vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a
suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case,
appellee Malayan Insurance (the plaintiff in the
lower court) averred in its complaint that the total
amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This
demand, however, was neither established in its
totality nor definitely ascertained. In the
stipulation of facts later entered into by the
parties, in lieu of proof, the amount of P1,447.51
was agreed upon. The trial court rendered
judgment ordering the appellants (defendants)
Manila Port Service and Manila Railroad Company
to pay appellee Malayan Insurance the sum of
P1,447.51 with legal interest thereon from the
date the complaint was filed on 28 December
1962 until full payment thereof. The appellants
then assailed, inter alia, the award of legal
interest. In sustaining the appellants, this Court
ruled:
Interest upon an obligation which calls for the
payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable
from the date of demand, judicial or extrajudicial.
The trial court opted for judicial demand as the
starting point.
But then upon the provisions of Article 2213 of
the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except
when the demand can be established with
reasonable certainty." And as was held by this
Court in Rivera vs. Perez, 4 L-6998, February 29,
1956, if the suit were for damages, "unliquidated
and not known until definitely ascertained,
assessed and determined by the courts after
proof (Montilla c. Corporacion de P.P.Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the
date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on
11 October 1985, was for "Recovery of Damages
for Injury to Person and Loss of Property." After
trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in

favor of the plaintiffs and third party defendants


and against the defendants and third party
plaintiffs as follows:

not within the ambit of the authority granted to


the Central Bank.
xxx xxx xxx

Ordering defendants and third party plaintiffs


Shell and Michael, Incorporated to pay jointly and
severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco
Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its
accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance
recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them
as a result of the fire of May 6, 1969 up to the
time they are actually paid or already the total
sum of P370,000.00 as of June 4, 1972 with legal
interest from the filing of the complaint until
paid and to pay attorney's fees of P5,000.00 with
costs against defendants and third party
plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter
modified the amount of damages awarded but
sustained the trial court in adjudging legal
interest from the filing of the complaint until fully
paid. When the appellate court's decision became
final, the case was remanded to the lower court
for execution, and this was when the trial court
issued its assailed resolution which applied the
6% interest per annum prescribed in Article 2209
of the Civil Code. In their petition for review
on certiorari, the petitioners contended that
Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under
Section 1 of Act 2655, as amended, 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%) percent per
annum. This Circular shall take effect
immediately. (Emphasis found in the text)
should have, instead, been applied. This
Court 6 ruled:
The judgments spoken of and referred to are
judgments in litigations 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

Coming to the case at bar, the decision herein


sought to be executed is one rendered in an
Action for Damages for injury to persons and loss
of property and does not involve any loan, much
less forbearances of any money, goods or credits.
As correctly argued by the private respondents,
the law applicable to the said case is Article 2209
of the New Civil Code which reads
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 interest agreed upon, and in the
absence of stipulation, the legal interest which is
six percent per annum.
The above rule was reiterated in Philippine Rabbit
Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July
1986. The case was for damages occasioned by
an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat
actual and compensatory damages in the amount
of P72,500.00 with legal interest thereon from
the filing of the complaint until fully paid. Relying
on the Reformina v. Tomol case, this
Court 8modified the interest award from 12% to
6% interest per annum but sustained the time
computation thereof, i.e., from the filing of the
complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial
court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co.,
Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of
P989,335.68 with interest at the legal rate from
November 29, 1968, the date of the filing of the
complaint until full payment . . . ." Save from the
modification of the amount granted by the lower
court, the Court of Appeals sustained the trial
court's decision. When taken to this Court for
review, the case, on 03 October 1986, was
decided, thus:
WHEREFORE, the decision appealed from is
hereby MODIFIED and considering the special and
environmental circumstances of this case, we
deem it reasonable to render a decision imposing,
as We do hereby impose, upon the defendant and
the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil
Code, Supra.
p. 10) indemnity in favor of the Philippine Bar

Association of FIVE MILLION (P5,000,000.00)


Pesos to cover all damages (with the exception to
attorney's fees) occasioned by the loss of the
building (including interest charges and lost
rentals) and an additional ONE HUNDRED
THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon
the finality of this decision. Upon failure to pay on
such finality, twelve (12%) per cent interest per
annum shall be imposed upon aforementioned
amounts from finality until paid. Solidary costs
against the defendant and third-party defendants
(Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United
Construction, contending that "the interest of
twelve (12%) per cent per annum imposed on the
total amount of the monetary award was in
contravention of law." The Court 10 ruled out the
applicability of the Reformina and Philippine
Rabbit Bus Lines cases and, in its resolution of 15
April 1988, it explained:
There should be no dispute that the imposition of
12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1)
loans; (2) forbearance of any money, goods or
credit; and
(3) rate allowed in judgments (judgments spoken
of refer to judgments involving loans or
forbearance of any money, goods or credits.
(Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139
SCRA 260 [1985]). It is true that in the instant
case, there is neither a loan or a forbearance, but
then no interest is actually imposed provided the
sums referred to in the judgment are paid upon
the finality of the judgment. It is delay in the
payment of such final judgment, that will cause
the imposition of the interest.
It will be noted that in the cases already adverted
to, the rate of interest is imposed on the total
sum, from the filing of the complaint until paid; in
other words, as part of the judgment for
damages. Clearly, they are not applicable to the
instant case. (Emphasis supplied.)
The subsequent case of American Express
International, Inc., vs. Intermediate Appellate
Court 11 was a petition for review
on certiorari from the decision, dated 27 February
1985, of the then Intermediate Appellate Court
reducing the amount of moral and exemplary
damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and
its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial
court, i.e., P2,000,000.00 as moral damages and
P400,000.00 as exemplary damages with interest

thereon at 12% per annum from notice of


judgment, plus costs of suit. In a decision of 09
November 1988, this Court, while recognizing the
right of the private respondent to recover
damages, held the award, however, for moral
damages by the trial court, later sustained by the
IAC, to be inconceivably large. The Court 12 thus
set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to
pay private respondent the sum of One Hundred
Thousand (P100,000.00) Pesos as moral
damages, with
six (6%) percent interest thereon computed from
the finality of this decision until paid. (Emphasis
supplied)
Reformina came into fore again in the 21
February 1989 case of Florendo v. Ruiz 13 which
arose from a breach of employment contract. For
having been illegally dismissed, the petitioner
was awarded by the trial court moral and
exemplary damages without, however, providing
any legal interest thereon. When the decision was
appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the
decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with
the modification that defendants-appellants,
except defendant-appellant Merton Munn, are
ordered to pay, jointly and severally, the amounts
stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of
compensatory damages, with interest at the legal
rate from the date of the filing of the complaint
until fully paid(Emphasis supplied.)
The petition for review to this Court was denied.
The records were thereupon transmitted to the
trial court, and an entry of judgment was made.
The writ of execution issued by the trial court
directed that only compensatory damages should
earn interest at 6% per annum from the date of
the filing of the complaint. Ascribing grave abuse
of discretion on the part of the trial judge, a
petition for certiorari assailed the said order. This
Court said:
. . . , it is to be noted that the Court of Appeals
ordered the payment of interest "at the legal
rate"from the time of the filing of the
complaint. . . Said circular [Central Bank Circular
No. 416] does not apply to actions based on a
breach of employment contract like the case at
bar. (Emphasis supplied)
The Court reiterated that the 6% interest per
annum on the damages should be computed from
the time the complaint was filed until the amount
is fully paid.

Quite recently, the Court had another occasion to


rule on the matter. National Power Corporation
vs. Angas, 14decided on 08 May 1992, involved
the expropriation of certain parcels of land. After
conducting a hearing on the complaints
for eminent domain, the trial court ordered the
petitioner to pay the private respondents certain
sums of money as just compensation for their
lands so expropriated "with legal interest
thereon . . . until fully paid." Again, in applying
the 6% legal interest per annum under the Civil
Code, the Court 15 declared:
. . . , (T)he transaction involved is clearly not a
loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a
public purpose, the payment of which is without
stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of
indemnity for damages. The legal interest
required to be paid on the amount of just
compensation for the properties expropriated is
manifestly in the form of indemnity for damages
for the delay in the payment thereof. Therefore,
since the kind of interest involved in the joint
judgment of the lower court sought to be
enforced in this case is interest by way of
damages, and not by way of earnings from loans,
etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances
in the above holdings. The cases can perhaps be
classified into two groups according to the
similarity of the issues involved and the
corresponding rulings rendered by the court. The
"first group" would consist of the cases
of Reformina v. Tomol (1985), Philippine Rabbit
Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992).
In the "second group" would be Malayan
Insurance Company v. Manila Port
Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express
International v. Intermediate Appellate
Court (1988).
In the "first group", the basic issue focuses on the
application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular)
interest per annum. It is easily discernible in
these cases that there has been a consistent
holding that the Central Bank Circular imposing
the 12% interest per annum applies only to loans
or forbearance 16 of money, goods or credits, as
well as to judgments involving such loan or
forbearance of money, goods or credits, and that
the 6% interest under the Civil Code governs
when the transaction involves the payment of
indemnities in the concept of damage arising
from the breach or a delay in the performance of
obligations in general. Observe, too, that in these

cases, a common time frame in the computation


of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed
until the adjudged amount is fully paid.
The "second group", did not alter the pronounced
rule on the application of the 6% or 12%
interest per annum, 17depending on whether or
not the amount involved is a loan or forbearance,
on the one hand, or one of indemnity for damage,
on the other hand. Unlike, however, the "first
group" which remained consistent in holding that
the running of the legal interest should be from
the time of the filing of the complaint until fully
paid, the "second group" varied on the
commencement of the running of the legal
interest.
Malayan held that the amount awarded
should bear legal interest from the date of the
decision of the court a quo, explaining that "if the
suit were for damages, 'unliquidated and not
known until definitely ascertained, assessed and
determined by the courts after proof,' then,
interest 'should be from the date of the
decision.'"American Express International
v. IAC, introduced a different time frame for
reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until
paid." The Nakpil and Sons case ruled that 12%
interest per annum should be imposed from the
finality of the decision until the judgment amount
is paid.
The ostensible discord is not difficult to explain.
The factual circumstances may have called for
different applications, guided by the rule that the
courts are vested with discretion, depending on
the equities of each case, on the award of
interest. Nonetheless, it may not be unwise, by
way of clarification and reconciliation, to suggest
the following rules of thumb for future guidance.
I. When an obligation, regardless of its
source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts 18 is breached, the
contravenor can be held liable for
damages. 19 The provisions under Title XVIII on
"Damages" of the Civil Code govern in
determining the measure of recoverable
damages. 20
II. With regard particularly to an award of interest
in the concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due

should be that which may have been stipulated in


writing. 21 Furthermore, the interest due shall
itself earn legal interest from the time it is
judicially demanded. 22 In the absence of
stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject
to the provisions of Article 1169 23 of the Civil
Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be
imposed at the discretion of the court 24 at the
rate of 6% per annum. 25 No interest, however,
shall be adjudged on unliquidated claims or
damages except when or until the demand can
be established with reasonable
certainty. 26 Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is
made, the interest shall begin to run only from
the date the judgment of the court is made (at
which time the quantification of damages may be
deemed to have been reasonably ascertained).
The actual base for the computation of legal
interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the
rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of
credit.
WHEREFORE, the petition is partly GRANTED. The
appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is
SIX PERCENT (6%) on the amount due computed
from the decision, dated
03 February 1988, of the court a quo. A TWELVE
PERCENT (12%) interest, in lieu of SIX PERCENT
(6%), shall be imposed on such amount upon
finality of this decision until the payment thereof.
SO ORDERED.
***
Maria Soledad Tomimbang vs. Atty. Jose Tomimbang, GR
No. 165116, August 4, 2009
This resolves the petition for review on certiorari under
Rule 45 of the Rules of Court, praying that the
Decision[1] dated July 1, 2004 and Resolution[2] dated August

31, 2004 promulgated by the Court of Appeals (CA), be


reversed and set aside.
The antecedent facts are as follows:
Petitioner and respondent are siblings. Their parents
donated to petitioner an eight-door apartment located at 149
Santolan Road, Murphy, Quezon City, with the condition that
during the parents' lifetime, they shall retain control over the
property and petitioner shall be the administrator thereof.
In 1995, petitioner applied for a loan from PAG-IBIG
Fund to finance the renovations on Unit H, of said apartment
which she intended to use as her residence. Petitioner failed to
obtain a loan from PAG-IBIG Fund, hence, respondent offered
to extend a credit line to petitioner on the following
conditions: (1) petitioner shall keep a record of all the
advances; (2) petitioner shall start paying the loan upon the
completion of the renovation; (3) upon completion of the
renovation, a loan and mortgage agreement based on the
amount of the advances made shall be executed by petitioner
and respondent; and (4) the loan agreement shall contain
comfortable terms and conditions which petitioner could have
obtained from PAG-IBIG.[3]
Petitioner accepted respondent's offer of a credit line and
work on the apartment units began. Renovations on Units B
to G were completed, and the work has just started on Unit A
when an altercation broke out between herein parties. In view
of said conflict, respondent and petitioner, along with some
family members, held a meeting in the house of their brother
Genaro sometime in the second quarter of 1997. Respondent
and petitioner entered into a new agreement whereby
petitioner was to start making monthly payments on her
loan. Upon respondent's demand, petitioner turned over to
respondent all the records of the cash advances for the
renovations. Subsequently, or from June to October of 1997,
petitioner made monthly payments of P18,700.00, or a total
ofP93,500.00. Petitioner never denied the fact that she started
making such monthly payments.
In October of 1997, a quarrel also occurred between
respondent and another sister, Maricion, who was then
defending the actions of petitioner. Because of said incident,
they had a hearing at the Barangay. At said hearing,
respondent had the occasion to remind petitioner of her
monthly payment. Petitioner allegedly answered, Kalimutan
mo na ang pera mo wala tayong pinirmahan. Hindi ako
natatakot sa 'yo! Thereafter, petitioner left Unit H and could
no longer be found. Petitioner being the owner of the
apartments, renovations on Unit A were discontinued when her
whereabouts could not be located. She also stopped making
monthly payments and ignored the demand letter
dated December 2, 1997 sent by respondent's counsel.
On February 2, 1998, respondent filed a Complaint
against petitioner, demanding the latter to pay the former the
net amount ofP3,989,802.25 plus interest of 12% per annum
from date of default.
At the pre-trial conference, the issues were narrowed
down as follows:
1.
Whether or not a loan was duly constituted between the
plaintiff and the defendant in connection with the
improvements or renovations on apartment units A-H, which
is in the name of the defendant [herein petitioner];
2.
Assuming that such a loan was duly constituted in favor
of plaintiff [herein respondent], whether or not the same is

already due and payable;


3.
Assuming that said loan is already due and demandable,
whether or not it is to be paid out of the rental proceeds from
the apartment units mentioned, presuming that such issue was
raised in the Answer of the Defendant;
4.
Assuming that the said loan was duly constituted in
favor of plaintiff [herein respondent], whether or not it is in
the amount of P3,909,802.20 and whether or not it will earn
legal interest at the rate of 12% per annum, compounded, as
provided in Article 2212 of the Civil Code of the Philippines,
from the date of the extrajudicial demand; and
5.
Whether or not the plaintiff [herein respondent] is
entitled to the reliefs prayed for in his Complaint or whether or
not it is the defendant [herein petitioner] who is entitled to the
reliefs prayed for in her Answer with Counterclaim.[4]
On November 15, 2002, the Regional Trial Court (RTC)
of Quezon City, Branch 82, rendered a Decision,[5] the
dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the plaintiff and against the
defendant ordering the latter to pay the former the following:
1.
The sum of P3,989,802.25 with interest thereon at the
legal rate of 12% per annum computed from the date of
default until the whole obligation is fully paid;
2.
The sum of P50,000.00 as and by way of attorney's fees;
and
3.
The cost of suit.
SO ORDERED.[6]
Petitioner appealed the foregoing RTC Decision to the
CA, but on July 1, 2004, the Court of Appeals promulgated its
Decision affirming in toto said RTC judgment. A motion for
reconsideration of the CA Decision was denied per Resolution
dated August 31, 2004.
Hence, this petition where petitioner alleges that:
I.THE COURT OF APPEALS ACTED NOT IN ACCORD
WITH LAW AND APPLICABLE JURISPRUDENCE OF
THE SUPREME COURT WHEN IT AFFIRMED
THE LOWER COURT'S FINDING THAT THE LOAN
BETWEEN PETITIONER AND RESPONDENT IS
ALREADY DUE AND DEMANDABLE.
II.THE COURT OF APPEALS ERRED BY DEPARTING
FROM THE ACCEPTED AND USUAL COURSE OF
JUDICIAL PROCEEDINGS OF AFFIRMING THE DUE
AND DEMANDABILITY OF THE LOAN CONTRARY TO
THE EVIDENCE PRESENTED IN THE LOWER COURT
AND SANCTIONING SUCH DEPARTURE BY THE
LOWER COURT IN THE INSTANT CASE.
III.THE COURT OF APPEALS ERRED FROM THE
ACCEPTED AND USUAL COURSE OF JUDICIAL
PROCEEDINGS OF AFFIRMING THE AWARD OF
ATTORNEY'S FEES TO THE RESPONDENT WITHOUT
ANY BASIS AND SANCTIONING SUCH DEPARTURE
BY THE LOWER COURT IN THE INSTANT CASE.[7]
The main issues in this case boil down to (1) whether
petitioner's obligation is due and demandable; (2) whether
respondent is entitled to attorney's fees; and (3) whether
interest should be imposed on petitioner's indebtedness and, if
in the affirmative, at what rate.
Petitioner does not deny that she obtained a loan from
respondent. She, however, contends that the loan is not yet
due and demandable because the suspensive condition the
completion of the renovation of the apartment units - has not

yet been fulfilled. She also assails the award of attorney's fees
to respondent as baseless.
For his part, respondent admits that initially, they agreed
that payment of the loan shall be made upon completion of the
renovations. However, respondent claims that during their
meeting with some family members in the house of their
brother Genaro sometime in the second quarter of 1997, he
and petitioner entered into a new agreement whereby
petitioner was to start making monthly payments on her loan,
which she did from June to October of 1997. In respondent's
view, there was a novation of the original agreement, and
under the terms of their new agreement, petitioner's obligation
was already due and demandable.
Respondent also maintains that when petitioner
disappeared from the family compound without leaving
information as to where she could be found, making it
impossible to continue the renovations, petitioner thereby
prevented the fulfillment of said condition. He claims that
Article 1186 of the Civil Code, which provides that the
condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment, is applicable to this case.
In his Comment to the present petition, respondent raised
for the first time, the issue that the loan contract between him
and petitioner is actually one with a period, not one with a
suspensive condition. In his view, when petitioner began to
make partial payments on the loan, the latter waived the
benefit of the term, making the loan immediately demandable.
Respondent also believes that he is entitled to attorney's
fees, as petitioner allegedly showed bad faith by absconding
and compelling him to litigate.
The Court finds the petition unmeritorious.
It is undisputed that herein parties entered into a valid
loan contract. The only question is, has petitioner's obligation
become due and demandable? The Court resolves the
question in the affirmative.
The evidence on record clearly shows that after
renovation of seven out of the eight apartment units had been
completed, petitioner and respondent agreed that the former
shall already start making monthly payments on the loan even
if renovation on the last unit (Unit A) was still
pending. Genaro Tomimbang, the younger brother of herein
parties, testified that a meeting was held among petitioner,
respondent, himself and their eldest sister Maricion, sometime
during the first or second quarter of 1997, wherein respondent
demanded payment of the loan, and petitioner agreed to
pay. Indeed, petitioner began to make monthly payments from
June to October of 1997 totalling P93,500.00.[8] In fact,
petitioner even admitted in her Answer with Counterclaim that
she had started to make payments to plaintiff [herein
respondent] as the same was in accord with her
commitment to pay whenever she was able; x x x .[9]
Evidently, by virtue of the subsequent agreement, the
parties mutually dispensed with the condition that petitioner
shall only begin paying after the completion of all
renovations. There was, in effect, a modificatory or partial
novation, of petitioner's obligation. Article 1291 of the Civil
Code provides, thus:
Art. 1291. Obligations may be modified by:
(1)
Changing their object or principal conditions;
(2)
Substituting the person of the debtor;
(3)
Subrogating a third person in the rights of the creditor.

(Emphasis supplied)
In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,[10] the
Court expounded on the nature of novation, to wit:
Novation may either be extinctive or modificatory, much
being dependent on the nature of the change and the intention
of the parties. Extinctive novation is never presumed; there
must be an express intention to novate; x x x .
An extinctive novation would thus have the twin effects of,
first, extinguishing an existing obligation and, second, creating
a new one in its stead. This kind of novation presupposes a
confluence of four essential requisites: (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4)
the birth of a new valid obligation. Novation is merely
modificatory where the change brought about by any
subsequent agreement is merely incidental to the main
obligation (e.g., a change in interest rates or an extension
of time to pay); in this instance, the new agreement will not
have the effect of extinguishing the first but would merely
supplement it or supplant some but not all of its
provisions.[11]
In Ong v. Bogalbal,[12] the Court also stated, thus:
x x x the effect of novation may be partial or
total. There is partial novation when there is only a
modification or change in some principal conditions of the
obligation. It is total, when the obligation is completely
extinguished. Also, the term principal conditions in Article
1291 should be construed to include a change in the period to
comply with the obligation. Such a change in the period
would only be a partial novation since the period merely
affects the performance, not the creation of the obligation.[13]
As can be gleaned from the foregoing, the aforementioned
four essential elements and the requirement that there be total
incompatibility between the old and new obligation, apply
only to extinctive novation. In partial novation, only the terms
and conditions of the obligation are altered, thus, the main
obligation is not changed and it remains in force.
Petitioner stated in her Answer with
Counterclaim[14] that she agreed and complied with
respondent's demand for her to begin paying her loan, since
she believed this was in accordance with her commitment to
pay whenever she was able. Her partial performance of her
obligation is unmistakable proof that indeed the original
agreement between her and respondent had been novated by
the deletion of the condition that payments shall be made only
after completion of renovations. Hence, by her very own
admission and partial performance of her obligation, there can
be no other conclusion but that under the novated agreement,
petitioner's obligation is already due and demandable.
With the foregoing finding that petitioner's obligation is
due and demandable, there is no longer any need to discuss
whether petitioner's disappearance from the family compound
prevented the fulfillment of the original condition,
necessitating application of Article 1186 of the Civil Code, or
whether the obligation is one with a condition or a period.
As to attorney's fees, however, the award therefor
cannot be allowed by the Court. It is an oft-repeated rule that
the trial court is required to state the factual, legal or equitable
justification for awarding attorney's fees.[15] The Court
explained in Buing v. Santos,[16] to wit:
x x x While Article 2208 of the Civil Code allows attorney's

fees to be awarded if the claimant is compelled to litigate with


third persons or to incur expenses to protect his interest by
reason of an unjustified act or omission of the party from
whom it is sought, there must be a showing that the losing
party acted willfully or in bad faith and practically
compelled the claimant to litigate and incur litigation
expenses. In view of the declared policy of the law that
awards of attorney's fees are the exception rather than the
rule, it is necessary for the trial court to make express
findings of facts and law that would bring the case within
the exception and justify the grant of such award. x x x.
Thus, the matter of attorney's fees cannot be touched
upon only in the dispositive portion of the decision. The text
itself must state the reasons why attorney's fees are being
awarded. x x x [17]
In the above-quoted case, there was a finding that defendants
therein had no intention of fulfilling their obligation in
complete disregard of the plaintiffs right, and yet, the Court
did not deem this as sufficient justification for the award of
attorney's fees. Verily, in the present case, where it is
understandable that some misunderstanding could arise as to
when the obligation was indeed due and demandable, the
Court must likewise disallow the award of attorney's fees.
We now come to a discussion of whether interest should
be imposed on petitioner's indebtedness. In Royal Cargo
Corp. v. DFS Sports Unlimited, Inc.,[18] the Court reiterated
the settled rule on imposition of interest, thus:
As to computation of legal interest, the seminal ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals controls, to
wit:
xxxx
II.
With regard particularly to an award of interest in
the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1.
When an obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2.
When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on
the amount finally adjudged.
3.
When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph

2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
The foregoing rule on legal interest was explained in SungaChan v. Court of Appeals,[19] in this wise:
Eastern Shipping Lines, Inc. synthesized the rules on
the imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No.
416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such
loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies
when the transaction involves the payment of indemnities in
the concept of damage arising from the breach or a delay in
the performance of obligations in general, with the
application of both rates reckoned from the time the
complaint was filed until the [adjudged] amount is fully
paid. In either instance, the reckoning period for the
commencement of the running of the legal interest shall be
subject to the condition that the courts are vested with
discretion, depending on the equities of each case, on the
award of interest.[20]
In accordance with the above ruling, since the obligation in
this case involves a loan and there is no stipulation in writing
as to interest due, the rate of interest shall be 12% per annum
computed from the date of extrajudicial demand.
IN VIEW OF THE FOREGOING, the petition
is AFFIRMED with the MODIFICATION that the award for
attorney's fees is DELETED.
___
G.R. No. 126890
November 28, 2006
UNITED PLANTERS SUGAR MILLING COMPANY,
INC. (UPSUMCO), Petitioner,
vs.
THE HONORABLE COURT OF APPEALS,
PHILIPPINE NATIONAL BANK (PNB), and ASSET
PRIVATIZATION TRUST (APT), as TRUSTEE OF THE
REPUBLIC OF THE PHILIPPINES, Respondents.
The Case
This is a petition for review1 of the Decision2 dated 29
February 1996 and the Resolution dated 29 October 1996 of
the Court of Appeals remanding to the Regional Trial Court of
Bais City, Negros Oriental a suit for collection of sum of
money and damages for further proceedings.
The Facts
Petitioner United Planters Sugar Milling Company, Inc.
("UPSUMCO") is a domestic sugar miller based in Manjuyod,
Negros Oriental. To finance the construction of its milling
plant, UPSUMCO obtained loans from respondent Philippine
National Bank ("PNB"), evidenced by, among others, a Credit
Agreement dated 5 November 1974, subsequently restructured
on 24 June 1982, 10 December 1982, and 9 May 1984 ("takeoff loans"). These loans were secured by a real estate
mortgage over two parcels of land3 where UPSUMCOs
milling plant stands and by chattel mortgages over
machineries and equipment on the parcels of land. The loan
agreements also required UPSUMCO to open bank accounts
with PNB the funds of which PNB could apply to pay any due
obligations of UPSUMCO. As of 1987, UPSUMCO
maintained five savings accounts4 and one current
account5 with PNBs Dumaguete City Branch ("PNB
Dumaguete") and an account6 at PNBs Escolta, Manila

Branch ("PNB Escolta"). UPSUMCO also maintained bank


accounts with the Bank of the Philippine Islands, Republic
Planters Bank, and the Rural Banks of Bais City and
Manjuyod, Negros Oriental, the latter two being PNB
affiliates at that time.
To monitor UPSUMCOs finances, PNB subsequently
assigned a comptroller to UPSUMCO, Dante Santos
("Santos"), who was made signatory to all checks UPSUMCO
drew against its current account with PNB Dumaguete. PNB
also placed five representatives in UPSUMCOs Board of
Directors. Lastly, PNB required UPSUMCOs Directors to
bind themselves solidarily liable with UPSUMCO on the
loans.
To finance its operations, UPSUMCO also obtained loans
from PNB evidenced by, among others, the Deed of
Assignment by Way of Payment, notarized on 16 November
1984 and the Credit Agreements dated 19 February 1987 and
29 April 1987 ("operational loans"). The Credit Agreements,
which also carried set-off clauses,7 were secured by Pledge
contracts dated 19 February 1987 and 30 March 1987. By
these contracts, UPSUMCO undertook to assign to PNB all its
sugar produce for PNB to sell and apply the proceeds to
satisfy UPSUMCOs unpaid obligation under the operational
loans. The promissory notes8 for the funds released under the
operational loans also carried set-off clauses. In the Deed of
Assignment by Way of Payment, UPSUMCO undertook to
assign to PNB its milled sugar and molasses beginning the
crop year 1984-1985. To keep track of UPSUMCOs sugar
assignments and the payments to UPSUMCOs loans, PNB
maintained "sugar accounts payable" under UPSUMCOs
name.9
In the early 1980s, UPSUMCO and other sugar millers, hard
hit by a slump in the international sugar market, started to
default on their loan payments. To bail out these corporations,
then President Ferdinand E. Marcos created10 the Philippine
Sugar Corporation (PHILSUCOR), which was authorized to
issue and sell "sugar bonds" to various commercial banks
holding non-performing loans of ailing sugar millers.
Accordingly, PHILSUCOR issued and sold to PNB P3 billion
worth of "sugar bonds" on 14 February 1984. PNB partly paid
the bonds by assigning to PHILSUCOR
30% of its credit with UPSUMCO, computed as of 14
February 1984.11 This made PHILSUCOR UPSUMCOs
creditor to that extent. To secure PHILSUCORs interest in
UPSUMCO, PHILSUCOR agreed that PNB will continue to
hold UPSUMCOs collateral for the take-off loans, for itself
and PHILSUCOR, to the extent of their pro-rata interest in the
event of a foreclosure.
On 8 December 1986, then President Corazon C. Aquino
issued Proclamation No. 5012 creating respondent Asset
Privatization Trust ("APT"),13 to among others,
"[circumscribe] the areas of economic activities within which
government corporations may operate x x x [by disposing and
liquidating the] non-relevant and non-performing assets of
retained corporations" like PNB. On 27 February 1987, PNB
assigned to the Government its "rights, titles, and interests in"
several corporations and entities, including UPSUMCO.14 The
Government then transferred these financial assets to APT
under a Trust Agreement.
To quickly dispose of UPSUMCOs mortgaged assets, APT
negotiated with UPSUMCO for the mortgages uncontested or
"friendly" foreclosure and for UPSUMCOs waiver of its right

of redemption. UPSUMCO accommodated APT. Hence, APT


and PNB ("respondents"), the latter as PHILSUCORs
representative, scheduled the foreclosure sale on 27 August
1987. In the notices of foreclosure, PNB placed UPSUMCOs
total "mortgage indebtedness" at P2,137,076,433.15, as of 30
June 1987. At the foreclosure sale, APT purchased the
auctioned properties for P450 million.
On 3 September 1987, UPSUMCO "transferred" to APT its
right to redeem the foreclosed properties under a Deed of
Assignment15 which reads in full:
That United Planter[s] Sugar Milling Co., Inc. (the
"Corporation") (pursuant to a resolution passed by its board
of Directors on September 3, 1987, and confirmed by the
Corporations stockholders in a stockholders Meeting held on
the same (date), for and in consideration of the Asset
Privatization Trust ("APT") condoning any deficiency amount
it may be entitled to recover from the Corporation under the
Credit Agreement dated November 5, 1974 and the
Restructuring Agreement[s] dated June 24 and December 10,
1982, and May 9, 1984, respectively, executed between the
Corporation and the Philippine National Bank ("PNB"), which
financial claims have been assigned to APT, through the
National Government, by PNB, hereby irrevocably sells,
assigns and transfer to APT its right to redeem the foreclosed
real properties covered by Transfer Certificates of Title Nos.
T-16700 and T-16701.
IN WITNESS WHEREOF, the Corporation has caused this
instrument to be executed on its behalf by Mr. Joaquin S.
Montenegro, thereunto duly authorized, this 3rd day of
September, 1987.16
On 29 September 1987, APT, in a public auction, sold the
foreclosed properties to Universal Robina Sugar Milling
Corporation ("URSUMCO") for P500 million. APT and
URSUMCO signed the Deed of Sale on 29 December 1987.
On 13 March 1989, UPSUMCO sued respondents in the
Regional Trial Court of Bais City, Branch 45 ("trial court"),
for sum of money and damages. UPSUMCO alleged that
respondents illegally appropriated funds belonging to it,
namely: (1) funds on deposit in UPSUMCOs bank accounts
with PNB, a portion of which APT allegedly used to pay for
the salaries of the mill workers; (2) the proceeds of the sale of
UPSUMCO sugar PNB sold in September 1987; and (3) a sum
of money respondent APT withdrew from UPSUMCOs
account in the Rural Bank of Bais City and placed in an
escrow account at PNB Dumaguete. UPSUMCO claimed that
it is entitled to recover these amounts as APT had condoned its
deficiency obligation. UPSUMCO subsequently amended its
complaint to pray for the remittance of the proceeds of all
UPSUMCO sugar PNB sold after 27 August 1987 and that
respondents liability be made solidary.
Respondents denied UPSUMCOs claims. PNB contended that
as foreclosing creditor, it had the prerogative to place
UPSUMCOs accounts in PNB Dumaguete in the name of
APT. PNB added that this procedure is based on the set-off
clauses provided in the "covering instruments" of
UPSUMCOs loans. PNB counterclaimed for damages.
For its part, APT contended that UPSUMCOs claims have
been "paid, waived, abandoned or otherwise extinguished." As
counterclaim, APT sought payment of the deficiency from the
foreclosure sale.
Pending trial, the trial court allowed UPSUMCO to examine
the records of PNB relating to UPSUMCOs accounts in PNB

Dumaguete and PNB Escolta. In the course of such


examination, UPSUMCO found out that, as of latest updating,
the credit balance in its five savings accounts in PNB
Dumaguete was P1,489,656.80.17 For its bank account in PNB
Escolta, UPSUMCO learned that as of 26 November 1986, it
had a credit balance ofP352,869.28 which, however, PNB
refused to release. UPSUMCO also discovered the following:
(1) on 27 August 1987, PNB transferred to APTs bank
account UPSUMCOs deposits from its five savings accounts
in PNB Dumaguete amounting to P14,316,593.29; (2) Santos,
as APTs comptroller, withdrew the funds in UPSUMCOs
bank accounts in the Rural Banks of Bais City and Manjuyod
and deposited them to APTs bank account in PNB
Dumaguete; (3) from 27 August 1987 to 8 December 1987,
PNB credited to APTs bank account, through credit
memoranda, the proceeds from the sale of UPSUMCOs sugar
amounting to P74,563,823.80; and (4) on 2 September 1987
and 2 October 1987, PNB paid PHILSUCOR P41,407,444.95.
UPSUMCO adopted as part of its evidence the documents
showing these transfers and payments.
The Ruling of the Trial Court
In its Decision 18 of 27 April 1992, the trial court rendered
judgment for UPSUMCO and ordered respondents, singly and
solidarily, to pay UPSUMCO, with interest, the following: (1)
the credit balance, as of 13 February 1990, in UPSUMCOs
five savings accounts in PNB Dumaguete and the deposits
from these accounts PNB credited to APT on 27 February
1987; (2) the deposits in UPSUMCOs bank accounts in the
Rural Banks of Bais City and Manjuyod Santos transferred to
APT; (3) the proceeds of the sale of UPSUMCO sugar PNB
transferred to APT from 27 August 1987 to 8 December 1987;
(4) the payments PNB made to PHILSUCOR; (5) the credit
balance, as of 26 November 1986, in UPSUMCOs bank
account in PNB Escolta; (6) the milling plants maintenance
and operating expenses from 3 September 1987 to January
1988 which UPSUMCO paid; and (7) attorneys fees. The trial
court also ordered respondents to solidarily pay exemplary
damages.19 The trial court held:
Crystal[l]izing in simpler terms the facts, it appears that the
[UPSUMCO] was both a debtor and depositor[], and that
defendant PNB was both a creditor and a depository bank.
When Proclamation No. 50 was issued by President Aquino on
[December 8, 1986] and defendant PNB executed in favor of
defendant APT a deed of assignment of its rights and interest
on certain corporations, UPSUMCOs debt was included
which indebtedness total[]ed as of June 30, 1987 in the
amount of P2,137,076,433.15. Defendants PNB and APT
jointly executed foreclosure proceedings against the properties
of [UPSUMCO] covered by mortgages and pledges. Prior, on
and after the foreclosure proceedings, defendant PNB paid
Philippine Sugar Corporation out of [UPSUMCOs] funds and
deposits. At the foreclosure sale, on August 27, 1987,
defendant APT was the winning bid [sic] in the amount
of P450,000,000.00. Thus, deducting the amount of the
winning bid, there remained a deficiency balance
ofP1,687,076,433.15. On September 3, 1987, [UPSUMCO]
and defendant APT entered into a Deed of Assignment (Exh.
"K") and [the] term[s] substantially stated that in consideration
of [UPSUMCOs] [sic] waiving its right of redemption,
defendant APT condoned any deficiency amount it may be
entitled from the [UPSUMCO].
In finest terms, before the assignment by defendant PNB of its

rights, interests, [and] collectibles in favor of defendant APT


on February 27, 1987 x x x the role of PNB, was both a
creditor and a depository bank. [UPSUMCO] was a debtor and
a depositor. After the execution of said Deed of Assignment of
February 27, 1987, defendant PNB became an assignor and
maintained its status as a depository bank. [UPSUMCO]
maintained itself as a debtor and a depositor. However, a third
party came in, APT, who was subrogated to the rights of
defendant PNB as a creditor.
As its legal effect, the obligation of [UPSUMCO] with
defendant PNB was novated by the subrogation of creditors,
i.e. defendant APT stepping into the shoes on the creditors
right of defendant PNB. x x x x
[D]efendant PNBs participation in the foreclosure
proceedings did not cause retention of the former as a creditor,
the same being unnecessary. Legally, as the assignee, and
subrogated to the rights of defendant PNB, defendant APT is
considered the only foreclosing creditor. Thus, defendant PNB
being not a foreclosing creditor, cannot claim to any
deficiency claim.
Furthermore, if at all any deficiency claim do exists [sic],
regardless as to whether it is in favor of defendant PNB, or
defendant APT, the same has been absolutely abandoned or
condoned upon the execution of [the] Deed of Assignment
between [UPSUMCO] and APT in its initial pleadings may
have attempted to becloued [sic] the existence and validity of
said Deed of Assignment, [however] in its Memorandum dated
February 18, 1992 (p. 716, Records), [APT] clearly admitted
its validity and existence with the qualification that the same
should not be given retroactive effects [sic] prior to August 27,
1987. But, even admitting in arguendo that either defendant
PNB or defendant APT is entitled to deficiency claim, was the
procedure in perfecting [sic] such claim followed[?] As of the
date of the foreclosure on August 27, 1987, [UPSUMCO] was
a creditor as to its deposits and proceeds of sugar sale with the
defendant PNB. NEITHER defendant PNB nor defendant APT
can[] simply appropriate the things of [UPSUMCO]. (Article
2088, Civil Code of the Philippines). If at all, such deficiency
claim did exist and subsist [sic], [the] foreclosing creditor
should have initiated proper actions to recover the same,
particularly the creditors interest of [UPSUMCO] in the form
of deposits and proceeds of sale with defendant PNB. x x x
Defendant PNB did not have any right, as a debtor, to debit the
interest of its creditor, [UPSUMCO], by the simple
expediency of furnishing [UPSUMCO] of credit memos that
the latters bank deposits have been debited, and credited in
favor of defendant APT.20 (Capitalization in the original)
Respondents separately appealed to, but raised similar claims
in, the Court of Appeals. Respondents took issue with the trial
courts finding that UPSUMCO no longer has any unpaid
obligations. Respondents claimed that the Deed of Assignment
only covered the loans dated 5 November 1974, 24 June 1982,
10 December 1982, and 9 May 1984. Thus, UPSUMCO
remains liable for the other loans not mentioned in the Deed of
Assignment.
The Ruling of the Court of Appeals
In its Decision of 29 February 1996, the Court of Appeals set
aside the trial courts ruling and remanded the case for further
proceedings. The Court of Appeals found merit in
respondents claim that the Deed of Assignment condoned
only some and not all of UPSUMCOs unpaid obligations. At
the same time, the Court of Appeals found that APT failed to

show how much UPSUMCO owes it and to account "for all


the money which had been transferred to its account," thus the
order to remand the case. The Court of Appeals held:
A perusal of the Deed of Assignment plainly shows that what
it expressly condoned was any deficiency which APT, as
assignee of PNBs rights, may be entitled to recover under the
following documents: (1) Credit Agreement dated November
5, 1974 x x x; and (2) the Restructuring Agreements dated:
(a) June 24, 1982, (b)December 10, 1982, and (c) May 9,
1984,
There is no ambiguity in the terms of the Deed of Assignment.
What APT condoned were the obligations covered by the
documents expressly mentioned therein[.] Therefore,
UPSUMCOs assertion that said Deed covered all its other
obligations with PNB and APT is unfounded. The Deed of
Assignment did not in any way include nor mention
UPSUMCOs other obligations with PNB subsequently
transferred to APT covered by the following instruments or
agreements, to wit:
1) Trust Receipts dated August 26, 1987; February 5, 1987;
and July 10, 1987;
2) Deed of Assignment By Way of Payment dated November
16, 1984 x x x;
(3) Two (2) documents of Pledge both dated February 19,
1987;
(4) Sugar Quedans x x x;
(5) Credit Agreements dated February 19, 1987 x x x and
April 29, 1987 x x x [;]
(6) Promissory Notes dated February 20, 1987 x x x; March 2,
1987 x x x; March 3, 1987 x x x; March 27, 1987 x x x; March
30,1987 x x x; April 7, 1987 x x x; May 22, 1987 x x x; and
July 30, 1987 x x x.
xxxx
The provisions [in these instruments] are clear and leave no
room for interpretation the Bank has all the right to apply the
proceeds of UPSUMCOs deposits with it and its affiliated
banks, as well as the proceeds of the sale of UPSUMCOs
sugar and molasses, in satisfaction of UPSUMCOs
obligations. This right was never waived by PNB and was
subsequently transferred to APT by virtue of the Deed of
Transfer executed between them (Exh. MM). Neither did APT
ever waive such right. Thus, the same should be considered as
valid and binding between it and UPSUMCO.
The lower court, in granting [UPSUMCOs] motion for release
of the aforementioned deposits, treated the savings deposits of
UPSUMCO with PNB and the Rural Banks of Bais and
Manjuyod as "ordinary or regular savings accounts." These
accounts however are not ordinary. They were opened because
UPSUMCO was required to do so in compliance with the
mandate of the Credit Agreements x x x. The deposits form
part of the additional securities required of UPSUMCO under
the Credit Agreements for the release of its additional loan.
Consequently, since APT as assignee of PNB enjoyed the
privilege to apply the proceeds therefrom in satisfaction of
UPSUMCOs obligations and had accordingly applied the
same thereto, UPSUMCO cannot validly claim that it still
owns the funds deposited in these accounts.
Significantly, if UPSUMCO truly owned these funds, why did
it need APTs approval to use or disburse the same while it
was acting as caretaker of the mill after the foreclosure? x x x
In view of the foregoing, APT is therefore entitled to have the
funds from UPSUMCOs savings accounts with PNB

Dumaguete and its affiliated banks transferred to its own


account, to the extent of UPSUMCOs remaining obligation,
less the amount condoned in the Deed of Assignment and
the P450,000,000.00 proceeds of the foreclosure. As transferee
of these deposits, APT has the right to use and enjoy these
funds as it deems fit, in furtherance of its role under
Proclamation No. 50. We find nothing irregular either in the
transfer of the proceeds of the sugar sold to APT x x x. As
previously mentioned, the obligations secured by these objects
were not included in the Deed of Assignment and have not
been condoned.
On APTs counterclaim that it is still entitled to recover
deficiency balance from UPSUMCO, it is not clear from the
record how much deficiency balance there is, if any. It is not
disputed that as of June 30, 1987, the total obligation of
UPSUMCO amounted to P2,137,076,433.15. x x x Thereafter,
it applied UPSUMCOs deposits as well as the sugar and
molasses sales to UPSUMCOs remaining obligation.
However, APT failed to present an accounting of
UPSUMCOs entire obligation and the total amount of
payments already made. We could not make an award based
on conjectures. APT has the duty to prove its claims against
UPSUMCO, and the latter is entitled to know how much it
already paid and to which obligations these payments were
applied.
Finally, although the foreclosure yielded
only P450,000,000.00, APT is still duty-bound to render an
accounting for all the money which had been transferred to its
account as well as the proceeds of the sugar and molasses sale.
Only after such accounting has been completed could this
Court decide how much it is still entitled to recover from
UPSUMCO.
Correlatively, before we could decide on whether any balance
remains in favor of UPSUMCO and whether it is entitled to
recover the funds expended for the operation of the mill and
the wages of the mill workers, the aforementioned accounting
should first be completed.21 (Emphasis in the original)
UPSUMCO sought reconsideration but the Court of Appeals
denied its motion in the Resolution of 29 October 1996.
Hence, this petition. UPSUMCO contends that:
(A) THE COURT OF APPEALS SERIOUSLY ERRED IN
ITS FINDINGS AND CONCLUSION THAT EXCEPT FOR
THE P2,137,076,433.15 PAST DUE OR DELINQUENT
ACCOUNTS OF UPSUMCO, COMPUTED AND
DETERMINED AS OF JUNE 30, 1987 WITH THE
CONFORMITY OF UPSUMCO, WHOSE COLLATERALS
WERE EXTRAJUDICIALLY FORECLOSED BY PNB AND
APT, UPSUMCO HAS OTHER UNPAID OBLIGATIONS
TO PNB WHICH IT SUBSEQUENTLY TRANSFERRED TO
APT.
(A-1) AS A SIGNATORY IN THE STATEMENT OF
ACCOUNT-SUMMARY COVERING THE PAST DUE
ACCOUNTS OF UPSUMCO AS OF JUNE 30, 1987 TO PNB
AND PHILSUCOR FOR PURPOSES OF EXTRAJUDICIAL
FORECLOSURE [PNB] KNEW IT WAS FULLY PAID OF
ITS OPERATIONAL LOANS GRANTED ON PER CROP
YEAR BASIS TO UPSUMCO.
(A-2) PNB IS ONLY A NOMINAL PARTY IN THE
EXTRAJUDICIAL FORECLOSURE, AS ATTORNEY-INFACT OF THE PHILIPPINE SUGAR CORPORATION
(PHILSUCOR).
(A-3) KNOWLEDGE OF FOREGOING FACTS

PRECLUDED PNB AND APT FROM ALLEGING IN


THEIR RESPECTIVE PLEADINGS CLAIMS OR
COUNTERCLAIMS CONSTITUTING OTHER UNPAID
OBLIGATIONS OF UPSUMCO TO PNB OR APT --THERE BEING NONE.
(A-4) THE PRE-TRIAL BRIEFS OF PNB AND APT DO
NOT RAISE ANY ISSUE CONCERNING OTHER UNPAID
OBLIGATIONS OF UPSUMCO TO PNB/APT.
(A-5) NO EVIDENCE OF DEMAND WAS MADE BY PNB
AND APT TO ENFORCE COLLECTION OF OTHER
UNPAID OBLIGATIONS ON UPSUMCO, IF TRUE.
(A-6) PNB AND APT ALLOWED UPSUMCO
UNIMPEDED ENJOYMENT OF ITS DEPOSITS AS AN
EXERCISE AND ATTRIBUTE OF OWNERSHIP IN
OTHER BANK BRANCHES OF PNB AFTER THE
EXTRAJUDICIAL FORECLOSURE, AND IN OTHER
BANKS WHERE UPSUMCO HAS BANK DEPOSITS.
ACTS WHICH AMOUNTED TO RELEASE AND
DISCHARGE OF UPSUMCOS OBLIGATIONS TO PNB,
THENCE TO APT.
(A-7) UPSUMCO PAID ITS CREDITORS FROM BANK
DEPOSITS AND SUGAR PROCEEDS MAINTAINED IN
PNB, DUMAGUETE CITY BRANCH WITHOUT PNB
AND/OR APT OBJECTING. ANOTHER EVIDENCE OF
RELEASE OF UPSUMCO FROM ITS REMAINING
OBLIGATIONS TO PNB/APT, IF ANY.
(A-8) OF THE ELIMINATION OF PNBS
REPRESENTATION, THENCE APT, IN THE BOARD OF
UPSUMCO DURING THE REGULAR ELECTION AT A
STOCKHOLDERS MEETING ON NOVEMBER 11, 1987
WAS ANOTHER INDELIBLE EVIDENCE THAT THE
FINDINGS AND CONCLUSION OF THE COURT OF
APPEALS WERE PREMISED ON THE ABSENCE OF
EVIDENCE AND IS CONTRADICTED BY THE
EVIDENCE ON RECORD CONCERNING ITS
ERRONEOUS FINDINGS ON "OTHER UNPAID
OBLIGATIONS OF UPSUMCO.["]
(A-9) PNB COULD NOT HAVE ASSIGNED OR
TRANSFERRED TO APT OTHER LOAN ACCOUNTS OF
UPSUMCO OBTAINED THRU QUEDAN FINANCING,
BEING CURRENT IN STATUS.
(A-10) CREDIT AGREEMENTS DATED FEBRUARY 19,
1987 AND APRIL 29, 1987 AND ALL OTHER
INSTRUMENTS OF INDEBTEDNESS OF UPSUMCO IN
1984 AND 1987 WERE NOT INCLUDED IN THE
FORECLOSED AMOUNT OF P2,137,076,433.15 AND
WERE NEITHER VALIDLY TRANSFERRED OR
ASSIGNED BY PNB TO APT ANYTIME THEREAFTER
BECAUSE OF THE STATUTE OF FRAUD[.]
(A-11) CREDIT AGREEMENTS, PROMISSORY NOTES,
AND TRUST RECEIPTS WERE FORMALLY OFFERED IN
EVIDENCE NOT TO ESTABLISH THE LIABILITY OF
UPSUMCO UNDER SAID INSTRUMENTS, BUT FOR
DIFFERENT PURPOSES.
(B) THE DECISION OF THE COURT OF APPEALS IS
CONTRARY TO THE LAWS ON NOVATION AND
COMPENSATION AND THE SETTLED AND
APPLICABLE DOCTRINES THEREON WHERE THE
TRIAL COURT HAS APTLY AND CORRECTLY APPLIED
IN ITS DECISION DATED APRIL 27, 199[2.]
(B-1) THERE IS NO DEFICIENCY BALANCE
REMAINING THAT UPSUMCO COULD BE HELD

LIABLE TO PAY AS A RESULT OF THE EXECUTION OF


THE DEED OF ASSIGNMENT ON SEPTEMBER 3, 1987.
AND SHOULD THERE BE ANY, PNBS RIGHTS UNDER
SAID CREDIT AGREEMENTS AND OTHER
INSTRUMENTS OF INDEBTEDNESS HAS BECOME
FUNCTUS OFFICIO, THAT COMPENSATION WAS NO
LONGER PROPER.
(B-2) APT IS NOT ENTITLED TO COMPENSATION
OTHERWISE THERE WOULD BE DOUBLE PAYMENT.
(B-3) PNB, AFTER FEBRUARY 27, 1987 COULD NO
LONGER INVOKE COMPENSATION[.]
(C) IN FAILING TO AFFIRM THE LIABILITY OF PNB TO
UPSUMCO WHEN PNB PAID PHILIPPINE SUGAR
CORPORATION (PHILSUCOR) THE TOTAL AMOUNT
OF P41,407,444.75 WITHOUT THE KNOWLEDGE AND
AUTHORITY FROM THE BOARD OF DIRECTORS OF
UPSUMCO.
(D) IN ORDERING THE REMAND OF THE CASE TO THE
LOWER COURT WHEN IT COUL[D] HAVE DECIDED
THE CASE BASED ON THE EVIDENCE ON RECORD.22
In their respective Comments, respondents claim that the
Court should deny the petition outright for raising questions of
fact instead of questions of law. Alternatively, respondents
maintain that the Court of Appeals did not commit any
reversible error.
The Issues
The petition raises the following issues:
(1) Procedurally, whether the petition should be denied
outright for raising factual questions; and
(2) On the merits
(a) Whether UPSUMCO has any outstanding obligations to
respondents, and, in the negative,
(b) Whether UPSUMCO is entitled to all the monetary awards
the trial court ordered respondents to pay.
The Ruling of the Court
The petition has merit. With some modifications, we reinstate
the trial courts ruling.
On Whether the Petition Deserves Outright Denial
Respondents correctly observe that the petition raises
questions of fact instead of questions of law because the issues
call for a determination of the truth or falsity of alleged facts
and not of what the law is on a certain state of
facts.23 However, respondents err in concluding that, for this
reason, the petition deserves outright denial. Although under
Section 1, Rule 45 of the 1997 Rules of Civil Procedure, this
Court will resolve only questions of law in a petition for
review,24 this rule is subject to several exceptions and one of
these is when, as here, the lower courts arrived at conflicting
findings of fact.25 For this reason, we opt to review this case.
UPSUMCO Has No
Unpaid Obligations to Respondents
UPSUMCOs obligations to PNB, and later, to APT, sprang
from two sources (1) the take-off loans to finance the
construction of UPSUMCOs milling plant (e.g. the Credit
Agreement dated 5 November 1974 as re-structured on 24
June 1982, 10 December 1982, and 9 May 1984) and (2) the
operational loans (e.g. Credit Agreements dated 19 February
1987 and 29 April 1987 and the loan under the Deed of
Payment by Way of Assignment). As will be shown shortly,
we find that UPSUMCO no longer owes respondents under
either types of loan.
As of 30 June 1987, PNB placed UPSUMCOs total

"mortgage indebtedness" at P2,137,076,433.15.26 By APTs


own admission27 in its counterclaim, this amount in fact
represents UPSUMCOs total indebtedness to PNB and APT
as of 30 June 1987, thus:
COUNTERCLAIM
19. The total indebtedness of [UPSUMCO] to PNB and
APT as of June 30, 1987 was TWO BILLION ONE
HUNDRED THIRTY SEVEN MILLION SEVENTY SIX
THOUSAND FOUR HUNDRED THIRTY THREE AND
15/100 (P2,137,076,433.15) PESOS, while the assets of
[UPSUMCO] were foreclosed and sold for FOUR HUNDRED
FIFTY MILLION (P450,000.000.00) PESOS[] only thereby
leaving a deficiency balance of ONE BILLION SIX
HUNDRED EIGHTY SEVEN MILLION SEVENTY SIX
THOUSAND FOUR HUNDRED THIRTY THREE AND
15/100 (P1,687,076,433.15) payable by the plaintiff
[UPSUMCO] to the NATIONAL GOVERNMENT[.]
(Capitalization in the original; boldfacing supplied) 28
The parties agree that this total obligation was partially paid
by the proceeds of the foreclosure sale of P450 million,
leaving a deficiency balance of P1,687,076,433.15. It is
respondents claim, which the Court of Appeals sustained, that
a portion of this amount remains unpaid because the Deed of
Assignment only condoned "any deficiency amount [APT]
may be entitled to recover from [UPSUMCO] under the Credit
Agreement dated November 5, 1974 and the Restructuring
Agreements dated June 24 and December 10, 1988, and May
9, 1984." Thus, the appellate court concluded that the Deed of
Assignment could not have condoned UPSUMCOs other
obligations under the Credit Agreements dated 19 February
1987 and 29 April 1987 and their ancillary documents (i.e. the
Pledges, assignment contracts and promissory notes).
This is error.
Contrary to the Court of Appeals ruling, we find that the Deed
of Assignment fully condoned UPSUMCOs deficiency
obligation of P1,687,076,433.15. For clarity in discussion, we
reproduce below the Deed of Assignment, thus:
That United Planter[s] Sugar Milling Co., Inc. (the
"Corporation") (pursuant to a resolution passed by its
board of Directors on September 3, 1987, and confirmed
by the Corporations stockholders in a stockholders
Meeting held on the same (date), for and in consideration of
the Asset Privatization Trust ("APT") condoning any
deficiency amount it may be entitled to recover from the
Corporation under the Credit Agreement dated November 5,
1974 and the Restructuring Agreement[s] dated June 24 and
December 10, 1982, and May 9, 1984, respectively, executed
between the Corporation and the Philippine National Bank
("PNB"), which financial claims have been assigned to APT,
through the National Government, by PNB, hereby
irrevocably sells, assigns and transfer to APT its right to
redeem the foreclosed real properties covered by Transfer
Certificates of Title Nos. T-16700 and T-16701.
IN WITNESS WHEREOF, the Corporation has caused this
instrument to be executed on its behalf by Mr. Joaquin S.
Montenegro, thereunto duly authorized, this 3rd day of
September, 1987.29 (Emphasis supplied)
UPSUMCOs Board Resolution of 3 September 1987,
authorizing its President Joaquin Montenegro ("Montenegro")
to sign the Deed of Assignment, reads in full:
RESOLVED, That in consideration of the Asset
Privatization Trust ("APT") condoning any deficiency

amount it may be entitled to recover from the


Corporation after having foreclosed the real estate and
chattel mortgages assigned to APT, through the National
Government, by the Philippine National Bank ("PNB"), which
mortgages were executed in favor of PNB by the
Corporation to secure its obligationsunder the Credit
Agreement dated November 5, 1974 and the Restructuring
Agreements dated June 24 and December 10, 1982, and
May 9, 1984, respectively, executed by the Corporation and
PNB, the Corporation is hereby authorized to irrevocably sell,
assign, and transfer to APT the Corporations right to redeem
the foreclosed real properties covered by Transfer Certificates
of Title Nos. T-16700 and T-16701;
RESOLVED, Further that Mr. Joaquin S. Montenegro, the
President-Director of the Corporation, be and is hereby
authorized for and in behalf of the Corporation to make, sign,
execute and/or deliver any and all such agreements,
undertakings, or other documents, as well as to perform any
and all such acts as may be necessary to implement the
foregoing resolution;
RESOLVED, FINALLY That all actions taken by Mr. Joaquin
S. Montenegro pursuant to the foregoing resolution be, and the
same are hereby confirmed and ratified to be binding on this
Corporation.30 (Emphasis supplied)
Taken together, these two documents support UPSUMCOs
claim that, as stated in its Resolution of 3 September 1987,
APT condoned "any deficiency amount it may be entitled to
recover x x x after [foreclosing the mortgages securing] the
obligations under the Credit Agreement dated November 5,
1974 and the Restructuring Agreements dated June 24 and
December 10, 1982, and May 9, 1984." Indeed, the Deed of
Assignment should not be treated in isolation but considered
in the larger context of the APT initiated "friendly foreclosure"
of UPSUMCOs mortgaged assets.
During the trial, it was disclosed that APT offered UPSUMCO
the following incentives for the latter to agree to the expedited
foreclosure (to enable APT to quickly dispose of the
mortgaged properties, as it did sell them to URSUMCO less
than a month after the Deed of Assignments signing): (1) a
5% "preference" or mark-up on UPSUMCOs bid price in the
auction sale of the foreclosed properties, or, should
UPSUMCO lose in the bidding, a cash payment equivalent to
5% of the winning bid; (2) the waiver of the solidary
obligation of UPSUMCOs Directors; and (3) the condonation
of any deficiency from the foreclosure sale.31 APT made good
on its word by releasing UPSUMCOs Directors from their
solidary liability, executing the Deed of Assignment, and
paying UPSUMCO P25 million in April 1988 (representing
5% of URSUMCOs P500 million winning bid).32 Thus, we
find unconvincing APTs claim here that the Deed of
Assignment condoned only a portion of UPSUMCOs
deficiency obligation. Significantly, UPSUMCO and APTs
actuations after the signing of the Deed of Assignment are
consistent with a full condonation of the formers deficiency
liability APT never demanded payment from UPSUMCO
and UPSUMCO carried out its affairs as a debt-free
corporation.33
Further, the question of whether APT fully condoned
UPSUMCOs deficiency obligation had been judicially settled.
In United Planters and Sugar Milling Corporation, Inc. v.
Philippine Sugar Corporation("PHILSUCOR Case"),
UPSUMCO sued PHILSUCOR also in the Regional Trial

Court of Bais City, Branch 45, for "Release and Discharge of


Obligation with Damages" to recover, as in this case, a sum of
money PNB paid to PHILSUCOR after the foreclosure on 27
August 1987. In its Decision dated 7 March 1994 in Civil
Case No. 63-B, the trial court ruled for UPSUMCO, holding
that since PHILSUCOR appointed PNB as its foreclosing
agent for its proportionate lien in UPSUMCOs mortgaged
assets, PHILSUCOR is bound by PNBs assignment of credit
to the Government/APT and by APTs subsequent
condonation of UPSUMCOs deficiency liability. The trial
court held:
Defendant [PHILSUCOR] ha[d] notice of the friendly
foreclosure conducted by APT and PNB. x x x x [UPSUMCO]
was made to believe that the proceedings were with the
participation of APT, PNB and the defendant
[PHILSUCOR]. [UPSUMCO], due to the conduct of the
defendant [PHILSUCOR], and the other parties, PNB and
APT[,] was made to believe that when it assigned its right
of redemption, it was in consideration of the condonation
of deficiency claims against it including that which
pertains to the defendant [PHILSUCOR].
xxxx
The doctrine of estoppel x x x, precludes [a party] from
repudiating an obligation voluntarily assumed after its having
accepted benefits therefrom. x x x x
Under the aforesaid principle of estoppel, defendant
[PHILSUCOR] in the case at bar, after having made
[UPSUMCO] believed [sic] in good faith that the
foreclosure proceedings, including[] a part of it, i.e.
condonation of deficiency claims against plaintiff, and
after having benefited from such conduct, [cannot]
undertake an inconsistent claim subsequently and proceed
with its concealed intention to collect deficiency claim
against [UPSUMCO].
In fact, according to Atty. Buag, defendant [PHILSUCOR]
did not make any reservation to claim for deficiency after
having received its share of the auction sale in the amount
of P58 million from APT. x x x However, defendant
[PHILSUCOR] left the matter of deficiency balance to APT. x
x x But, what happened was that APT condoned said
deficiency claim against [UPSUMCO]. x x x x
WHEREFORE, premises considered, this Court renders the
following judgment:
On Civil Case No. 63-B
1. [UPSUMCO] is hereby ordered released and discharged
from any and all claims that the defendant [PHILSUCOR]
may have against the former;
x x x x34
(Underlining in the original; boldfacing supplied)
PHILSUCOR appealed to the Court of Appeals but that court
affirmed the trial courts ruling in its Decision35dated 15
October 1997 in CA G.R. CV No. 46957, the dispositive
portion of which provides:
WHEREFORE, the decision appealed from is AFFIRMED
with the MODIFICATION that the defendant-appellant, the
PHILIPPINE SUGAR CORPORATION[,] is held liable to
plaintiff-appellant, the UNITED PLANTERS SUGAR
MILLING [COMPANY], INC., for attorneys fees in the
amount equivalent to ten percent (10%) of the award for
compensatory damages allowed by the court below.36
PHILSUCOR further appealed to this Court but we dismissed
its petition outright in the Resolution of 30 March 1998 in

G.R. No. 132731.1wphi1 This ruling became final on 6


August 1998. The doctrine of stare decisis provides that a
conclusion reached in one case should, for the sake of
certainty, be applied to those which follow, if the facts are
substantially the same, even though the parties may be
different.37 Accordingly, we apply the conclusion in the
PHILSUCOR Case here.
Indeed, for us to rule that UPSUMCO still owes respondents,
nothing less than concrete and uncontested proof of
UPSUMCOs unpaid obligations suffices. Absent such proof,
and respondents presented none, we see no reason to remand
this case to the trial court to compute UPSUMCOs supposed
unpaid obligations, the existence of which is left to inference.
PNB and/or APTs Right to Set-Off
UPSUMCO Funds Ended on 26 August 1987
Aside from wiping-out all of UPSUMCOs deficiency
obligation, the Deed of Assignment also ended any right PNB
and/or APT had to set-off UPSUMCO funds.38 Although
UPSUMCO and APT signed the Deed of Assignment on 3
September 1987, we hold that its effectivity should properly
retroact to the date of the foreclosure on 27 August 1987
considering that the Deed of Assignment was part of the APTsponsored "friendly foreclosure" of UPSUMCOs assets,
entailing UPSUMCOs waiver of its redemption right. Hence,
the cut-off date for PNB and/or APT to set-off UPSUMCO
funds was 26 August 1987. From 27 August 1987 onwards, all
UPSUMCO funds under the control or possession of
respondents belonged wholly to UPSUMCO. What PNB did
here was (1) pay PHILSUCORs deficiency claim against
UPSUMCO; (2) transfer to APTs account, upon the latters
request, UPSUMCOs bank deposits in PNB Dumaguete; (3)
transfer to APT, through credit memos, the proceeds of the
sale of UPSUMCO sugar; and (4) appropriate the bank deposit
in UPSUMCOs account in PNB Escolta on or after 27 August
1987. Similarly, Santos, as APT comptroller, withdrew funds
from UPSUMCOs bank accounts in the Rural Banks of Bais
City and Manjuyod and deposited them to APTs bank account
in PNB Dumaguete on and after 27 August 1987, respectively.
On the Monetary Awards UPSUMCO is Entitled
Accordingly, we affirm the trial courts ruling ordering PNB
and/or APT to pay UPSUMCO (1) the credit balance in
UPSUMCOs savings accounts in PNB Dumaguete, PNB
Escolta, and the Rural Banks of Bais City and Manjuyod,
Negros Oriental; (2) the deposits from UPSUMCOs savings
accounts in PNB Dumaguete PNB transferred to APT; (3) the
proceeds from the sale of UPSUMCO sugar from 27 August
1987 onwards which PNB credited to APT; and (4) the
amounts paid to PHILSUCOR. UPSUMCO did not include in
its Complaint the last item because it could not have done so,
having discovered the documentary evidence on this matter
only during the course of the trial after the trial court allowed
the examination of PNBs books. However, we agree with the
trial court that such falls under UPSUMCOs prayer in its
Amended Complaint for the payment of the proceeds of
"sugar [PNB] sold and/or liquidated" after the foreclosure on
27 August 1987 as PNB paid PHILSUCOR using funds taken
from such sale.39
For the other items awarded to UPSUMCO, the following
modifications are in order:
(1) On the trial courts order for APT to pay the cost for the
milling plants maintenance and operating expenses,
ordinarily, the mortgagor retains ownership of the foreclosed

property during the redemption period,40 and thus remains


liable for the maintenance expenses. However, in the present
case, UPSUMCO waived its redemption right. This had the
effect of consolidating ownership over the foreclosed
properties to APT effective 27 August 1987, the date of
foreclosure. APTs ownership continued until it sold the
milling plant to URSUMCO on 29 December 1987. Thus,
APT is liable for the milling plants maintenance and
operating expenses only from 27 August 1987 to 29 December
1987.1wphi1
During the trial, UPSUMCO showed that it paid for the
maintenance and operating expenses from 3 September 1987
to "January 1988." UPSUMCO thus waived presenting
evidence on the expenses from 27 August 1987 to 3
September 1987. On the other hand, the expenses incurred
after 29 December 1987 cannot be charged to APT. Hence, in
the execution of this judgment, the trial court is ordered to
recompute the amount chargeable to APT covering the period
3 September 1987 to 29 December 1987 only. This does not
entail reception of new evidence but only a mathematical
computation to proportionately reduce the amount payable
taking into account the shortened period;41
(2) On the award of exemplary damages, we also find this
appropriate to set an example to creditor banks and their
assignees not to trifle with the funds of their depositors or
debtors, as the case may be.42However, since exemplary
damages cannot be awarded by itself but must be given in
addition to moral, temperate, or actual damages, none of
which the trial court awarded,43 we further order respondents
to jointly and severally pay UPSUMCO nominal damages in
the amount of P100,000. This is but proper as respondents
clearly violated UPSUMCOs right to enjoy and have control
over its deposited funds and the proceeds of the sale of its
sugar produce;44
(3) The award of attorneys fees is also in order because
UPSUMCO had to incur expenses to protect its interest and of
the award of exemplary damages.45 However, we reduce the
award to P500,000 for which respondents are solidarily liable.
If the trial courts order requiring respondents to pay 20%
attorneys fees on each of the obligations respondents are held
liable singly and solidarily (apparently the rate agreed between
UPSUMCO and its counsel), UPSUMCO stands to
receive P26,217,744.698, excluding interest and the adjusted
amount for the maintenance expenses. This, by any measure,
is exorbitant. Under the circumstances, we find the amount
of P500,000 as attorneys fees to be more appropriate;46
(4) On the payment of interest, the 12% rate the trial court
imposed applies only when the obligation breached consists in
the payment of a sum of money i.e. forbearance of money, in
the absence of a stipulation. Otherwise the applicable rate is
6% per annum.47 Thus, except for UPSUMCOs bank deposits
in (1) PNB Dumaguete and Escolta and (2) the Rural Banks of
Bais City and Manjuyod, which being forbearance in money,
are subject to interest rates of 10%48 and 12%49 per annum,
respectively, the interest rate on all the other monetary awards
to UPSUMCO should be reduced to 6% per annum. Upon the
finality of this ruling, the rate of interest shall be 12% per
annum for the entire judgment, until its satisfaction.50
WHEREFORE, we GRANT the petition. We SET
ASIDE the Decision dated 29 February 1996 and the
Resolution dated 29 October 1996 of the Court of Appeals.
We REINSTATE the Decision dated 27 April 1992 of the

Regional Trial Court of Bais City, Branch 45, with the


following MODIFICATIONS:
(1) APT, now the Privatization Management Office ("PMO"),
is ORDERED to pay UPSUMCO the maintenance and
operating expenses of the milling plant incurred from 3
September 1987 to 29 December 1987 only;
(2) PNB and APT, now the PMO, are ORDERED to jointly
and severally pay UPSUMCO nominal damages in the amount
of P100,000;
(3) PNB and APT, now the PMO, are ORDERED to jointly
and severally pay UPSUMCO attorneys fees in the amount
of P500,000; and
(4) The interest rates for the monetary awards relating to
UPSUMCOs bank accounts in (a) PNB Dumaguete and
Escolta Branches and (b) the Rural Banks of Bais City and
Manjuyod are 10% and 12%per annum, respectively,
computed from 13 March 1987. All the other monetary awards
due to UPSUMCO shall earn interest at 6% per annum also
computed from 13 March 1987. Upon the finality of this
ruling, the rate of interest for the entire judgment shall be 12%
per annum until its payment.
SO ORDERED.
***

He denied having represented that he will not foreclose


the mortgage as long as the Petitioner-spouses pay
interest.

Lower courts ruled in favour of Respondent. Thus, this


petition.

Issue:
Whether or not the 6% monthly interest is unconscionable?
Ruling:
Yes. The SC ruled that this is unconscionable.

While the Usury Law ceiling on interest rates was lifted


by C.B. Circular No. 905, nothing in the said circular
grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets.

In Medel v. Court of Appeals, the Court decreed that the


5.5% interest or 66% per annum was not usurious but
held that the same must be equitably reduced for being
iniquitous, unconscionable and exorbitant , and hence,
contrary to morals (contra bonos mores), if not against
the law.

In the case at bench, Petitioner-spouses stand on a worse


situation. They are required to pay the stipulated interest
rate of 6% per month or 72% per annum which is
definitely outrageous and inordinate.

Hence, the interest rate must be reduced equitably. An


interest of 12% per annum is deemed fair and reasonable.

Solangon vs Salazar
G.R. No. 125944

June 29, 2001

Facts:

Petitioner-spouses executed 3 real estate mortgages on a


parcel of land situated in Bulacan, in favor of the same
Respondent Salazar to secure payment of loans of P60 K,
P136 K and P230 K payable within 4 months, 1 year, and
4 months in that order, with 6% monthly interest on the
first loan, and legal interests on the others.

This action was initiated by the Petitioner-spouses to


prevent the foreclosure of the mortgaged property.

They alleged that they obtained only one loan from the
Respondent which was the P60 K secured by the first
mortgage. Also, Petitioner-spouses opined that the 6%
monthly interest was unconscionable.

The subsequent mortgages were merely continuations of


the first one, which is null and void.

Moreover, the Respondent assured them that he will not


foreclose the mortgage as long as they pay the stipulated
interest upon maturity or within a reasonable time
thereafter. Petitioner-spouses substantially paid the loans
with interest but were unable to pay it in full.

On the other hand, the Respondent claimed that the


mortgages were executed to secure 3 separate loans of
and that the first two loans were paid, but the last one was
not.

***
AUTOWORLD SALES CORPORATION, and PIO
BARRETTO REALTY DEVELOPMENT
CORPORATION,respondents.
FACTS:
Petitioner Investors Finance Corporation, then
known also as FNCB Finance (now doing business
under the name of Citytrust Finance Corporation),
is a financing company doing business with
private respondent Autoworld Sales Corporation
(AUTOWORLD) since 1975. Anthony Que,
president of AUTOWORLD, also held the same
position at its affiliate corporation, private
respondent Pio Barretto Realty Corporation
(BARRETTO).
Sometime in August 1980 Anthony Que, in behalf
of AUTOWORLD, applied for a direct loan with

FNCB. However, since the Usury Law imposed an


interest rate ceiling at that time, FNCB informed
Anthony Que that it was not engaged in direct
lending; consequently, AUTOWORLD's request for
loan was denied.
But sometime thereafter, FNCB's Assistant Vice
President, Mr. Leoncio Araullo, informed Anthony
Que that although it could not grant direct loans
it could extend funds to AUTOWORLD by
purchasing any of its outstanding receivables at a
discount. After a series of negotiations the parties
agreed to execute an Installment Paper Purchase
("IPP") transaction to enable AUTOWORLD to
acquire the additional capital it needed. The
mechanics of the proposed "IPP" transaction was

(1) First, Pio Barretto (BARRETTO) would


execute a Contract to Sell a parcel of land
in
favor
of
AUTOWORLD
for
P12,999,999.60 payable in sixty (60) equal
monthly installments of P216,666.66.
Consequently, BARRETTO would acquire
P12,999,999.60 worth of receivables from
AUTOWORLD;
(2) FNCB would then purchase the
receivables worth P12,999,999.60 from
BARRETTO at a discounted value of
P6,980,000.00 subject to the condition
that such amount would be "flowed back"
to AUTOWORLD;
(3) BARRETTO, would in turn, execute a
Deed of Assignment (in favor of FNCB)
obliging
AUTOWORLD
to
pay
the
installments
of
the
P12,999,999.60
purchase price directly to FNCB; and
(4) Lastly, to secure the payment of the
receivables
under
the
Deed
of
Assignment, BARRETTO would mortgage
the property subject of the sale to FNCB.
On
17
November
1980
FNCB
informed
AUTOWORLD that its Executive Committee
approved the proposed "IPP" transaction. The
lawyers of FNCB then drafted the contracts
needed and furnished Anthony Que with copies
thereof.
On 9 February 1981 the parties signed three (3)
contracts to implement the "IPP" transaction:
(1) Contract to Sell whereby BARRETTO
sold a parcel of land to AUTOWORLD,
situated in San Miguel, Manila, together
with the improvements thereon, covered
by TCT No. 129763 for the price of

P12,999,999.60 payable in sixty (60)


consecutive
and
equal
monthly
installments of P216,666.66.
(2)
Deed
of
Assignment
whereby
BARRETTO assigned and sold in favor of
FNCB all its rights, title and interest to all
the money and other receivables due from
AUTOWORLD under the Contract to Sell,
subject to the condition that the assignee
(FNCB) has the right of recourse against
the assignor (BARRETTO) in the event that
the payor (AUTOWORLD) defaulted in the
payment of its obligations.
(3) Real Estate Mortgage whereby
BARRETTO, as assignor, mortgaged the
property subject of the Contract to Sell to
FNCB as security for payment of its
obligation under the Deed of Assignment.
After the three (3) contracts were concluded
AUTOWORLD started paying the monthly
installments to FNCB.
On 18 June 1982 AUTOWORLD transacted with
FNCB for the second time obtaining a loan of
P3,000,000.00 with an effective interest rate of
28% per annum. AUTOWORLD and BARRETTO, as
co-makers, then signed a promissory note in
favor of FNCB worth P5,604,480.00 payable in
sixty (60) consecutive monthly installments of
P93,408.00. To secure the promissory note,
AUTOWORLD mortgaged a parcel of land located
in Sampaloc, Manila, to FNCB. Thereafter,
AUTOWORLD began paying the installments.
In December 1982, after paying nineteen (19)
monthly installments of P216,666.66 on the first
transaction ("IPP" worth P6,980,000.00) and three
(3) monthly installments of P93,408.00 on the
second transaction (loan worth P3,000,000.00),
AUTOWORLD advised FNCB that it intended to
preterminate the two (2) transactions by paying
their outstanding balances in full. It then
requested FNCB to provide a computation of the
remaining balances. FNCB sent AUTOWORLD its
computation requiring it to pay a total amount of
P10,026,736.78, where P6,784,551.24 was the
amount to settle the first transaction while
P3,242,165.54 was the amount to settle the
second transaction.
On 20 December 1982 AUTOWORLD wrote FNCB
that it disagreed with the latter's computation of
its outstanding balances. On 27 December 1982
FNCB replied that it would only be willing to
reconcile
its
accounting
records
with
AUTOWORLD upon payment of the amounts
demanded. Thus,
despite
its
objections,

AUTOWORLD
reluctantly
paid
P10,026,736.78 through its UCPB account.

FNCB

On 5 January 1983 AUTOWORLD asked FNCB for a


refund of its overpayments in the total amount of
P3,082,021.84. According to AUTOWORLD, it
overpaid P2,586,035.44 to settle the first
transaction and P418,262.00 to settle the second
transaction.
The parties attempted to reconcile their
accounting
figures
but
the
subsequent
negotiations broke down prompting AUTOWORLD
to file an action before the Regional Trial Court of
Makati to annul the Contract to Sell, the Deed of
Assignment and the Real Estate Mortgage all
dated 9 February 1981. It likewise prayed for the
nullification of thePromissory Note dated 18 June
1982 and the Real Estate Mortgage dated 24 June
1982.
In its complaint, AUTOWORLD alleged that the
aforementioned contracts were only perfected to
facilitate a usurious loan and therefore should be
annulled
FNCB argued that the contracts dated 9 February
1981 were not executed to hide a usurious loan.
Instead, the parties entered into a legitimate
Installment Paper Purchase ("IPP") transaction, or
purchase of receivables at a discount, which
FNCB could legally engage in as a financing
company. With regard to the second transaction,
the existence of a usurious interest rate had no
bearing on the P3,000,000.00 loan since at the
time it was perfected on 18 January 1982 Central
Bank Circular No. 871 dated 21 July 1981 had
effectively lifted the ceiling rates for loans having
a period of more than three hundred sixty-five
(365) days.
On 11 July 1988 the Regional Trial Court of Makati
ruled in favor of FNCB declaring that the parties
voluntarily and knowingly executed a legitimate
"IPP"
transaction
or
the
discounting
of
receivables. AUTOWORLD was not entitled to any
reimbursement since it was unable to prove the
existence of a usurious loan.
The Court of Appeals modified the decision of the
trial court and concluded that the "IPP"
transaction, comprising of the three (3) contracts
perfected on 9 February 1981, was merely a
scheme employed by the parties to disguise a
usurious loan. It ordered the annulment of the
contracts and required FNCB to reimburse
AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate. However,
with regard to the second transaction, the
appellate court ruled that at the time it was

executed the ceiling rates imposed by the Usury


Law had already been lifted thus allowing the
parties to stipulate any rate of interest.
ISSUE:
We stress at the outset that this petition concerns
itself only with the first transaction involving the
alleged' "IPP" worth P6,980,000.00, which was
implemented through the three (3) contracts of 9
February 1981. As to the second transaction,
which involves the P3,000,000.00 loan, we agree
with the appellate court that it was executed
when the ceiling rates of interest had already
been removed, hence the parties were free to fix
any interest rate.
The pivotal issue therefore is whether the three
(3) contracts all dated 9 February 1981 were
executed to implement a legitimate Installment
Paper Purchase ("IPP") transaction or merely to
conceal a usurious loan.
HELD:
The three (3) contracts were executed to conceal
a usurious loan.
Generally, the courts only need to rely on the
face of written contracts to determine the
intention of the parties. "However, the law will
not permit a usurious loan to hide itself behind a
legal form. Parol evidence is admissible to show
that a written document though legal in form was
in fact a device to cover usury. If from a
construction of the whole transaction it becomes
apparent that there exists a corrupt intention to
violate the Usury Law, the courts should and will
permit no scheme, however ingenious, to becloud
the crime of usury." The following circumstances
show that such scheme was indeed employed:
First, petitioner claims that it was never a party
to the Contract to Sell between AUTOWORLD and
BARRETTO. As far as it was concerned, it merely
purchased receivables at a discount from
BARRETTO as evidenced by the Deed of
Assignment dated 9 February 1981. Whether
the Contract to Sell was fictitious or not would
have no effect on its right to claim the
receivables of BARRETTO from AUTOWORLD since
the two contracts were entirely separate and
distinct from each other.
Curiously however, petitioner admitted that its
lawyers were the ones who drafted all the three
(3) contracts involved which were executed on
the same day. Also, petitioner was the one who
procured the services of the Asian Appraisal
Company to determine the fair market value of

the land to be sold way back in September of


1980 or six (6) months prior to the sale. If it were
true that petitioner was never privy to
the Contract to Sell, then why was it interested in
appraising the lot six (6) months prior to the sale?
And why did petitioner's own lawyers prepare the
Contract to Sell? Obviously, petitioner actively
participated in the sale to ensure that the
appraised lot would serve as adequate collateral
for the usurious loan it gave to AUTOWORLD.
Second, petitioner insists that the 9 February
1981 transaction was a legitimate "IPP"
transaction where it only bought the receivables
of BARRETTO from AUTOWORLD amounting to
P12,999,999.60 at a discounted price of
P6,980,000.00. However, per instruction of
petitioner in its letter to BARRETTO dated 17
November 1980 the whole purchase price of the
receivables was to be "flowed back" to
AUTOWORLD. And in its subsequent letter of 24
February 1981 petitioner also gave instructions
on how BARRETTO should apply the proceeds
worth P6,980,000.00.
It can be seen that out of the nine (9) items of
appropriation stated (in the letter), Item Nos. 2-8
had to be returned to petitioner. Thus, in
compliance with the aforesaid letter, BARRETTO
had to yield P4,058,468.47 of the P6,980,000.00
to petitioner to settle some of AUTOWORLD's
previous debts to it. Any remaining amount after
the application of the proceeds would then be
surrendered to AUTOWORLD in compliance with
the letter of 17 November 1980; none went to
BARRETTO.
The foregoing circumstances confirm that the
P6,980,000.00 was really an indirect loan
extended to AUTOWORLD so that it could settle
its previous debts to petitioner. Had petitioner
entered into a legitimate purchase of receivables,
then BARRETTO, as seller, would have received
the whole purchase price, and free to dispose of
such proceeds in any manner it wanted. It would
not have been obliged to follow the "Application
of Proceeds" stated in petitioner's letter.
Third, in its 17 November 1980 letter to
BARRETTO, petitioner itself designated the
proceeds of the "IPP" transaction as a "loan." In
that letter, petitioner stated that the "loan
proceeds" amounting to P6,980,000.00 would be
released to BARRETTO only upon submission of
the documents it required. And as previously
mentioned, one of the required documents was a
letter agreement between BARRETTO and
AUTOWORLD stipulating that the P6,980,000.00
should be "flowed back" to AUTOWORLD. If it
were a genuine "IPP" transaction then petitioner

would not have designated the money to be


released as "loan proceeds" and BARRETTO would
have been the end recipient of such proceeds
with no obligation to turn them over to
AUTOWORLD.
Fourth, after the interest rate ceilings were lifted
on 21 July 1981 petitioner extended on 18 June
1982 a direct loan of P3,000,000.00 to
AUTOWORLD. This time however, with no more
ceiling rates to hinder it, petitioner imposed a
28% effective interest rate on the loan. And no
longer having a need to cloak the exorbitant
interest rate, the promissory note evidencing the
second transaction glaringly bore the 28%
interest rate on its face. We are therefore of the
impression that had there been no interest rate
ceilings in 1981, petitioner would not have
resorted to the fictitious "IPP" transaction;
instead, it would have directly loaned the money
to AUTOWORLD with an interest rate higher than
12%.
Thus, although the three (3) contracts seemingly
show at face value that petitioner only entered
into a legitimate discounting of receivables, the
circumstances cited prove that the P6,980,000.00
was really a usurious loan extended to
AUTOWORLD.
Petitioner anchors its defense on Sec. 7 of the
Usury Law which states
Provided, finally, That nothing herein
contained shall be construed to prevent
the purchase by an innocent purchaser of
a negotiable mercantile paper, usurious or
otherwise, for valuable consideration
before maturity, when there has been no
intention on the part of said purchaser to
evade the provisions of the Act and said
purchase was not a part of the original
usurious transaction. In any case however,
the maker of said note shall have the right
to recover from said original holder the
whole interest paid by him thereon and, in
any case of litigation, also the costs and
such attorney's fees as may be allowed by
the court.
Indeed, the Usury Law recognizes the legitimate
purchase of negotiable mercantile paper by
innocent purchasers. But even the law has
anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the
law itself made a qualification. It would recognize
legitimate purchase of negotiable mercantile
paper, whether usurious or otherwise, only if the
purchaser had no intention of evading the
provisions of the Usury Law and that the

purchase was not a part of the original usurious


transaction. Otherwise, the law would not
hesitate to annul such contracts. Thus, Art. 1957
of the Civil Code provides
Contracts and stipulations, under any
cloak or device whatever, intended to
circumvent the laws on usury shall be
void. The borrower may recover in
accordance with the laws on usury.
In the case at bar, the attending factors
surrounding the execution of the three (3)
contracts on 9 February 1981 clearly establish
that the parties intended to transact a usurious
loan. These contracts should therefore be
declared void. Having declared the transaction
between the parties as void, we are now tasked
to
determine
how
much
reimbursement
AUTOWORLD is entitled to. The Court of Appeals,
adopting the computation of AUTOWORLD in its
plaintiff-appellant's brief, ruled
According to plaintiff-appellant, defendantappellee
was
able
to
collect
P3,921,217.78 in interests from appellant.
This is not denied by the appellee.
Computed at 12% the effective interest
should have been P1,545,400.00. Hence,
appellant
may
recover
P2,586,035.44, representing overpayment
arising from usurious interest rate charged
by appellee.
While we do not dispute the appellate court's
finding that the first transaction was a usurious
loan, we do not agree with the amount of
reimbursement awarded to AUTOWORLD. Indeed,
it erred in awarding only the interest paid in
excess of the 12% ceiling. In usurious loans, the
creditor can always recover the principal
debt. However, the stipulation on the interest is
considered void thus allowing the debtor to claim
the whole interest paid. In a loan of P1,000.00
with interest at 20% per annum or P200.00 per
year, if the borrower pays P200.00, the whole
P200.00 would be considered usurious interest,
not just the portion thereof in excess of the
interest allowed by law.
In the instant case, AUTOWORLD obtained a loan
of P6,980,000.00. Thereafter, it paid nineteen
(19) consecutive installments of P216,666.66
amounting to a total of P4,116,666.54, and
further paid a balance of P6,784,551.24 to settle
it. All in all, it paid the aggregate amount of
P10,901,217.78 for a debt of P6,980,000.00. For
the 23-month period of the existence of the loan
covering the period February 1981 to January
1982, AUTOWORLD paid a total of P3,921,217.78

in interests. Applying the 12% interest ceiling rate


mandated by the Usury Law, AUTOWORLD should
have only paid a total of P1,605,400.00 in
interests. Hence, AUTOWORLD is entitled to
recover the whole usurious interest amounting to
P3,921,217.78.
***
DEPOSIT
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.
Nature of the Case: Petition for Review on
Certiorari
Facts:
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
wherein 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 2
certificates of titles thereto 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 Aguirre, and the Pugaos then
rented Safety Deposit Box No. 1448 of private
respondent Security Bank and Trust Company. For
this purpose, both signed a contract of lease
which contains these conditions: (1) The bank is
not a depositary of the contents of the safe and it
has neither the possession nor control of the
same and (2) The bank has no interest
whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no
liability in connection therewith.
Two (2) renter's keys were given to the renters
one to Aguirre 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.
On 4 October 1979, Aguirre, accompanied by the
Pugaos, then proceeded to the Bank 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, on on 1 September 1980, the petitioner
filed a complaint for damages against the
respondent Bank with the Court of First Instance
(now RTC) of Pasig.
Bank alleged that the petitioner has no cause of
action because of paragraphs 13 and 14 of the
contract of lease in which 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 and
attorney's fees of P20,000.00. Petitioner
subsequently filed an answer to the counterclaim.
RTC decision: Dismissed. Bank has no liability
for the loss of the certificates of title as provided
in the lease contract. Then, a Motion for
Reconsideration was filed by the plaintiff but was
denied.
Petitioner appealed to CA stating that: The trial
court erred in (a) absolving the respondent Bank
from liability (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 (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.
CA decision: Affirmed RTC decision. The contract
they executed is in the nature of a contract of
lease governed by Art. 1643 of NCC stating that:
clearly, 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." 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: 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.
SC: In this petition, petitioner avers that CA and
RTC: (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.
Petitioner maintains that regardless of
nomenclature, the contract for the rent of the
safety deposit box is actually a contract of
deposit and averred that Bank is liable for the
loss of the certificates of title pursuant to Article
1972 of NCC:
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.
Petitioner then quotes a passage from American
Jurisprudence: 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
Also, petitioner argues that the conditions 13 and
14 of the questioned contract are contrary to law
and public policy and should be declared null and
void.
Issue:
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?


Held:
The petition is partly meritorious.
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, Sc did
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 NCC on deposit; the
contract in the case at bar is a special kind of
deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643
because the full and absolute possession and
control of the safety deposit box was not given to
the joint renters 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.
The deposit theory itself does not altogether find
unanimous support even in American
jurisprudence. 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. 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, safedeposit 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.
Our laws which authorize banking institutions to rent out
safety deposit boxes in which 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. A contract of deposit may be entered
into orally or in writing and 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. For responsibility for the safekeeping,


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. In the absence of any stipulation
prescribing the degree of diligence required, that of a good
father of a family is to be observed. 27 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.
Conditions 13 and 14 are null and void being inconsistent with
the respondent Bank's responsibility as a depositary under
Section 72(a) of the General Banking Act.
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.
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.
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.
Decision is hereby AFFIRMED and the instant
Petition for Review is otherwise DENIED for lack of
merit.
***
G.R. Nos. L-26948 and L-26949

October 8, 1927
SILVESTRA BARON, plaintiff-appellant,
vs.PABLO DAVID, defendant-appellant. And
GUILLERMO BARON, plaintiff-appellant,
vs.PABLO DAVID, defendant-appellant.
FACTS:
-

soon after the institution of the action. In the


same cross-action the defendant also sought
compensation for damages incident to the
shutting down of the defendant's rice mill for the
period of 170 days during which the abovementioned attachment was in force. The trial
judge disallowed these claims for damages,
and from this feature of the decision the
defendant appealed.
SC: Five distinct appeals in this record.

The defendant owns a rice mill, which was


well patronized by the rice growers of the
vicinity.

On January 17, 1921, a fire occurred that


destroyed the mill and its contents, and it
was some time before the mill could be
rebuilt and put in operation again.

Silvestra Baron (Plaintiff 1) and Guillermo


Baron (Plaintiff 2) each filed an action for
the recovery of the value of palay from the
defendant (D), alleged that:
o

The palay have been sold by both


plaintiffs to the D in the year 1920

Palay was delivered to D at his


special request, with a promise of
compensation at the highest price
per cavan

First Case: Silvestra Baron is plaintiff, the


court gave judgment for her to recover of the
defendant the sum of P5,238.51, with costs. From
this judgment both the plaintiff and the
defendant appealed.
Second Case: Guillermo Baron, is plaintiff,
the court gave judgment for him to recover of the
defendant the sum of P5,734.60, with costs, from
which judgment both the plaintiff and the
defendant also appealed. The defendant
interposed a counterclaim in which he asked
credit for the sum of P2,800 which he had
advanced to the plaintiff Guillermo Baron on
various occasions. This credit was admitted by
the plaintiff and allowed by the trial court. But the
defendant also interposed a cross-action against
Guillermo Baron in which the defendant claimed
compensation for damages alleged to have Ben
suffered by him by reason of the alleged
malicious and false statements made by the
plaintiff against the defendant in suing out an
attachment against the defendant's property

D claims that the palay was deposited


subject to future withdrawal by the
depositors or to some future sale, which
was never effected. D also contended that
in order for the plaintiffs to recover, it is
necessary that they should be able to
establish that the plaintiffs' palay was
delivered in the character of a sale, and
that if, on the contrary, the defendant
should prove that the delivery was made
in the character of deposit, the defendant
should be absolved.

ISSUE: WoN there was deposit


SC: NO
-

Art. 1978. When the depositary has


permission to use the thing deposited, the
contract loses the concept of a deposit
and becomes a loan or commodatum,
except where safekeeping is still the
principal purpose of the contract. The
permission shall not be presumed, and its
existence must be proved.

Palay in question was place by the


plaintiffs in the defendant's mill with the
understanding that the defendant was at
liberty to convert it into rice and dispose
of it at his pleasure. The defendant admits
that the plaintiffs' palay was mixed with
that of others. All of the plaintiffs' palay,
which was put in before June 1, 1920,
been milled and disposed of long prior to
the fire of January 17, 1921. Furthermore,
the proof shows that when the fire
occurred there could not have been more
than about 360 cavans of palay in the mill,
none of which by any reasonable
probability could have been any part of
the palay delivered by the plaintiffs.
Considering the fact that the defendant
had thus milled and doubtless sold the
plaintiffs' palay prior to the date of the

fire, it result that he is bound to account


for its value, and his liability was not
extinguished by the occurence of the fire.
-

The case does not depend precisely upon


this
explicit
alternative;
for
even
supposing that the palay may have been
delivered in the character of deposit,
subject to future sale or withdrawal at
plaintiffs' election, nevertheless if it was
understood that the defendant might mill
the palay and he has in fact appropriated
it to his own use, he is of course bound to
account for its value.
Under article 1768 of the Civil Code, when
the depository has permission to make use
of the thing deposited, the contract loses
the character of mere deposit and
becomes a loan or a commodatum; and of
course by appropriating the thing, the
bailee becomes responsible for its value.
In this connection we wholly reject the
defendant's pretense that the palay
delivered by the plaintiffs or any part of it
was actually consumed in the fire of
January, 1921. Nor is the liability of the
defendant in any wise affected by the
circumstance that, by a custom prevailing
among rice millers in this country, persons
placing palay with them without special
agreement as to price are at liberty to
withdraw it later, proper allowance being
made for storage and shrinkage, a thing
that is sometimes done, though rarely.

***
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.
>On October 13, 1966 and December 12, 1966, Manuel
Serrano and Concepcion Maneja made time deposits with the
Overseas Bank of Manila.
Manuel Serrano = 150k for 1 year with 6% interest.
Concepcion MAneja = 200k for 1 year with 6.5%
interest.
>On August 31, 1968, Maneja assigned and conveyed her time
deposit of 200k to Serrano.
>Overseas Bank of Manila did not honor a single demand for
encashment of the above time deposits made from December
6, 1967 up to March 4, 1968.

>Petitioner filed a 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.
>In its defense, the respondent Central Bank:
1. 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.
2: The Monetary Board through its resolution 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.
3. denies that it is guarantor of the permanent solvency of any
banking institution as claimed by petitioner. In the years 19661967, there were no findings to declare the respondent
Overseas Bank of Manila as insolvent.
4. denies 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.
5. 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.
>Previous SC rulings have rendered decisons on cases with
similar facts, to wit:
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. L29352, 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.
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.
>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.
Issues
1. WON a constructive trust was formed or 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 thus making Central Bank jointly and
severally liable with respondent Overseas Bank of Manila.
2. WON actions for mandamus and prohibiton are proper in
claims of this nature.
Held:
1.No.
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.
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 the respondent Bank
to honor the time deposit is failure to pay his obligation as
a debtor and not a breach of trust arising from
depositary's failure to return the subject matter of the
deposit. (Main doctrine of this case)
2. No. 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.
WHEREFORE, the petition is dismissed for lack of merit,
with costs against petitioner
***
DE LOS SANTOS vs TAN KHEY
O.G.No.26695-R, July 30, 1962
Facts:
Tan Khey was the owner of International Hotel
located in Iloilo city. Romeo de los Santos lodged in Tna
Kheys hotel. After arrival, he left the hotel, depositing his
revolver and his bag with the person in charge in the hotel.
When he returned to the hotel, he took his revolver and his bag
from the person in charge in the hotel and proceeded to his
room. He locked the door before sleeping.
When he woke up, he discovered that the door in his
room was opened and his bag and pants, wherein he placed his
revolver , was missing. He reported the matter to the Assistant
Manager of the hotel, who in turn informed Tan Khey.
A secret service agent was sent to investigate and it
was found that the wall of the room occupied by De los Santos
was only seven feet high with an open space above through
which one could enter from outside. De los Santos told the
detective that he lost his revolver.
Tan Khey disclaimed liability because De los Santos
did not deposit his properties with the manager despite a
notice to that effect was posted in the hotel.
Tan Khey contended that to be liable under Article
1998 of the Civil Code, the following conditions must concur:

1.
2.
3.

Deposit of effects by travellers in hotel or inn


Notice given to hotel keepers or employees of
the effects brought by guests
Guest or travellers take the precautions which
said hotel keepers or their substitutes advised
relative to the care and vigilance of their effects.

Issue: Whether the hotel owner should be held liable for the
loss of the effects of the guest?
Rulng:
The Court ruled that the hotel owner should be liable
for the loss of the revolver, pants and bag of the guest.
Deposit
While the law speaks of deposit of effects by
travellers in hotels or inns, personal receipt by the innkeeper
for safe keeping of effects is not necessaily meant thereby. The
reason therefor is the fact that it is the nature of business of an
innkeeper to provide not only lodging for travellers but also to
security to their persons and effects. The secuity mentioned is
not confined to the effects actually delivered to the innkeeper
but also to all effects placed within the premises of the hotel.
This is because innkeepers by the neture of their business,
have supervision and controlof their inns and the premises
threof.
It is not necessary that the effect was actually
delivered but it is enough that they are within the inn. If a
guest and goods are within the inn, that is sufficient to charge
him.
The owner of a hotel may exonerate himself from
liability by showing that the guest has taken exclusive control
of his own goods, but this must be exclusive custody and
control of a guest, and must not be held under the supervision
and care of the innkeeper,ey are kept in a room assigned to a
guest or the other proper depository in the house.
In this case, the guest deposited his effects in the
hotel because they are in his room and within the premises of
the hotel, and therefore, within the supervision and control of
the hotel owner.
Notice
The Court ruled that there was no doubt that the
person in charge had knowledge of his revolver, the bag, and
pants of the guest, De los Santos.
The requirement of notice being evidently for the
purpose of closing the door to fraudulent claims for nonexistent articles, the lack thereof was fatal to De los Santos
claim for reparation for the loss of his eyeglass, ring, and cash.
Precautions
While an innkeeper cannot free himself from
responsibility by posting notices, there can be no doubt of the
innkeepers right to make such regulations in the management
of his inn as will more effectually secure the property of his
guest and operate as protection to himself, and that it is
incumbent upon the guest, if he means to hold the inkeeper ho
his responsibility, to comply with any regulation that is just
and reasonable, when he is requested to do so.
However, in this case, the notice requiring actual
deposit of the effects with the manager was an unreasonable
regulation. It was unreasonable to require the guest to deposit
his bag ,pants and revolver to the manager. De los Santos had
exercised the necessary diligence with respect to the care and
vigilance of his effects.

YHT Realty Corporation, Erlinda Lainez And Anicia Payam,


Petitioners, Vs. The Court Of Appeals And Maurice
Mcloughlin, Respondents.
FACTS:
On 30 October 1987, Private Respondent Maurice
McLoughlin, a businessman-philanthropist, arrived from
Australia and registered with Tropicana Copacabana
Apartment Hotel, owned and operated by YHT Realty
Corporation. He rented a safety deposit box as it was his
practice to rent a safety deposit box every time he registered at
Tropicana in previous trips.
The safety deposit box could only be opened through the use
of two keys, one of which is given to the registered guest, and
the other remaining in the possession of the management of
the hotel. Lainez and Payam had custody of the keys for the
safety deposit boxes of Tropicana.
McLoughlin allegedly placed the following in his safety
deposit box: Fifteen Thousand US Dollars (US$15,000.00)
which he placed in two envelopes; Ten Thousand Australian
Dollars (AUS$10,000.00) which he also placed in another
envelope; letters and credit cards;
bankbooks; and a
checkbook.
When he went abroad, some of his money and jewelry were
missing from the deposit box.
When McLoughlin discovered the loss, he immediately
confronted Lainez and Payam who admitted that Tan opened
the safety deposit box with the key assigned to him.
McLoughlin went up to his room where Tan was staying and
confronted her. Tan admitted that she had stolen
McLoughlins key and was able to open the safety deposit box
with the assistance of Lopez, Payam and Lainez. Lopez also
told McLoughlin that Tan stole the key assigned to
McLoughlin while the latter was asleep.
Lopez requested Tan to sign a promissory note which the latter
did and Lopez also signed as a witness. Despite the execution
of promissory note by Tan, McLoughlin insisted that it must
be the hotel who must assume responsibility for the loss he
suffered. However, Lopez refused to accept the responsibility
relying on the conditions for renting the safety deposit box
entitled Undertaking For the Use Of Safety Deposit Box,
paragraphs (2) and (4) thereof, to wit:
2.
To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any
loss in the contents and/or use of the said deposit box for any
cause whatsoever, including but not limited to the presentation
or use thereof by any other person should the key be lost;
4.
To return the key and execute the RELEASE in favor of
TROPICANA APARTMENT HOTEL upon giving up the use
of the box.
RTC: In favor of McLoughlin. Defendants acted with gross
negligence in the performance and exercise of their duties and
obligations as innkeepers and were therefore liable to answer
for the losses incurred by McLoughlin.
RTC also ruled that the Undertaking For The Use Of Safety
Deposit Box are not valid for being contrary to the express
mandate of Article 2003 of the New Civil Code and against
public policy.
CA affirmed but modified amount of damages
ISSUE: Whether a hotel may evade liability for the loss of
items left with it for safekeeping by its guests, by having these
guests execute written waivers holding the establishment or its

employees free from blame for such loss


HELD: NO. Petition is devoid of merit
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an
expression of public policy precisely to apply to situations
such as that presented in this case. The hotel business like the
common carriers business is imbued with public interest.
Catering to the public, hotelkeepers are bound to provide not
only lodging for hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the
public to be negated or diluted by any contrary stipulation in
so-called undertakings that ordinarily appear in prepared
forms imposed by hotel keepers on guests for their signature.
Paragraphs (2) and (4) of the undertaking manifestly
contravene Article 2003 of the New Civil Code for they allow
Tropicana to be released from liability arising from any loss in
the contents and/or use of the safety deposit box for any cause
whatsoever. Evidently, the undertaking was intended to bar
any claim against Tropicana for any loss of the contents of the
safety deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is explicit
that the responsibility of the hotel-keeper shall extend to loss
of, or injury to, the personal property of the guests even if
caused by servants or employees of the keepers of hotels or
inns as well as by strangers, except as it may proceed from
any force majeure. It is the loss through force majeure that
may spare the hotel-keeper from liability. In the case at bar,
there is no showing that the act of the thief or robber was done
with the use of arms or through an irresistible force to qualify
the same as force majeure
Petitioners anchor their defense on Article
2002 which exempts the hotel-keeper from
liability if the loss is due to the acts of his guest,
his family, or visitors. Even a cursory reading of
the provision would lead us to reject petitioners
contention. The justification they raise would
render nugatory the public interest sought to be
protected by the provision.
What if the
negligence of the employer or its employees
facilitated the consummation of a crime
committed by the registered guests relatives or
visitor? Should the law exculpate the hotel from
liability since the loss was due to the act of the
visitor of the registered guest of the hotel?
Hence, this provision presupposes that the hotelkeeper is not guilty of concurrent negligence or
has not contributed in any degree to the
occurrence of the loss. A depositary is not
responsible for the loss of goods by theft, unless
his actionable negligence contributes to the loss.
In the case at bar, the responsibility of
securing the safety deposit box was shared not
only by the guest himself but also by the

management since two keys are necessary to


open the safety deposit box. Without the
assistance of hotel employees, the loss would not
have occurred. Thus, Tropicana was guilty of
concurrent negligence in allowing Tan, who was
not the registered guest, to open the safety
deposit box of McLoughlin, even assuming that
the latter was also guilty of negligence in allowing
another person to use his key. To rule otherwise
would result in undermining the safety of the
safety deposit boxes in hotels for the
management will be given imprimatur to allow
any person, under the pretense of being a family
member or a visitor of the guest, to have access
to the safety deposit box without fear of any
liability that will attach thereafter in case such
person turns out to be a complete stranger. This
will allow the hotel to evade responsibility for any
liability incurred by its employees in conspiracy
with the guests relatives and visitors.

***
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I.
MARTIN, and TERESITA SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B.
FLAMINIANO, ASST. CITY FISCAL FELIZARDO
N. LOTA and CLEMENT DAVID, respondents.
FACTS: This is a petition for prohibition and injunction with a
prayer for the immediate issuance of restraining order and/or
writ of preliminary injunction filed by petitioners, the instant
petition seeks to prohibit public respondents from proceeding
with the preliminary investigation, in which petitioners were
charged by private respondent Clement David, with estafa and
violation of Central Bank Circular No. 364 and related
regulations regarding foreign exchange transactions
principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private
respondent's principal witness and the evidence through said
witness, showed that petitioners' obligation is civil in nature.
Private respondent David filed a complaint with the Office of
the City Fiscal of Manila charging petitioners with estafa and
violation of Central Bank Circular No. 364 and related Central
Bank regulations on foreign exchange transactions. Private
respondent David, together with his sister, Denise Kuhne,
invested with the Nation Savings and Loan Association the
sum of P1,145,546.20 on time deposits covered by Bankers
Acceptances and Certificates of Time Deposits and the sum of
P13,531.94 on savings account deposits covered by passbook
nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16,
roc.). It appears further that private respondent David, together
with his sister, made investments in the aforesaid bank in the
amount of US$75,000.00. When the bank was placed under
receivership, petitioners Guingona and Martin, upon the
request of private respondent David, assumed the obligation of
the bank to private respondent David by executing on June 17,

1981 a joint promissory note in favor of private respondent


acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00. This promissory note was based on the
statement of account as of June 30, 1981 prepared by the
private respondent. The amount of indebtedness assumed
appears to be bigger than the original claim because of the
added interest and the inclusion of other deposits of private
respondent's sister in the amount of P116,613.20. Petitioners
Guingona and Martin agreed to divide the said indebtedness,
and petitioner Guingona executed another promissory note
antedated to June 17, 1981 whereby he personally
acknowledged an indebtedness of P668,307.01 (1/2 of
P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in
favor of private respondent. The promissory notes were
executed as a result of deposits made by Clement David and
Denise Kuhne with the Nation Savings and Loan Association.
ISSUE: Whether public respondents acted without jurisdiction
when they investigated the charges (estafa and violation of CB
Circular No. 364 and related regulations regarding foreign
exchange transactions) subject matter of I.S. No. 81-31938.
RULING: Public respondents have no jurisdiction over the
charge of estafa. When private respondent David invested his
money on nine. and savings deposits with the aforesaid bank,
the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of
the New Civil Code provides that:
Article 1980. Fixed, savings, and current deposits
of-money in banks and similar institutions shall be
governed by the provisions concerning simple
loan.
Hence, the relationship between the private respondent and the
Nation Savings and Loan Association is that of creditor
and debtor; consequently, the ownership of the amount
deposited was transmitted to the Bank upon the perfection of
the contract and it can make use of the amount deposited for
its banking operations, such as to pay interests on deposits and
to pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the
failure of the Bank to return the amount deposited will not
constitute estafa through misappropriation punishable under
Article 315, par. l(b) of the Revised Penal Code, but it will
only give rise to civil liability over which the public
respondents have no- jurisdiction.
In order that a person can be convicted under the
above-quoted provision, it must be proven that
he has the obligation to deliver or return the
some money, goods or personal property that he
received Petitioners had no such obligation to
return the same money, i.e., the bills or coins,
which they received from private respondents.
This is so because as clearly as stated in criminal
complaints, the related civil complaints and the
supporting sworn statements, the sums of money
that petitioners received were loans.
The nature of simple loan is defined in Articles
1933 and 1953 of the Civil Code.
"Art. 1933. - By the contract of loan, one of the

parties delivers to another, either something not


consumable so that the latter may use the same
for a certain time- and return it, in which case the
contract is called a commodatum; or money
or other consumable thing, upon the condition
that the same amount of the same kind and
quality shall he paid in which case the contract is
simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a
stipulation to pay interest.
"In commodatum the bailor retains the ownership
of the thing loaned while in simple loan,
ownership passes to the borrower.
"Art. 1953. - A person who receives a loan of
money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and
quality."
It can be readily noted from the above-quoted
provisions that in simple loan (mutuum), as
contrasted to commodatum the borrower
acquires ownership of the money, goods or
personal property borrowed Being the owner, the
borrower can dispose of the thing borrowed
(Article 248, Civil Code) and his act will not be
considered misappropriation thereof' (Yam vs.
Malik, 94 SCRA 30, 34 [1979]; Emphasis
supplied).
But even granting that the failure of the bank to
pay the time and savings deposits of private
respondent David would constitute a violation of
paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability
was deemed avoided, because when the
aforesaid bank was placed under receivership by
the Central Bank, petitioners Guingona and
Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the
novation of the original contractual obligation
arising from deposit into a contract of loan and
converting the original trust relation between the
bank and private respondent David into an
ordinary debtor-creditor relation between the
petitioners
and
private
respondent.
Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the
deposits of private respondent would not
constitute a breach of trust but would merely be
a failure to pay the obligation as a debtor.cha

***
DURBAN APARTMENTS CORPORATION, doing

business under the name and style of City Garden Hotel


(petitioner) versus -PIONEER INSURANCE AND
SURETY CORPORATION(respondent), Jan. 12, 2011
Nature of the Case: Petition for review of the Decision of CA
which affirmed the decision of the RTC holding petitioner
Durban Apartments Corp solely liable to respondent Pioneer
Insurance and Surety Corp for the loss of Jeffrey Sees
vehicle.
Facts:
On April 30, 2002, See arrived and checked in at the City
Garden Hotel before midnight, and its parking attendant,
Justimbaste got the key to said Vitara from See to park it.
On May 1, 2002, at about 1:00 am, See received a phone call
where the Hotel Chief Security Officer informed him that his
Vitara was carnapped while it was parked unattended at the
parking area of Equitable PCI Bank . They reported the
incident to the police wherein Hotel Security Officer, Ernesto
T. Horlador, Jr. and Justimbaste were investigated.
PISC paid the P1,163,250.00 money claim of See and
mortgagee ABN AMRO Savings Bank, Inc. as indemnity for
the loss of the Vitara.
The Vitara was lost due to the negligence of Durban
Apartments and Justimbaste because it was discovered during
the investigation that this was the second time that a similar
incident of carnapping happened in the valet parking service
and no necessary precautions were taken to prevent its
repetition. Durban Apartments was wanting in due diligence in
the selection and supervision of its employees particularly
defendant Justimbaste. Both failed and refused to pay its valid,
just, and lawful claim despite written demands.
July 22, 2003, Pioneer Insurance and Surety Corp (PISC) , by
right of subrogation, filed with the RTC of Makati a
Complaint for Recovery of Damages against Durban
Apartments Corp ( or City Garden Hotel) and defendant
before the RTC, Vicente Justimbaste. Respondent averred that
it is the insurer for loss and damage of Jeffrey S. Sees 2001
Suzuki Grand Vitara in the amount of P1,175,000.00.
Answer and Counterclaim of Justimbaste and Durban
Apartments: See did not check in at its hotel and he was just
only a guest of Ching Montero. Justimbaste did not get the
ignition key of Sees Vitara, on the contrary, it was See who
requested a parking attendant to park the Vitara at any
available parking space within Sees view, while he and
Montero were waiting in front of the hotel. Valet parking
service provided by the hotel is a special privilege and it does
not include responsibility for any losses or damages to motor
vehicles and its accessories in the parking area. Also, the
carnapper was able to open the Vitara without using the key
given earlier to the parking attendant.
During pre-trial, counsel of record of Durban Apartments and
Justimbaste was absent instead, a certain Atty. Nestor Mejia
appeared but was not able to submit their pre-trial brief.
See testified that: He and Montero checked in at the said hotel.
Justimbaste approached and asked for his ignition key, told
him that the latter would park the car, and issued him a valet
parking customers claim stub. After the incident, he filed his
claim with Pioneer Insurance, and a representative of the
latter, who is also an adjuster of Vesper Insurance AdjustersAppraisers [Vesper], investigated the incident; and Pioneer
Insurance required him to sign a Release of Claim and
Subrogation Receipt, and finally paid him the sum
of P1,163,250.00 for his claim.

Ricardo F. Red testified that: He is a claims evaluator of


Pioneer Insurance tasked with the receipt and investigation of
claims and documents from the insured. Durban Apartments
and Justimbaste did not pay Pioneer Insurance
notwithstanding their receipt of the demand letters.
RTC decision: Ordered Durban Apartments Corporation to pay
Pioneer Insurance the sum of P1,163,250.00 with legal interest
thereon from July 22, 2003 until the obligation is fully paid
and attorneys fees and litigation expenses amounting
to P120,000.00.
CA decision: Affirmed RTC decision
Thus, this petition in the SC.
Issues:
1.
Whether the lower courts erred in declaring
petitioner as in default for failure to appear at the pre-trial
conference and to file a pre-trial brief ;No, (Not relevant to our
class)
2.
Corollary thereto, whether the trial court correctly
allowed respondent to present evidence ex-parte; No (Not
relevant)
3.
Whether petitioner is liable to respondent for
attorneys fees in the amount of P120,000.00; Yes (Not
relevant)
4.
Whether petitioner is liable to respondent for
the loss of Sees vehicle.
In this case, respondent substantiated the allegations in
its complaint that a contract of necessary deposit existed
between the insured See and petitioner.
Article 1962, in relation to Article 1998, of the Civil
Code defines a contract of deposit and a necessary deposit
made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
Art. 1998. The deposit of effects made by travelers in
hotels or inns shall also be regarded as necessary. The keepers
of hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees,
of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or
their substitutes advised relative to the care and vigilance of
their effects.
Plainly, from the facts found by the lower courts, the
insured See deposited his vehicle for safekeeping with
petitioner, through the latters employee, Justimbaste. In turn,
Justimbaste issued a claim stub to See. Thus, the contract of
deposit was perfected from Sees delivery, when he handed
over to Justimbaste the keys to his vehicle, which Justimbaste
received with the obligation of safely keeping and returning it.
Ultimately, petitioner is liable for the loss of Sees vehicle.
Petition is DENIED. CA Decision AFFIRMED with
the MODIFICATION that the award of attorneys fees is
reduced to P60,000.00.
***
GUARANTY AND SURETYSHIP
G.R. No. 34642
September 24, 1931
FABIOLA SEVERINO, accompanied by her

husband RICARDO VERGARA, plaintiffsappellees,


vs.
GUILLERMO SEVERINO, ET AL., defendants.
ENRIQUE ECHAUS, appellant.
Facts of the Case:
Plaintiff Fabiola Severino is the recognized natural
daughter of Melecio Severino. Upon the death of
Melecio, he left considerable property and
litigation ensued between his widow, Felicitas
Villanueva, and Fabiola Severino, on the one part,
and other heirs of the deceased on the other part.
To end litigation, they entered into a compromise
where Guillermo, a son of Melecio Severino, took
over the property pertaining to the estate of his
father at the same time agreeing to pay P100,000
to Felicitas and Fabiola. The sum of money was
made payable first P40,000 in cash upon the
execution of the document of compromise, and
the balance in three several payments of P20,000
each at the end of three years. Enrique Echaus
affixed his name as guarantor.
The first payment of P40,000 was made and of
this amount the plaintiff Fabiola received the sum
of P10,000. Of the remaining P60,000, all as yet
unpaid, Fabiola Severino is entitled to the sum of
P20,000.
(However, at the time of the compromise
agreement, Fabiola had not yet been judicially
recognized as the natural daughter of Melecio
Severino. It was stipulated that the last P20,000
corresponding to Fabiola and the last P5,000
corresponding to Felicitas Villanueva should
retained on deposit until the definite status of
Fabiola Severino as natural daughter of Melecio
Severino should be established. The money which
was contemplated to be held in suspense has
never in fact been paid to the parties entitled
thereto.) In short, upon failure to pay the balance,
plaintiff filed an action against the defendant and
Echaus.
Action filed at CFI: Recovery of P20,000 from
Guillermo Severino and Enrique Echaus(guarantor
of Severino)
CFI ILOILO: Decision: In favor of plaintiffs;
execution of this judgment should issue first
against the property of Guillermo Severino, and if
no property should be found belonging to said
defendant sufficient to satisfy the judgment in
whole or in part, execution for the remainder
should be issued against the property of Enrique
Echaus as guarantor
Echaus appealed but his principal, Guillermo

Severino, did not.


On appeal, Echaus asserts that he received
nothing for affixing his signature as guarantor to
the contract which is the subject of suit and that
in effect the contract was lacking in consideration
as to him.
Issue: WON the contract of guaranty was lacking
in consideration.
Held: No. A guarantor or surety is bound by the
same consideration that makes the contract
effective between the principal parties thereto.
The compromise and dismissal of a lawsuit
is recognized in law as a valuable
consideration; and the dismissal of the action
which Felicitas Villanueva and Fabiola Severino
had instituted against Guillermo Severino was an
adequate consideration to support the promise on
the part of Guillermo Severino to pay the sum of
money stipulated in the contract which is the
subject of this action. The promise of the
appellant Echaus as guarantor therefore binding.
It is never necessary that the guarantor or
surety should receive any part of the
benefit, if such there be, accruing to his
principal. But the true consideration of this
contract was the detriment suffered by the
plaintiffs in the former action in dismissing that
proceeding, and it is immaterial that no benefit
may have accrued either to the principal or his
guarantor.

***
Piczon vs Piczon 61 SCRA 67
G.R. No. L-29139 November 15, 1974
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, plaintiffs-appellants,
vs.
ESTEBAN PICZON and SOSING-LOBOS & CO., INC.,
defendants-appellees.
Appeal from the decision of the Court of First Instance of
Samar in its Civil Case No. 5156, entitled Consuelo P. Piczon,
et al. vs. Esteban Piczon, et al., sentencing defendantsappellees, Sosing Lobos and Co., Inc., as principal, and
Esteban Piczon, as guarantor, to pay plaintiffs-appellants "the
sum of P12,500.00 with 12% interest from August 6, 1964
until said principal amount of P12,500.00 shall have been duly
paid, and the costs."
After issues were joined and at the end of the pre-trial held on
August 22, 1967, the trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and

defendants through their lawyers, appeared and entered into


the following agreement:
1. That defendants admit the due execution of Annexes "A"
and "B" of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc.
binds itself to the plaintiffs for P12,500.00, the same to be paid
on or before October 31, 1967 together with the interest that
this court may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00
commence to run from August 6, 1964 when plaintiffs made
the first demand or from August 29, 1956 when the obligation
becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a
surety?
That the parties are hereby required to file their respective
memorandum if they so desire on or before September 15,
1967 to discuss the legal issues and therewith the case will be
considered submitted for decision.
WHEREFORE, the instant case is hereby considered
submitted based on the aforesaid facts agreed upon and upon
submission of the parties of their respective memorandum on
or before September 15, 1967.
SO ORDERED. 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino,
and resident of and with postal address in the municipality of
Catbalogan, Province of Samar, Philippines, in my capacity as
the President of the corporation known as the "SOSINGLOBOS and CO., INC.," as controlling stockholder, and at the
same time as guarantor for the same, do by these presents
contract a loan of Twelve Thousand Five Hundred Pesos
(P12,500.00), Philippine Currency, the receipt of which is
hereby acknowledged, from the "Piczon and Co., Inc." another
corporation, the main offices of the two corporations being in
Catbalogan, Samar, for which I undertake, bind and agree to
use the loan as surety cash deposit for registration with the
Securities and Exchange Commission of the incorporation
papers relative to the "Sosing-Lobos and Co., Inc.," and to
return or pay the same amount with Twelve Per Cent (12%)
interest per annum, commencing from the date of execution
hereof, to the "Piczon and Co., Inc., as soon as the said
incorporation papers are duly registered and the Certificate of
Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in
Catbalogan, Samar, Philippines, this 28th day of September,
1956.

(Sgd.) ESTEBAN PICZON


(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor
aforequoted, appellants assign the following alleged errors:
I
THE TRIAL COURT ERRED IN ORDERING THE
PAYMENT OF 12% INTEREST ON THE PRINCIPAL OF
P12,500.00 FROM AUGUST 6, 1964, ONLY, INSTEAD OF
FROM SEPTEMBER 28, 1956, WHEN ANNEX "A" WAS
DULY EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING
DEFENDANT ESTEBAN PICZON AS GUARANTOR
ONLY AND NOT AS SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING
DAMAGES IN FAVOR OF THE PLAINTIFFSAPPELLANTS. (Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of
requiring appellees to pay interest at 12% only from August 6,
1964, the trial court should have adhered to the terms of the
agreement which plainly provides that Esteban Piczon had
obligated Sosing-Lobos and Co., Inc. and himself to "return or
pay (to Piczon and Co., Inc.) the same amount (P12,500.00)
with Twelve Per Cent (12%) interest per annum commencing
from the date of the execution hereof", Annex A, which was
on September 28, 1956. Under Article 2209 of the Civil Code
"(i)f 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." In the case
at bar, the "interest agreed upon" by the parties in Annex A
was to commence from the execution of said document.
Appellees' contention that the reference in Article 2209 to
delay incurred by the debtor which can serve as the basis for
liability for interest is to that defined in Article 1169 of the
Civil Code reading thus:
Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or (3)

When demand would be useless, as when the obligor has


rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the moment
one of the parties fulfills his obligation, delay by the other
begins.
is untenable. In Quiroz vs. Tan Guinlay , 5 Phil. 675, it was
held that the article cited by appellees (which was Article 1100
of the Old Civil Code read in relation to Art. 1101) is
applicable only when the obligation is to do something other
than the payment of money. And in Firestone Tire & Rubber
Co. (P.I.) vs. Delgado , 104 Phil. 920, the Court squarely ruled
that if the contract stipulates from what time interest will be
counted, said stipulated time controls, and, therefore interest is
payable from such time, and not from the date of the filing of
the complaint (at p. 925). Were that not the law, there would
be no basis for the provision of Article 2212 of the Civil Code
providing that "(I)nterest due shall earn legal interest from the
time it is judicially demanded, although the obligation may be
silent upon this point." Incidentally, appellants would have
been entitled to the benefit of this article, had they not failed to
plead the same in their complaint. Their prayer for it in their
brief is much too late. Appellees had no opportunity to meet
the issue squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose
cannot be sustained. Under the terms of the contract, Annex A,
Esteban Piczon expressly bound himself only as guarantor,
and there are no circumstances in the record from which it can
be deduced that his liability could be that of a surety. A
guaranty must be express, (Article 2055, Civil Code) and it
would be violative of the law to consider a party to be bound
as a surety when the very word used in the agreement is
"guarantor."
Moreover, as well pointed out in appellees' brief, under the
terms of the pre-trial order, appellants accepted the express
assumption of liability by Sosing-Lobos & Co., Inc. for the
payment of the obligation in question, thereby modifying their
original posture that inasmuch as that corporation did not exist
yet at the time of the agreement, Piczon necessarily must have
bound himself as insurer.
As already explained earlier, appellants' prayer for payment of
legal interest upon interest due from the filing of the complaint
can no longer be entertained, the same not having been made
an issue in the pleadings in the court below. We do not believe
that such a substantial matter can be deemed included in a
general prayer for "any other relief just and equitable in the
premises", especially when, as in this case, the pre-trial order
does not mention it in the enumeration of the issues to be
resolved by the court.
PREMISES CONSIDERED, the judgment of the trial court is
modified so as to make appellees liable for the stipulated
interest of 12% per annum from September 28, 1956, instead
of August 6, 1964. In all other respects, said judgment is
affirmed. Costs against appellees.

Fernando (Chairman), Antonio, Fernandez and Aquino, JJ.,


concur.
***
RIZAL
COMMERCIAL
BANKING
CORPORATION, petitioner,
vs.
HON. JOSE P. ARRO, Judge of the Court of First instance
of Davao, and RESIDORO CHUA,respondents.
Petition for certiorari to annul the orders of respondent judge
dated October 6, 1978 and November 7, 1978 in Civil Case
No. 11-154 of the Court of First Instance of Davao, which
granted the motion filed by private respondent to dismiss the
complaint of petitioner for a sum of money, on the ground that
the complaint states no cause of action as against private
respondent.
Petitioner then requested it to be treated as a petition for
review.
Facts
On Oct 19, 1976, Residoro Chua and Enrique Go, Sr. executed
a comprehensive surety agrrements.
The purpose of which is to guaranty among others, any
existing indebtedness of Davao Agricultural Industries
Corporation and/or induce the bank at any time or from time
to time thereafter, to make loans or advances or to extend
credit in other manner to, or at the request, or for the account
of the Borrower, either with or without security, and/or to
purchase on discount, or to make any loans or advances
evidenced or secured by any notes, bills, receivables, drafts,
acceptances, checks or other evidences of indebtedness (all
hereinafter called "instruments") upon which the Borrower is
or may become liable, provided that the liability shall not
exceed at any one time the aggregate principal sum of
P100,000.00.
On April 29,1977, a promissory note in the amount of
100,000.00 was issued for petitioner payable on June 13,1977.
It was signed by Enrique Go,Sr. in behalf of Daicor.
The promissory note was not paid despite repeated demands.
On June 30,1978, petitioner filed a complaint for a sum of
money against Daicor, Enrique Go and Residora Chua.
A motion to dismiss dated September 23, 1978 was filed by
respondent Residoro Chua on the ground that the complaint
states no cause of action as against him. 5 It was alleged in the
motion that he can not be held liable under the promissory
note because it was only Enrique Go, Sr. who signed the same
in behalf of Daicor and in his own personal capacity.
In an opposition dated September 26, 1978 6 petitioner alleged
that by virtue of the execution of the comprehensive surety
agreement, private respondent is liable because said agreement
covers not merely the promissory note subject of the
complaint, but is continuing; and it encompasses every other
indebtedness the Borrower may, from time to time incur with
petitioner bank.
CFI Davao dismissed the complaint. MR denied.
The sole issue resolved by respondent court was the
interpretation of the comprehensive surety agreement,
particularly in reference to the indebtedness evidenced by the
promissory note involved in the instant case, said
comprehensive surety agreement having been signed by
Enrique Go, Sr. and private respondent, binding themselves as

solidary debtors of said corporation not only to existing


obligations but to future ones. Respondent court said that
corollary to that agreement must be another instrument
evidencing the obligation in a form of a promissory note or
any other evidence of indebtedness without which the said
agreement serves no purpose; that since the promissory notes,
which is primarily the basis of the cause of action of
petitioner, is not signed by private respondent, the latter can
not be liable thereon.
Issue :
whether private respondent is liable to pay the obligation
evidence by the promissory note dated April 29,1977 which he
did not sign, in the light of the provisions of the
comprehensive surety agreement which petitioner and private
respondent had earlier executed on October 19, 1976.
Held. Yes, respondent is liable pay the obligation.
The comprehensive surety agreement was jointly executed by
Residoro Chua and Enrique Go, Sr., President and General
Manager, respectively of Daicor, on October 19, 1976 to cover
existing as well as future obligations which Daicor may incur
with the petitioner bank, subject only to the proviso that their
liability shall not exceed at any one time the aggregate
principal sum of P100,000.00.
The comprehensive surety agreement was admittedly in full
force and effect. The loan was, therefore, covered by the said
agreement, and private respondent, even if he did not sign the
promisory note, is liable by virtue of the surety agreement.
The only condition that would make him liable thereunder is
that the Borrower "is or may become liable as maker,
endorser, acceptor or otherwise". There is no doubt that Daicor
is liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique
Go, Sr. and private respondent, is an accessory obligation, it
being dependent upon a principal one which, in this case is the
loan obtained by Daicor as evidenced by a promissory note.
What obviously induced petitioner bank to grant the loan was
the surety agreement whereby Go and Chua bound themselves
solidarily to guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can be clearly seen
that the surety agreement was executed to guarantee future
debts which Daicor may incur with petitioner, as is legally
allowable under the Civil Code. Thus
Article 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there can
be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.
In view of the foregoing, the decision (which should have
been a mere "order"), dismissing the complaint is reversed and
set side. The case is remanded to the court of origin with
instructions to set aside the motion to dismiss, and to require
defendant Residoro Chua to answer the complaint after which
the case shall proceed as provided by the Rules of Court. No
costs.
SO ORDERED.
***
PNB vs Luzon Surety
Nature: Petitioner PNB seeks a review and reversal of the
decision of the Court of Appeals absolving Luzon Surety Co.,
Inc. of its liability to PNB reversing the decision of the CFI of

Negros Occidental.
Facts: Sometime before November 27, 1951, Augusto
Villarosa applied for a crop loan with PNB, which was
approved on March 6, 1951 in the amount of P32,400. To
guarantee the crop loan, Villarosa executed a Chattel
Mortgage on standing crops. In consideration of the periodical
sum received, he issued promissory notes.
Due to non-payment, PNB filed a complained on June 8, 1960.
The amount had reached a much higher sum because of the
accrued interest. PNB sought relief not only against the
planter but also against the three (3) bondsman namely, Luzon
Surety, Central Surety and Associated Surety.
CFI of Negros Occidental ordered defendant Augusto
Villarosa to pay PNB P81,200.00 plus accrued interest of 5%
p.a., attorneys fees and the cost. Each bonding company was
ordered to pay saintly and severally with the defendant certain
bonds, with the understanding that such payments shall be
deducted from the total outstanding obligation of defendant
Villarosa in favour of the plaintiff. The CFI modified its
decision granting PNB to recover 5% interest from the
bonding companies from December 24, 1953.
Villarosa, Central Surety and Assocuated Surety did not appeal
the decision of the CFI, unlike Luzon Surety. Luzon Surety
argued that plaintiffs evidence did not establish a cause of
action and that there had been material alteration in the
principal obligation which Luzon Surety guaranteed.
The Court of Appeals absolved Luzon Surety of its liability
and reversed the decision of the CFI.
Issues:
1. W/N the alleged material alteration of the terms and
conditions release Luzon Surety from its obligations.
-- No
2. W/N the charging of interest would increase Luzon
Surety liability to more than the amount of its bond
of P10,000. Yes
Ratio:
1. As a surety, the bonding company is charged as an
original promissory and is an insurer of the debt.
While it is an accepted rule in our jurisdiction that an
alteration of the contract is a ground for release, this
alteration must be material. A cursory examination
of the record shows that the alterations in the form of
increases were made with the full consent of Luzon
Surety Co., Inc. Paragraph 4 of the Chattel Mortgage
explicitly provided for this increase(s), viz:
... the Mortgagee may increase or decrease the amount of the
loan as well as the installment as it may deem convenient ...
and this contract, Exhibit "B", was precisely referred to and
mentioned in the Surety Bond itself. In the case of Lim Julian
vs. Tiburcio Lutero, et al No. 25235, 49 Phil. 703, 717, 718,
this Court held:
It has been decided in many cases that the consideration
named in a mortgage for future advancements does not limit
the amount for which such contract may stand as security, if
from the four corners of the document, the intent to secure
future indebtedness is apparent. Where, by the plain terms of
the contract, such an intent is evident, it will control. ...
2. In previous SC rulings, it was held: If a surety upon
demand fails to pay, he can be held liable for interest,
even if in thus paying, the liability becomes more
than that in the principal obligation. The increased
liability is not because of the contract but because of

the default and the necessity of judicial collection. It


should be noted, however, that the interest runs from
the time the complaint is filed, not from the time the
debt becomes due and demandable.
The judgment appealed from is reversed and set aside. The
judgment of the Court of First Instance of Negros Occidental
is reinstated, holding Luzon Surety liable for the amount of
P10,000.00 with the modification that interest thereon shall be
computed at the legal rate from June 8, 1960 when the
complaint was filed
***
G.R. No. L-34539 July 14, 1986
EULALIO
PRUDENCIO
and
ELISA
T.
PRUDENCIO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, THE
PHILIPPINE
NATIONAL BANK,
RAMON
C.
CONCEPCION and MANUEL M. TAMAYO, partners of
the defunct partnership Concepcion & Tamayo
Construction Company, JOSE TORIBIO, Atty-in-Fact of
Concepcion & Tamayo Construction Company, and THE
DISTRICT
ENGINEER,
Puerto
Princesa,
Palawan, respondents.
GUTIERREZ, JR., J.:
This is a petition for review seeking to annul and set aside the
decision of the Court of Appeals, now the Intermediate
Appellate Court, affirming the order of the trial court which
dismissed the petitioners' complaint for cancellation of their
real estate mortgage and held them jointly and severally liable
with the principal debtors on a promissory note which they
signed as accommodation makers.
The factual background of this case is stated in the decision of
the appellate court:
Appellants are the registered owners of a parcel of land
located in Sampaloc, Manila, and covered by T.C.T. 35161 of
the Register of Deeds of Manila. On October 7, 1954, this
property was mortgaged by the appellants to the Philippine
National Bank, hereinafter called PNB, to guarantee a loan of
P1,000.00 extended to one Domingo Prudencio.
Sometime in 1955, the Concepcion & Tamayo Construction
Company, hereinafter called Company, had a pending contract
with the Bureau of Public Works, hereinafter called the
Bureau, for the construction of the municipal building in
Puerto Princess, Palawan, in the amount of P36,800.00 and, as
said Company needed funds for said construction, Jose
Toribio, appellants' relative, and attorney-in-fact of the
Company, approached the appellants asking them to mortgage
their property to secure the loan of P10,000.00 which the
Company was negotiating with the PNB.
After some persuasion appellants signed on December 23,
1955 the 'Amendment of Real Estate Mortgage', mortgaging
their said property to the PNB to guaranty the loan of
P10,000.00 extended to the Company. The terms and
conditions of the original mortgage for Pl,000.00 were made
integral part of the new mortgage for P10,000.00 and both
documents were registered with the Register of Deeds of
Manila. The promissory note covering the loan of P10,000.00
dated December 29, 1955, maturing on April 27, 1956, was
signed by Jose Toribio, as attorney-in-fact of the Company,
and by the appellants. Appellants also signed the portion of the
promissory note indicating that they are requesting the PNB to

issue the Check covering the loan to the Company. On the


same date (December 23, 1955) that the 'Amendment of Real
Estate' was executed, Jose Toribio, in the same capacity as
attorney-in- fact of the Company, executed also the 'Deed of
Assignment' assigning all payments to be made by the Bureau
to the Company on account of the contract for the construction
of the Puerto Princesa building in favor of the PNB.
This assignment of credit to the contrary notwithstanding, the
Bureau; with approval, of the PNB, conditioned, however that
they should be for labor and materials, made three payments to
the Company on account of the contract price totalling
P11,234.40. The Bureau's last request for P5,000.00 on June
20, 1956, however, was denied by the PNB for the reason that
since the loan was already overdue as of April 28, 1956, the
remaining balance of the contract price should be applied to
the loan.
The Company abandoned the work, as a consequence of
which on June 30, 1956, the Bureau rescinded the construction
contract and assumed the work of completing the building. On
November 14, 1958, appellants wrote the PNB contending that
since the PNB authorized payments to the Company instead of
on account of the loan guaranteed by the mortgage there was a
change in the conditions of the contract without the knowledge
of appellants, which entitled the latter to a cancellation of their
mortgage contract.
Failing in their bid to have the real estate mortgage cancelled,
appellants filed on June 27, 1959 this action against the PNB,
the Company, the latter's attorney-in-fact Jose Toribio, and the
District Engineer of Puerto Princesa, Palawan, seeking the
cancellation of their real estate mortgage. The complaint was
amended to exclude the Company as defendant, it having been
shown that its life as a partnership had already expired and, in
lieu thereof, Ramon Concepcion and Manuel M. Tamayo,
partners of the defunct Company, were impleaded in their
private capacity as defendants.
After hearing, the trial court rendered judgment, denying the
prayer in the complaint that the petitioners be absolved from
their obligation under the mortgage contract and that the said
mortgage be released or cancelled. The petitioners were
ordered to pay jointly and severally with their co-makers
Ramon C. Concepcion and Manuel M. Tamayo the sum of
P11,900.19 with interest at the rate of 6% per annum from the
date of the filing of the complaint on June 27, 1959 until fully
paid and Pl,000.00 attorney's fees.
The decision also provided that if the judgment was not
satisfied within 90 days from its receipt, the mortgaged
properties together with all the improvements thereon
belonging to the petitioners would be sold at public auction
and applied to the judgment debt.
The Court of Appeals affirmed the trial court's decision in toto
stating that, as accommodation makers, the petitioners'
liability is that of solidary co-makers and that since "the
amounts released to the construction company were used
therein and, therefore, were spent for the successful
accomplishment of the work constructed for, the authorization
made by the Philippine National Bank of partial payments to
the construction company which was also one of the solidary
debtors cannot constitute a valid defense on the part of the
other solidary debtors. Moreover, those who rendered services
and furnished materials in the construction are preferred
creditors and have a lien on the price of the contract." The
appellate court further held that PNB had no obligation

whatsoever to notify the petitioners of its authorizing the three


payments in the total amount of Pll,234.00 in favor of the
Company because aside from the fact that the petitioners were
not parties to the deed of assignment, there was no stipulation
in said deed making it obligatory on the part of the PNB to
notify the petitioners everytime it authorizes payment to the
Company. It ruled that the petitioners cannot ask to be released
from the real estate mortgage.
In this petition, the petitioners raise the following issues which
they present in the form of errors:
I. First Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT HEREIN PETITIONERS WERE
SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:
II. Second Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT PETITIONERS WERE NOT RELEASED
FROM THEIR OBLIGATION TO THE RESPONDENT
PNB, WHEN THE PNB, WITHOUT THE KNOWLEDGE
AND CONSENT OF PETITIONERS, CHANGED THE
TENOR AND CONDITION OF THE ASSIGNMENT OF
PAYMENTS MADE BY THE PRINCIPAL DEBTOR;
CONCEPCION & TAMAYO CONSTRUCTION COMPANY;
AND RELEASED TO SUCH PRINCIPAL DEBTOR
PAYMENTS FROM THE BUREAU OF PUBLIC WORKS
WHICH WERE MORE THAN ENOUGH TO WIPE OUT
THE INDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the
nature of their liability is only that of mere sureties instead of
solidary co-debtors such that "a material alteration in the
principal contract, effected by the creditor without the
knowledge and consent of the sureties, completely discharges
the sureties from all liability on the contract of suretyship. "
They state that when respondent PNB did not apply the initial
and subsequent payments to the petitioners' debt as provided
for in the deed of assignment, they were released from their
obligation as sureties and, therefore, the real estate mortgage
executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:
Liability of accommodation party. An accommodation party
is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for
the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
In the case of Philippine Bank of Commerce v. Aruego (102
SCRA 530, 539), we held that "... in lending his name to the
accommodated party, the accommodation party is in effect a
surety. ... . " However, unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary
but also unconditional to a holder for value such that even if
the accommodated party receives an extension of the period
for payment without the consent of the accommodation party,
the latter is still liable for the whole obligation and such
extension does not release him because as far as a holder for
value is concerned, he is a solidary co- debtor.
Expounding on the nature of the liability of an accommodation
petition party under the aforequoted section, we ruled in Ang
Tiong v. Ting (22 SCRA 713, 716):
3. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the maker

to protect himself against the danger of insolvency of the


latter, cannot in any manner affect his liability to the appellee,
as the said remedy is a matter of concern exclusively between
accommodation indorser and accommodated party. So that the
appellant stands only as a surety in relation to the maker,
granting this to be true for the sake of argument, is immaterial
to the claim of the appellee, and does not a whit diminish nor
defeat the rights of the latter who is a holder for value. The
liability of the appellant remains primary and unconditional.
To sanction the appellant's theory is to give unwarranted legal
recognition to the patent absurdity of a situation where an
indorser, when sued on an instrument by a holder in due
course and for value, can escape liability on his indorsement
by the convenient expedient of interposing the defense that he
is a mere accommodation indorser.
There is, therefore, no question that as accommodation
makers, petitioners would be primarily and unconditionally
liable on the promissory note to a holder for value, regardless
of whether they stand as sureties or solidary co-debtors since
such distinction would be entirely immaterial and
inconsequential as far as a holder for value is concerned.
Consequently, the petitioners cannot claim to have been
released from their obligation simply because the time of
payment of such obligation was temporarily deferred by PNB
without their knowledge and consent. There has to be another
basis for their claim of having been freed from their
obligation. The question which should be resolved in this
instant petition, therefore, is whether or not PNB can be
considered a holder for value under Section 29 of the
Negotiable Instruments Law such that the petitioners must be
necessarily barred from setting up the defense of want of
consideration or some other personal defenses which may be
set up against a party who is not a holder in due course.
A holder for value under Section 29 of the Negotiable
Instruments Law is one who must meet all the requirements of
a holder in due course under Section 52 of the same law
except notice of want of consideration. (Agbayani,
Commercial Laws of the Philippines, 1964, p. 208). If he does
not qualify as a holder in due course then he holds the
instrument subject to the same defenses as if it were nonnegotiable (Section 58, Negotiable Instruments Law).
In the case at bar, can PNB, the payee of the promissory note
be considered a holder in due course?
Petitioners contend that the payee PNB is an immediate party
and, therefore, is not a holder in due course and stands on no
better footing than a mere assignee.
In those cases where a payee was considered a holder in due
course, such payee either acquired the note from another
holder or has not directly dealt with the maker thereof. As was
held in the case of Bank of Commerce and Savings v.
Randell (186 NorthWestern Reporter 71):
We conclude, therefore, that a payee who receives a negotiable
promissory note, in good faith, for value, before maturity, and
without any notice of any infirmity, from a holder, not the
maker. to whom it was negotiated as a completed instrument,
is a holder in due course within the purview of a Negotiable
Instruments law, so as to preclude the defense of fraud and
failure of consideration between the maker and the holder to
whom the instrument, was delivered.
Similarly, in the case of Stone v. Goldberg & Lewis (60
Southern Reporter 748) on rehearing and quoting Daniel on
Negotiable Instruments, it was held:

It is a general principle of the law merchant that, as between


the immediate parties to a negotiable instrument-the parties
between whom there is a privity-the consideration may be
inquired into; and as to them the only superiority of a bill or
note over other unsealed evidence of debt is that it prima facie
imports a consideration.
Although as a general rule, a payee may be considered a
holder in due course we think that such a rule cannot apply
with respect to the respondent PNB. Not only was PNB an
immediate party or in privy to the promissory note, that is, it
had dealt directly with the petitioners knowing fully well that
the latter only signed as accommodation makers but more
important, it was the Deed of Assignment executed by the
Construction Company in favor of PNB which principally
moved the petitioners to sign the promissory note also in favor
of PNB. Petitioners were made to believe and on that belief
entered into the agreement that no other conditions would alter
the terms thereof and yet, PNB altered the same. The Deed of
Assignment specifically provided that Jose F. Toribio, on
behalf of the Company, "have assigned, transferred and
conveyed and by these presents, do assign, transfer and
convey unto the said Philippine National Bank, its successors
and assigns all payments to be received from the Bureau of
Public Works on account of contract for the construction of the
Puerto Princesa Municipal Building in Palawan, involving the
total amount of P 36,000.00" and that "This assignment shall
be irrevocable and subject to the terms and conditions of the
promissory note and or any other kind of documents which the
Philippine National Bank have required or may require the
assignor to execute to evidence the above-mentioned
obligation."
Under the terms of the above Deed, it is clear that there are no
further conditions which could possibly alter the agreement
without the consent of the petitioners such as the grant of
greater priority to obligations other than the payment of the
loan due to the PNB and part of which loan was guaranteed by
the petitioners in the amount of P10,000.00.
This, notwithstanding, PNB approved the Bureau's release of
three payments directly to the Company instead of paying the
same to the Bank. This approval was in violation of the Deed
of Assignment and without any notice to the petitioners who
stood to lose their property once the promissory note falls due
without the same having been paid because the PNB, in effect,
waived payments of the first three releases. From the
foregoing circumstances, PNB can not be regarded as having
acted in good faith which is also one of the requisites of a
holder in due course under Section 52 of the Negotiable
Instruments Law. The PNB knew that the promissory note
which it took from the accommodation makers was signed by
the latter because of full reliance on the Deed of Assignment,
which, PNB had no intention to comply with strictly. Worse,
the third payment to the Company in the amount of P4,293.60
was approved by PNB although the promissory note was
almost a month overdue, an act which is clearly detrimental to
the petitioners.
We, therefore, hold that respondent PNB is not a holder in due
course. Thus, the petitioners can validly set up their personal
defense of release from the real estate mortgage against PNB.
The latter, in authorizing the third payment to the Company
after the promissory note became due, in effect, extended the
term of the payment of the note without the consent of the
accommodation makers who stand as sureties to the

accommodated party and to all other parties who are not


holders in due course or who do not derive their right from the
same, including PNB.
It may be argued that the Prudencios could have mortgaged
their property even without the promissory note. The records
show, however, that they would not have mortgaged the lot
were it not for the sake of the Company whose attorney-in-fact
was their relative. The spouses did not need the money for
themselves.
The attorney-in-fact tried twice to convince the Prudencios to
mortgage their property in order to secure a loan in favor of
the Company but the Prudencios refused. It was only when the
deed of assignment was shown to the spouses that they
consented to the mortgage and signed the promissory note in
the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a
valid mortgage contract. Petitioners do not dispute the validity
of the mortgage. They only want to have it cancelled because
the Bank violated the deed of assignment and extended the
period of time of payment of the promissory note without the
petitioners' consent and to the latter's detriment.
The mortgage cannot be separated from the promissory note
for it is the latter which is the basis of determining whether the
mortgage should be foreclosed or cancelled. Without the
promissory note which determines the amount of indebtedness
there would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the petition
petitioners would be obliged to pay the Bank as their creditor
on the promissory note, irrespective of whether or not the deed
of assignment had been violated. However, the assignee and
the creditor in this case are one and the samethe Bank itself.
When the Bank violated the deed of assignment, it prejudiced
itself because its very violation was the reason why it was not
paid on time in its capacity as creditor in the promissory note.
It would be unfair to make the petitioners now answer for the
debt or to foreclose on their property.
Neither can PNB justify its acts on the ground that the Bureau
of Public Works approved the deed of assignment with the
condition that the wages of laborers and materials needed in
the construction work must take precedence over the payment
of the promissory note. In the first place, PNB did not need the
approval of the Bureau. But even if it did, it should have
informed the petitioners about the amendment of the deed of
assignment. Secondly, the wages and materials have already
been paid. That issue is academic. What is in dispute is who
should bear the loss in this case. As between the petitioners
and the Bank, the law and the equities of the case favor the
petitioners, And thirdly, the wages and materials constitute a
lien only on the constructed building but do not enjoy
preference over the loan unless there is a liquidation
proceeding such as in insolvency or settlement of estate. (See
Philippine Savings Bank v. Lantin, 124 SCRA 476). There
were remedies available at the time if the laborers and the
creditors had not been paid. The fact is, they have been paid.
Hence, when the PNB accepted the condition imposed by the
Bureau without the knowledge or consent of the petitioners, it
amended the deed of assignment which, as stated earlier, was
the principal reason why the petitioners consented to become
accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of
the Court of Appeals affirming the decision of the trial court is
hereby REVERSED and SET ASIDE and a new one entered

absolving the petitioners from liability on the promissory note


and under the mortgage contract. The Philippine National
Bank is ordered to release the real estate mortgage constituted
on the property of the petitioners and to pay the amount of
THREE THOUSAND PESOS (P3,000.00) as attorney's fees.
JACINTO UY DIO and NORBERTO UY, petitioners,
vs.
HON. COURT OF APPEALS and METROPOLITAN
BANK AND TRUST COMPANY, respondents
Facts:
1977- Uy Tiam Enterprises and Freight Services (UTEFS),
thru its representative Uy Tiam, applied for and obtained
credit accommodations (letter of credit1 and trust receipt2
accommodations) from the METROBANK in the sum of
P700,000.00.To secure this, Norberto Uy and Jacinto Uy Dio
executed separate Continuing Suretyships wherein Norberto
Uy agreed to pay METROBANK any indebtedness of UTEFS
up to the aggregate sum of P300,000.00 while Jacinto Uy
Dio agreed to be bound up to the aggregate sum of
P800,000.00. Having paid the said obligation in 1977, UTEFS,
through obtained another credit accommodation from
METROBANK in 1978, which credit accommodation was
fully settled before an irrevocable letter of credit was applied
for and obtained in 1979. The Irrevocable Letter of Credit in
the sum of P815, 600.00 was applied for and obtain by UTEFS
without the participation of Uy and Dio as they did not sign
the document denominated as "Commercial Letter of Credit
and Application. Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did
METROBANK nor UTEFS inform them that the 1979 Letter
of Credit has been opened and the Continuing Suretyships
separately executed in February, 1977 shall guarantee its
payment. The 1979 letter of credit was negotiated and
METROBANK paid Planters Products the amount of
P815,600.00 which payment was covered by a Bill of
Exchange dated 4 June 1979. UTEFS executed and delivered
to METROBANK and Trust Receipt whereby the former
acknowledged receipt in trust from the latter of the
aforementioned goods from Planters Products. Being the
entrusted, the former agreed to deliver to METROBANK the
entrusted goods in the event of non-sale or, if sold, the
proceeds of the sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt. As a consequence,
METROBANK sent letters to the said principal obligor and its
sureties, Uy and Dio, demanding payment of the amount due.
Informed of the amount due, UTEFS made partial payments to

1 A letter from a bank guaranteeing that a buyer's payment to a seller will be


received on time and for the correct amount. If buyer is unable to make
payment on the purchase, the bank will be required to cover the full or
remaining amount of the purchase.

2
Notice of the release merchandise to a buyer from a bank, with the bank
retaining the ownership title to the released assets.

the Bank which were accepted by the latter.


Dio, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him copies
of documents showing the source of his liability. In its reply,
the bank informed him that the source of his liability is the
Continuing Suretyship which he executed on February 25,
1977.
As a rejoinder, Dio maintained that he cannot be held liable
for the 1979 credit accommodation because it is a new
obligation contracted without his participation. Besides, the
1977 credit accommodation has been fully paid.
Having sent the last demand letter to UTEFS, Dio and Uy
and finding resort to extrajudicial remedies to be futile,
METROBANK filed a complaint for collection of a sum of
money with a prayer for the issuance of a writ of preliminary
attachment, against Uy Tiam, representative of UTEFS and
impleaded Dio and Uy as parties-defendants.
The court issued an order, dated 29 July 1983, granting the
attachment writ, which writ was returned unserved and
unsatisfied as defendant Uy Tiam was nowhere to be found
and his enterprise was already non-operational.
April 11, 1984, Uy and Dio filed a motion to dismiss the
complaint on the ground of lack of cause of action. They
maintained that the obligation which they guaranteed in 1977
has been extinguished since it has already been paid in the
same year. Accordingly, the Continuing Suretyships executed
in 1977 cannot be availed of to secure Uy Tiam's Letter of
Credit obtained in 1979 because a guaranty cannot exist
without a valid obligation. They argued that they cannot be
held liable for the obligation contracted in 1979 because they
are not privies thereto as it was contracted without their
participation.
On April 24, 1984, METROBANK filed its opposition to the
motion to dismiss. Invoking the terms and conditions wherein
sureties-movants bound themselves as solidary obligors of
defendant Uy Tiam to both existing obligations and future
ones. It relied on Article 2053 of the new Civil Code which
provides: "A guaranty may also be given as security for future
debts, the amount of which is not yet known; . . . ." The
agreement was in full force and effect at the time the letter of
credit was obtained in 1979 as sureties-defendants did not
exercise their right to revoke it by giving notice to the bank.
sureties-defendants filed their responsive pleading which
merely rehashed the arguments in their motion to dismiss and
maintained that they are entitled to the benefit of excussion.
On February 23, 1987, plaintiff filed a motion to dismiss the
complaint against defendant Uy Tiam on the ground that it has
no information as to the heirs or legal representatives of the
latter who died sometime in December, 1986, which motion
was granted on the following day.
RTC decision: 1979 Letter of Credit is different from the 1977
Letter of Credit which covered the 1977 account of Uy Tiam.
Thus, the obligation under either is apart and distinct from the
obligation created in the other. DISMISSED complaint against
Uy and Dio.
CA decision: REVERSED RTC decision; Ordering suretiesappellees Dio and Uy to pay, jointly and severally, to
appellant METROBANK the amount of P2,397,883.68; the
Continuing Suretyship Agreements separately executed by the
petitioners in 1977 were intended to guarantee payment of Uy
Tiam's outstanding as well as future obligations
Petitioners filed MR but was denied by CA. Hence, this

petition.
Issue:
1. Whether petitioners are liable as sureties for
the 1979 obligations of Uy Tiam to METROBANK
by virtue of the Continuing Suretyship
Agreements they separately signed in 1977; and
2. On the assumption that they are, what is the
extent of their liabilities for said 1979 obligations.
Defenses: 1. The Continuing Suretyship
Agreements were automatically extinguished
upon payment of the principal obligation secured;
2. they were not advised by either METROBANK
or Uy Tiam that the Continuing Suretyship
Agreements would stand as security for the 1979
obligation; 3. to extend the application of such
agreements to the 1979 obligation would amount
to a violation of Article 2052 of the Civil Code
which expressly provides that a guaranty cannot
exist without a valid obligation; 4. for the sake of
argument, that the Continuing Suretyship
Agreements still subsisted, they cannot be held
liable for more than what they guaranteed to pay
because it s axiomatic that the obligations of a
surety cannot extend beyond what is stipulated in
the agreement.
Ruling:
Under the Civil Code, a guaranty may be given to
secure even future debts, the amount of which
may not known at the time the guaranty is
executed. This is the basis for contracts
denominated as continuing guaranty or
suretyship. A continuing guaranty is one
which is not limited to a single transaction,
but which contemplates a future course of
dealing, covering a series of transactions,
generally for an indefinite time or until
revoked. It is prospective in its operation and is
generally intended to provide security with
respect to future transactions within certain
limits, and contemplates a succession of
liabilities, for which, as they accrue, the
guarantor becomes liable. A guaranty shall be
construed as continuing when by the terms
thereof it is evident that the object is to give a
standing credit to the principal debtor to be used
from time to time either indefinitely or until a
certain period, especially if the right to recall the
guaranty is expressly reserved. Hence, where the
contract of guaranty states that the same is to
secure advances to be made "from time to time"
the guaranty will be construed to be a continuing
one.
The stipulations in the agreement unequivocally reveal
that the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in fact,

they candidly admitted it. Neither have they denied the fact
that they had not revoked the suretyship agreements.
Example of stipulations in their contract: SURETY is now
obligated to the BANK, either as guarantor or
otherwise, and/or in order to induce the BANK, in its
discretion, at any time or from time to time hereafter, to make
loans or advances or to extend credit in any other manner to,
or at the request, or for the account of the Borrowe; This
is a continuing guaranty and shall remain in full force and
effect until written notice shall have been received by the
BANK that it has been revoked by the SURETY, but any such
notice shall not release the SURETY, from any liability as to
any instruments, loans, advances or other obligations hereby
guaranteed.
No violation of Art 2052. Article 2052 speaks
about a valid obligation, as distinguished from
a void obligation, and not an existing or current
obligation. This distinction is made clearer in the
second paragraph of Article 2052 which reads:
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract. It
may also guarantee a natural obligation.
Continuing Suretyship Agreements signed by
petitioner Dio and petitioner Uy fix the
aggregate amount of their liability, at any given
time, at P800,000.00 and P300,000.00,
respectively. The law is clear that a guarantor
may bond himself for less, but not for more than
the principal debtor, both as regards the amount
and the onerous nature of the conditions.
Petitioners would, nevertheless, be liable for the
interest and judicial costs. Article 2055 of the Civil
Code provides:
Art. 2055. A guaranty is not presumed; it
must be express and cannot extend to
more than what is stipulated therein.
If it be simple or indefinite, it shall comprise
not only the principal obligation, but also
all its accessories, including the judicial
costs, provided with respect to the latter,
that the guarantor shall only be liable for
those costs incurred after he has been
judicially required to pay.
Interest and damages are included in the
term accessories.Also, it is stipulated in the agreement that:
In the event of judicial proceedings, SURETY further agrees
to pay the BANK a reasonable compensation for and as
attorney's fees and costs of collection, which shall not in any
event be less than ten per cent (10%) of the amount due.
SC Decision: The petition is partly GRANTED insofar as the
challenged decision has to be modified with respect to the
extend of petitioners' liability. Petitioners JACINTO UY
DIO and NORBERTO UY are hereby declared liable for and
are ordered to pay, up to the maximum limit only of their
respective Continuing Suretyship Agreement, the remaining
unpaid balance of the principal obligation of UY TIAM or UY
TIAM ENTERPRISES & FREIGHT SERVICES under

Irrevocable Letter of Credit No. SN-Loc-309, dated 30 March


1979, together with the interest due thereon at the legal rate
commencing from the date of the filing of the complaint in
Civil Case.
***
FORTUNE MOTORS (PHILS.) CORPORATION and
EDGAR L. RODRIGUEZA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and FILINVEST
CREDIT CORPORATION, respondents.
Petition for review. CA had previously ruled in favor of
Filinvest
To fund their acquisition of new vehicles (which are later
retailed or resold to the general public), car dealers normally
enter into wholesale automotive financing schemes whereby
vehicles are delivered by the manufacturer or assembler on the
strength of trust receipts or drafts executed by the car dealers,
which are backed up by sureties. These trust receipts or drafts
are then assigned and/or discounted by the manufacturer
to/with financing companies, which assume payment of the
vehicles but with the corresponding right to collect such
payment from the car dealers and/or the sureties. In this
manner, car dealers are able to secure delivery of their stockin-trade without having to pay cash therefor; manufacturers
get paid without any receivables/collection problems; and
financing companies earn their margins with the assurance of
payment not only from the dealers but also from the sureties.
When the vehicles are eventually resold, the car dealers are
supposed to pay the financing companies and the business
goes merrily on. However, in the event the car dealer defaults
in paying the financing company, may the surety escape
liability on the legal ground that the obligations were incurred
subsequent to the execution of the surety contract?
The Facts:
On August 4, 1981, Joseph L. G. Chua and Petitioner Edgar
Lee Rodrigueza ("Petitioner Rodrigueza") each executed an
undated "Surety Undertaking" whereunder they "absolutely,
unconditionally and solidarily guarantee(d)" to Respondent
Filinvest Credit Corporation ("Respondent Filinvest") the
"full, faithful and prompt performance, payment and discharge
of any and all obligations and agreements" of Fortune Motors
(Phils.) Corporation ("Petitioner Fortune") "under or with
respect to any and all such contracts and any and all other
agreements (whether by way of guaranty or otherwise)" of the
latter with Filinvest and its affiliated and subsidiary companies
"now in force or hereafter made."
April 1982, Petitioner Fortune, Respondent Filinvest and
Canlubang Automotive Resources Corporation ("CARCO")
entered into an "Automotive Wholesale Financing Agreement"
("Financing Agreement") under which CARCO will deliver
motor vehicles to Fortune for the purpose of resale in the
latter's ordinary course of business; Fortune, in turn, will
execute trust receipts over said vehicles and accept drafts
drawn by CARCO, which will discount the same together with
the trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for
Fortune. Under the same agreement, Petitioner Fortune, as
trustee of the motor vehicles, was to report and remit proceeds
of any sale for cash or on terms to Respondent Filinvest
immediately without necessity of demand.
Later when the obligation matured, Filinvest demanded

payment from Fortune Motor as well as from Chua and


Rodrigueza. No payment was made. A case was filed.
Rodrigueza averred that the surety agreement was void
because when it was signed in 1981, the principal obligation
(1982) did not yet exist.
Issues raised by petitioners in the appealed CA decision:
1.that the CA erred in declaring that surety can exist even if
there was no existing indebtedness at the time of its execution.
2.
that the CA erred when it declared that there was no
novation. (Oblicon)
3.
that the CA erred when it declared, that the evidence
was sufficient to prove the amount of the claim. (Factual
Issue)
Petitioners argue that future debts which can be guaranteed
under Article 2053 of the Civil Code refer only to "debts
existing at the time of the constitution of the guaranty but the
amount thereof is unknown," and that a guaranty being an
accessory obligation cannot exist without a principal
obligation. Petitioners claim that the surety undertakings
cannot be made to cover the Financing Agreement executed by
Fortune, Filinvest and CARCO since the latter contract was
not yet in existence when said surety contracts were entered
into.
Petitioners further aver that the Financing Agreement would
effect a novation of the surety contracts since it changed the
principal terms of the surety contracts and imposed additional
and onerous obligations upon the sureties.
Lastly, petitioners claim that no accounting of the payments
made by Petitioner Fortune to Respondent Filinvest was done
by the latter. Hence, there could be no way by which the
sureties can ascertain the correct amount of the balance, if any.
Ruling: The Court's Ruling affirmed the decisions of the trial
and appellate courts.
First Issue: Surety May Secure Future Obligations
Comprehensive or continuing surety agreements are in fact
quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates
entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor to
execute a continuing surety agreement along with its sureties.
By executing such an agreement, the principal places itself in
a position to enter into the projected series of transactions with
its creditor; with such suretyship agreement, there would be no
need to execute a separate surety contract or bond for each
financing or credit accommodation extended to the principal
debtor.
Petition is DENIED and the assailed Decision of the Court of
Appeals concurring with the decision of the trial court is
hereby AFFIRMED. Costs against petitioners.
***
Bank of Commerce and Stephen Taala vs Flores
Case Digest
Nature: Petition for review on certiorari assailing the decision
of the CA
Facts Of the case:
Respondent filed a case for specific performance against
petitioners before the Regional Trial Court (RTC) of Quezon
City. Respondents are the registered owners of a condominium
unit in Embassy Garden Homes, West Triangle, Quezon City,
registered under Condominium Certificate of Title (CCT) No.

2130,[3] issued by the Register of Deeds of Quezon City


In 1993, Respondents borrowed form petitioner bank in the
amount of Nine Hundred Thousand Pesos (P900,000.00).
Respondents executed a Real Estate Mortgage[5] over the
condominium unit as collateral, and the same was annotated at
the back of CCT No. 2130.
On October 3, 1995, respondents again borrowed
P1,100,000.00 from petitioner bank, which was also secured
by a mortgage over the same property.
On January 2, 1996, respondents paid P1,011,555.54, as
evidenced by Official Receipt No. 147741[7] issued by
petitioner bank. On the face of the receipt, it was written that
the payment was in full payment of the loan and interest.
Respondents then requested that the mortgage annotations be
canceled as they have paid in full. However, the bank refused
to cancel the same and demanded payment of 4,633,916.67
representing the outstanding obligation of respondents as of
February 27, 1998. Respondents requested for an accounting
which would explain how the said amount was arrived at.
However, instead of heeding respondents request, petitioner
bank applied for extra-judicial foreclosure of the mortgages
over the condominium unit. The public auction sale was
scheduled on September 4, 1998. Petitioner Stephen Z. Taala,
a notary public, was tasked to preside over the auction sale.
Respondents filed suit with the RTC, Quezon City, assailing
the validity of the foreclosure and auction sale of the property.
They averred that the loans secured by the property had
already been paid in full and that the Notice of Auction Sale
by Notary Public[9] failed to comply with the provisions of Act
No. 3135, as amended by Act No. 4118, requiring the
publication and posting of the notice of auction sale in at least
three (3) public places in Quezon City.
RTC granted respondents prayer for issuance of a writ of
preliminary injunction, restraining petitioner bank from
foreclosing on the mortgage.
Petitioner contends that the payment made by respondent was
only for one of the loans with the bank. There were remaining
loans already due and demandable, and had not been paid by
respondents despite repeated demands by petitioner bank. The
remaining loans, although not availed of at the same time,
were similarly secured by the subject real estate mortgage as
provided in the continuing guaranty agreement therein.
Rtc ruled in favor of petitioner Bank declaring that
respondents incurred other debts from petitioner bank, which
must be paid first before they could be absolved of liability,
and, consequently, demand the release of the mortgage. The
RTC also struck down respondents assertion that petitioner
bank did not comply with the posting and publication
requirements under Act No. 3135, as amended.
CA reversed the decision. CA ratiocinated that the principal
obligation or loan was already extinguished by the full
payment thereof. Consequently, the real estate mortgages
securing the principal obligation were also extinguished. The
CA opined that the individual annotations clearly indicated
that the said mortgages were not meant to serve as a
continuing guaranty for any future loan that respondents
would obtain from petitioner bank.
Brief Explanation: If the terms in the Deed of Real Estate
Mortgage show a continuing guaranty then there will be no
full payment since respondent still has several loans left
unpaid. Thus, the bank is justified in foreclosing the land. If
however, it is intended only for a single loan as respondents

contend, it cannot be foreclosed since the first loan was paid in


full.
Issue:
Whether or not the real estate mortgage over the subject
condominium unit is a continuing guaranty for the future loans
of respondent spouses despite the full payment of the principal
loans annotated on the title of the subject property.
Held: Yes. The language of the real estate mortgage
unambiguously reveals that the security provided in the real
estate mortgage is continuing in nature. Thus, it was intended
as security for the payment of the loans annotated at the back
of CCT No. 2130, and as security for all amounts that
respondents may owe petitioner bank. It is well settled that
mortgages given to secure future advance or loans are valid
and legal contracts, and that the amounts named as
consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other
indebtedness can be gathered.
A guaranty shall be construed as continuing when, by the
terms thereof, it is evident that the object is to give a
standing credit to the principal debtor to be used from
time to time either indefinitely or until a certain period,
especially if the right to recall the guaranty is expressly
reserved. In other jurisdictions, it has been held that the
use of particular words and expressions, such as payment
of "any debt," "any indebtedness," "any deficiency," or
"any sum," or the guaranty of "any transaction" or money
to be furnished the principal debtor "at any time" or "on
such time" that the principal debtor may require, has been
construed to indicate a continuing guaranty.
A continuing guaranty is a recognized exception to the rule
that an action to foreclose a mortgage must be limited to the
amount mentioned in the mortgage contract.[23] Under Article
2053 of the Civil Code, a guaranty may be given to secure
even future debts, the amount of which may not be known at
the time the guaranty is executed. This is the basis for
contracts denominated as a continuing guaranty or suretyship.
A continuing guaranty is not limited to a single transaction,
but contemplates a future course of dealing, covering a series
of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor becomes
liable. In other words, a continuing guaranty is one that covers
all transactions, including those arising in the future, which are
within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof.[
Respondents full payment of the loans annotated on the
title of the property shall not effect the release of the
mortgage because, by the express terms of the mortgage, it
was meant to secure all future debts of the spouses and
such debts had been obtained and remain unpaid
Annex : What is written in the Deed of Real Estate Mortgage
WITNESSETH: That for and in consideration of the credit
accommodations granted by the MORTGAGEE [Bank of
Commerce] to the MORTGAGOR [Andres Flores] and/or

_____________________ hereby initially fixed at


_____________________________PESOS:
(P____________), Philippine Currency, and as security for
the payment of the same, on demand or at maturity as the
case may be, be the interest accruing thereon, the cost of
collecting the same, the cost of keeping the mortgaged
property(ies), of all amounts now owed or hereafter owing
by the MORTGAGOR to the MORTGAGEE under this
or separate instruments and agreements, or in respect of
any bill, note, check, draft accepted, paid or discounted,
or advances made and all other obligations to every kind
already incurred or which may hereafter be incurred, for
the use or accommodation of the MORTGAGOR, as well
as the faithful performance of the terms and conditions of
this mortgage and of the separate instruments and/or
documents under which credits have been or may
hereafter be advanced by the MORTGAGEE to the
MORTGAGOR, including their renewals, extensions and
substitutions, any and all of which separate instruments
and/or documents and their renewals, extensions and
substitutions are hereunto incorporated and made
integral parts hereof, the MORTGAGOR [Andres Flores]
has transferred and conveyed, as by these presents it/he does
hereby transfer and convey, by way of First Mortgage, to the
MORTGAGEE [Bank of Commerce], its successors and
assigns, all its/ his rights, title and interest to that parcel(s) of
land, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed
thereon, including all other rights or benefits annexed to or
inherent therein now existing or which may hereafter exist,
situated in Embassy Garden Homes, Quezon City,
Philippines, and more particularly described in
Original/Transfer Certificate(s) of Title No. CCT No. 2130 of
the Registry of Deeds [of] Quezon City, as follows:
***
Arroyo vs Jungsay
Facts:
Jose Arroyo is the guardian one Tito Jocsing, an
imbecile, appointed by the court to succeed
Florentino Jungsay, the former guardian, who
absconded with the funds of his ward. The
defendants are the absconding guardian and his
bondsmen. The bondsmen appealed the decision
of the court.
The court credited the appellants with P4,400, the
alleged value of certain property attached as that
of the absconding guardian. The property is in the
exclusive possession of third parties under claim
of ownership.
The appellants contended that under article 1834
of the Civil Code, the surety is given the benefit
of a levy (excusion), even when a judgment is
rendered against both the surety and the
principal. But, according to article 1832, before
the surety is entitled to this benefit, he must
point out to the creditor property of the principal

debtor which can be sold and which is sufficient


to cover the amount of the debt.
Issue:
Whether the appellants should be credited with
P4,400 the alleged value of certain property
attached as that of the absconding guardian.
Held:
Yes.
In Manresa, vol. 12, pp. 263-265:
xxx it is not sufficient that the surety
claim the benefit of discussion in time,
nor that is so doing he designate
property of the debtor wherein to
satisfy the debt. It is also necessary
that another condition be fulfilled, to
wit, that such property be realizable
and that it be situated in Spanish
territory. xxxx
In Hill & Co. vs. Bourcier and Pond (29 La.
Ann., 841):
The surety has the right, under
certain circumstances, to demand the
discussion of the property of the
principal debtor. Where suit is brought
against the surety alone, he may
interpose the plea, and compel the
creditor to discuss the principal debtor.
xxxx the surety who desires to avail
himself of this right must demand it in
limine,
`on
the
institution
of
proceedings against him.' He must,
moreover, point out to the creditor
property of the principal debtor, not
incumbered, subject to seizure; and
must furnish a sufficient sum to have
the discussion carried into effect. (R. C.
C., 3045, 3046, 3047.) A plea which
does not meet these requirements
must be disregarded. (Robechot vs.
Folse, 11 La., 136; Banks vs. Brander,
13 La., 276.)
However, the property pointed out by the sureties
is not sufficient to pay the indebtedness; it is not
salable. It is so incumbered that third parties
have full possession under claim of ownership
without leaving to the absconding guardian a
fractional or reversionary interest without
determining first whether the claim of one or
more of the occupants is well founded. In all
these respects the sureties have failed to meet

the requirements of article 1832 of the Civil Code.


Where a guardian absconds or is beyond the
jurisdiction of the court, the proper method,
under article 1834 of the Civil Code and section
577 of the Code of Civil Procedure, in order to
ascertain whether such guardian is liable and to
what extent, in order to bind the sureties on his
official bond, is by a proceeding in the nature of a
civil action wherein the sureties are made parties
and given an opportunity to be heard. As all this
was done in the instant case, the judgment
appealed from is upheld.
G.R. No. 173526
August 28, 2008
Benjamin Bitanga, Petitioner, Vs. Pyramid Construction
Engineering Corporation, Respondent.
FACTS: Respondent (PYRAMID CONSTRUCTION) alleged
in its Complaint that on 26 March 1997, it entered into an
agreement with Macrogen Realty, of which petitioner
(BITANGA) is the President, to construct for the latter the
Shoppers Gold Building. Respondent commenced civil,
structural, and architectural works on the construction project
by May 1997. However, Macrogen Realty failed to settle
respondents progress billings. Petitioner assured respondent
that the outstanding account of Macrogen Realty would be
paid, and requested respondent to continue working on the
construction project. Relying on the assurances made by
petitioner respondent continued the construction project.
In August 1998, respondent suspended work on the
construction project since the conditions that it imposed for
the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen Realty. On
1 September 1999, respondent instituted with the Construction
Industry Arbitration Commission (CIAC) a case for arbitration
against Macrogen Realty seeking payment by the latter of its
unpaid billings and project costs.
On 17 April 2000, before the arbitration case could be set for
trial, respondent and Macrogen Realty entered into a
Compromise Agreement, with petitioner acting as signatory
for and in behalf of Macrogen Realty. Under the Compromise
Agreement, Macrogen Realty agreed to pay respondent the
total amount of P6,000,000.00 in six equal monthly
installments, with each installment to be delivered on the
15th day of the month, beginning 15 June 2000. Macrogen
Realty also agreed that if it would default in the payment of
two successive monthly installments, immediate execution
could issue against it for the unpaid balance, without need of
judgment or decree from any court or tribunal. Petitioner
guaranteed the obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of
Guaranty in favor of respondent, by virtue of which he
irrevocably and unconditionally guaranteed the full and
complete payment of the principal amount of liability of
Macrogen Realty in the sum of P6,000,000.00. Upon joint
motion of respondent and Macrogen Realty, the CIAC
approved the Compromise Agreement on 25 April 2000.
However, contrary to petitioners assurances,
Macrogen Realty failed and refused to pay all the
monthly installments agreed upon in the
Compromise Agreement. Respondent then made

a written demand on petitioner, as guarantor of


Macrogen Realty, to pay the P6,000,000.00, or to
point out available properties of the Macrogen
Realty within the Philippines sufficient to cover
the obligation guaranteed.
As to Marilyns liability, respondent contended that Macrogen
Realty is 99% owned by the Asian Appraisal Holdings, Inc.
(AAHI), which in turn is 99% owned by Marilyn. Considering
Marilyns enormous interest in AAHI, she cannot be unaware
of the obligations incurred by Macrogen Realty and/or
petitioner in the course of the business operations of the said
corporation.
Marilyn filed a Motion to Dismiss, asserting that respondent
had no cause of action against her, since she did not co-sign
the Contract of Guaranty with her husband; nor was she a
party to the Compromise Agreement between respondent and
Macrogen Realty. She had no part at all in the execution of the
said contracts. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of
another corporation is not by itself a sufficient ground for
disregarding the separate personality of the latter corporation.
The RTC denied Marilyns Motion to Dismiss for lack of
merit.
Petitioners (Bitanga) Answer filed in RTC: He
never made representations to respondent that
Macrogen Realty would faithfully comply with its
obligations under the Compromise Agreement. He
did not offer to guarantee the obligations of
Macrogen Realty to entice respondent to enter
into the Compromise Agreement but that, on the
contrary, it was respondent that required
Macrogen Realty to offer some form of security
for its obligations before agreeing to the
compromise. Petitioner further alleged that his
wife Marilyn was not aware of the obligations that
he assumed under both the Compromise
Agreement and the Contract of Guaranty as he
did not inform her about said contracts, nor did
he secure her consent thereto at the time of their
execution.
As a special and affirmative defense, petitioner
argued that the benefit of excussion was still
available to him as a guarantor since he had set
it up prior to any judgment against him.
According to petitioner, respondent failed to
exhaust all legal remedies to collect from
Macrogen Realty the amount due under the
Compromise Agreement, considering that
Macrogen Realty still had uncollected credits
which were more than enough to pay for the
same. Given these premise, petitioner could not
be held liable as guarantor. Consequently,
petitioner presented his counterclaim for
damages.
Prior to the trial proper, respondent filed a Motion
for Summary Judgment. Respondent alleged
therein that it was entitled to a summary
judgment on account of petitioners admission

during the pre-trial of the genuineness and due


execution of the Contract of Guaranty. The
contention of petitioner and Marilyn that they
were entitled to the benefit of excussion was not
a genuine issue. Respondent had already
exhausted all legal remedies to collect from
Macrogen Realty, but its efforts proved
unsuccessful. In any event, petitioner and Marilyn
were deemed to have forfeited their right to avail
themselves of the benefit of excussion because
they failed to comply with Article 2060 of the Civil
Code when petitioner ignored respondents
demand letter dated 3 January 2001 for payment
of the amount he guaranteed. The duty to collect
the supposed receivables of Macrogen Realty
from its creditors could not be imposed on
respondent, since petitioner and Marilyn never
informed respondent about such uncollected
credits even after receipt of the demand letter for
payment. The allegation of petitioner and Marilyn
that they could not respond to respondents
demand letter since they did not receive the
same was unsubstantiated and insufficient to
raise a genuine issue of fact which could defeat
respondents Motion for Summary Judgment. The
claim that Marilyn never participated in the
transactions that culminated in petitioners
execution of the Contract of Guaranty was
nothing more than a sham.
Petitioner counterarguments: They appended
thereto an affidavit executed by petitioner, in
which he declared that his spouse Marilyn could
not be held personally liable under the Contract
of Guaranty or the Compromise Agreement, nor
should her share in the conjugal partnership be
made answerable for the guaranty petitioner
assumed, because his undertaking of the
guaranty did not in any way redound to the
benefit of their family. As guarantor, petitioner
was entitled to the benefit of excussion, and he
did not waive his right thereto. He never received
the respondents demand letter dated 3 January
2001, as Ms. Dette Ramos, the person who
received it, was not an employee of Macrogen
Realty nor was she authorized to receive the
letter on his behalf. As a guarantor, petitioner
could resort to the benefit of excussion at any
time before judgment was rendered against
him. Petitioner reiterated that Macrogen Realty
had uncollected credits which were more than
sufficient to satisfy the claim of respondent.
RTC: Decided in favor of Respondent (PYRMAID
CONSTRUCTION)
CA: Upheld RTC decision with Modifications.
Marilyn Bitanga not held liable. Substantial
ownership of shares in Macrogen Realty by
Marilyn Bitanga was not enough basis to hold her
liable.

ISSUE: W Petitioner is entitled to benefit of


excussion
Held: No, Petitioner cannot avail himself of the
benefit of excussion.
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may
make use of the benefit of excussion, he
must set it up against the creditor upon
the latters demand for payment from him,
and point out to the creditor available
property of the debtor within Philippine
territory, sufficient to cover the amount of
the debt
Article 2060 of the Civil Code clearly requires that
in order for the guarantor to make use of the
benefit of excussion, he must set it up against the
creditor upon the latters demand for payment
and point out to the creditor available property of
the debtor within the Philippines sufficient to
cover the amount of the debt.
It must be stressed that despite having been
served a demand letter at his office, petitioner
still failed to point out to the respondent
properties of Macrogen Realty sufficient to cover
its debt. Such failure on petitioners part
forecloses his right to set up the defense of
excussion.
Worthy of note as well is the Sheriffs return
stating that the only property of Macrogen Realty
which he found was its deposit of P20,242.23 with
the Planters Bank.
Article 2059(5) of the Civil Code thus finds
application and precludes petitioner from
interposing the defense of excussion. We quote:
Art. 2059. This excussion shall not take
place:
xxxx
(5) If it may be presumed that an
execution on the property of the principal
debtor would not result in the satisfaction
of the obligation.
***
Manila Banking vs Teodoro
Date: January 13, 1989
Plaintiff Appellee: Manila Banking Corporation
Defendants Appellants: Anastacio Teodoro Jr
and Anna Teodoro

Ponente: Bidin
Fact: Defendants, together with Anastacio
Teodoro, Sr., jointly and severally, executed in
favor of plaintiff a promissory note for the sum of
P10,420. Defendants failed to pay the said
amount inspite of repeated demands and the
obligation as of September 30, 1969 stood at P
15,137.11. The defendants executed in favor of
plaintiff two PNS for P8,000 and P1,000. They
made partial payments but none were paid,
leaving an unpaid balance of P8,934.74 as of
September 30, 1969 including.
It appears that the Son executed in favor
of plaintiff a Deed of Assignment of Receivables
from the Emergency Employment Administration
in the sum of P44,635.00. The Deed of
Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts
and other credit accommodations extended to
defendants as security for the payment of said
sum and the interest thereon, and that
defendants do hereby remise, release and
quitclaim all its rights, title, and interest in and to
the accounts receivables. Further, title to the AR
is to remain in the assignee.
Plaintiff extended loans to defendants on
the basis and by reason of certain contracts
entered into by the defunct Emergency
Employment Administration (EEA) with
defendants for the fabrication of fishing boats,
and that the Philippine Fisheries Commission
succeeded the EEA after its abolition; that nonpayment of the notes was due to the failure of
the Commission to pay defendants after the latter
had complied with their contractual obligations;
and that the President of the Bank took steps to
collect from the Commission, but no collection
was effected.
The action was instituted against the
defendants for the collection of sum on the PNs.
The trial court rendered judgment adverse to the
defendants.
Issue: WON the assignment of receivables has
the effect of payment of all the loans
Held: No
Ratio: Assignment of credit is an agreement by
virtue of which the owner of a credit, known as
the assignor, by a legal cause, such as sale,
dation in payment, exchange or donation, and
without the need of the consent of the debtor,
transfers his credit and its accessory rights to
another, known as the assignee, who acquires the
power to enforce it to the same extent as the
assignor could have enforced it against the
debtor. ... It may be in the form of a sale, but at
times it may constitute a dation in payment, such
as when a debtor, in order to obtain a release

from his debt, assigns to his creditor a credit he


has against a third person, or it may constitute a
donation as when it is by gratuitous title; or it
may even be merely by way of guaranty, as when
the creditor gives as a collateral, to secure his
own debt in favor of the assignee, without
transmitting ownership. The character that it may
assume determines its requisites and effects. its
regulation, and the capacity of the parties to
execute it; and in every case, the obligations
between assignor and assignee will depend upon
the judicial relation which is the basis of the
assignment:
There is no question as to the validity of
the assignment of receivables executed by
appellants in favor of appellee bank. The issue is
with regard to its legal effects. It is evident that
the assignment of receivables executed did not
transfer the ownership of the receivables to
appellee bank and release appellants from their
loans with the bank incurred under the PNs.
The Deed of Assignment provided that it
was for and in consideration of certain credits,
loans, overdrafts, and their credit
accommodations in the sum of P10,000.00
extended to appellants by appellee bank, and as
security for the payment of said sum and the
interest thereon; that appellants as assignors,
remise, release, and quitclaim to assignee bank
all their rights, title and interest in and to the
accounts receivable assigned. It was further
stipulated that the assignment will also stand as
a continuing guaranty for future loans of
appellants to appellee bank and correspondingly
the assignment shall also extend to all the
accounts receivable; appellants shall also obtain
in the future, until the consideration on the loans
secured by appellants from appellee bank shall
have been fully paid by them.
The position of appellants, however, is
that the deed of assignment is a quitclaim in
consideration of their indebtedness to appellee
bank, not mere guaranty. The character of the
transactions between the parties is not, however,
determined by the language used in the
document but by their intention.
Definitely, the assignment of the
receivables did not result from a sale transaction.
It cannot be said to have been constituted by
virtue of a dation in payment for appellants' loans
with the bank evidenced by the PNs which are the
subject of the suit for collection in Civil Case No.
78178. At the time the deed of assignment was
executed, said loans were non-existent yet. The
deed of assignment was executed on January 24,
1964, while promissory note No. 11487 is dated
April 25, 1966, promissory note 11515, dated
May 3, 1966, promissory note 11699, on June 20,
1966. At most, it was a dation in payment for
P10,000.00, the amount of credit from appellee
bank indicated in the deed of assignment. At the

time the assignment was executed, there was no


obligation to be extinguished except the amount
of P10,000.00. Moreover, in order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and
the new obligations be on every point
incompatible with each other (Article 1292 CC).
Obviously, the deed of assignment was
intended as collateral security for the bank loans
of appellants, as a continuing guaranty for
whatever sums would be owing by defendants to
plaintiff, as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a
pledge or a dation in payment, the presumption is
in favor of pledge, the latter being the lesser
transmission of rights and interests.
Issue: WON the bank must exhaust all legal
remedies against PSC first
Held: No
Ratio: The obligation of appellants under the
promissory notes not having been released by
the assignment of receivables, appellants remain
as the principal debtors of appellee bank rather
than mere guarantors. The deed of assignment
merely guarantees said obligations. That the
guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the
legal remedies against the debtor, under Article
2058 of the New Civil Code does not therefore
apply to them. It is of course of the essence of a
contract of pledge or mortgage that when the
principal obligation becomes due, the things in
which the pledge or mortgage consists may be
alienated for the payment to the creditor (2087
CC). In the instant case, appellants are both the
principal debtors and the pledgors or mortgagors.
Resort to one is, therefore, resort to the other.
Appellee bank did try to collect on the
pledged receivables. As the EEA which issued the
receivables had been abolished, the collection
had to be coursed through the Office of the
President which disapproved the same. The
receivable became virtually worthless leaving
appellants' loans from appellee bank unsecured.
It is but proper that after their repeated demands
made on appellants for the settlement of their
obligations, appellee bank should proceed against
appellants. It would be an exercise in futility to
proceed against a defunct office for the collection
of the receivables pledged.
Feliciano, concurring:
The point that appears to me to be worth
making is that although in its form, the deed of
assignment of receivables partakes of the nature
of a complete alienation of the receivables

assigned, such form should be taken in


conjunction with, and indeed must be qualified
and controlled by, other language showing an
intent of the parties that title to the receivables
shall pass to the assignee for the limited purpose
of securing another, principal; obligation owed by
the assignor to the assignee. Title moves from
assignor to asignee but that title is defeasible
being designed to collateralize the principal
obligation. Operationally, what this means is that
the assignee is burdened with an obligation of
taking the proceeds of the receivables assigned
and applying such proceeds to the satisfaction of
the principal obligation and returning any balance
remaining thereafter to the assignor.
The parties gave the deed of assignment
the form of an absolute conveyance of title over
the receivables assigned, essentially for the
convenience of the assignee. Without such
formally unlimited conveyance of title, the
assignee would have to treat the deed of
assignment as no more than a deed of pledge or
of chattel mortgage. In other words, in such
hypothetical case, should the assignee seek to
realize upon the security given to him through
the deed of assignment (which would then have
to comply with the documentation and
registration requirements of a pledge or chattel
mortgage), the assignee would have to foreclose
upon the securities or credits assigned and place
them on public sale and there acquire the same.
It should be recalled that under the principle
which forbids a pactum commisorium Article
2088, Civil Code), a mortgagee or pledgee is
prohibited from simply taking and appropriating
the personal property turned over to him as
security for the payment of a principal obligation.
A deed of assignment by way of security avoids
the necessity of a public sale impose by the rule
on pactum commisorium, by in effect placing the
sale of the collateral up front. (Emphasis
supplied)
The foregoing is applicable where, as in
the present instance, the deed of assignment of
receivables combines elements of both a
complete or absolute alienation of the credits
being assigned and a security arrangement to
assure payment of a principal obligation.
(1) The title and right of possession to said
accounts receivable is to remain in the assignee,
and it shall have the right to collect the same
from the debtor, and whatsoever the Assignor
does in connection with the collection of said
accounts, it agrees to do as agent and
representative of the Assignee and in trust for
said Assignee ; xxx xxx xxx
(6) The Assignor guarantees the existence and
legality of said accounts receivable, and the due
and punctual payment thereof unto the
assignee, ... on demand, ... and further, that

Assignor warrants the solvency and credit


worthiness of each and every account.
(7) The Assignor does hereby guarantee the
payment when due on all sums payable under the
contracts giving rise to the accounts receivable ...
including reasonable attorney's fees in enforcing
any rights against the debtors of the assigned
accounts receivable and will pay upon demand,
the entire unpaid balance of said contract in the
event of non-payment by the said debtors of any
monthly sum at its due date or of any other
default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a
continuing guarantee for any and all whatsoever
there is or in the future there will be justly owing
from the Assignor to the Assignee ...
***
G.R. No. 126490 March 31, 1998
ESTRELLA PALMARES vs. COURT OF APPEALS and
M.B. LENDING CORPORATION
Facts:
Private respondent M.B. Lending Corporation
extended a loan to the spouses Azarraga,
together with petitioner Estrella Palmares, in the
amount of P30,000.00 payable on or before May
12, 1990 (evidenced by an PN dated March 13,
1990) with compounded interest at the rate of
6% per annum to be computed every 30 days
from the date thereof. On four occasions after the
execution of the promissory note and even after
the loan matured, petitioner and the Azarraga
spouses were able to pay a total of P16,300.00,
thereby leaving a balance of P13,700.00. No
payments were made after the last payment on
September 26, 1991.
Respondent corporation filed a complaint against
petitioner Palmares as the lone party-defendant,
to the exclusion of the principal debtors, allegedly
by reason of the insolvency of the latter.
In her Amended Answer with
Counterclaim, petitioner alleged:

that sometime in August 1990,


immediately after the loan matured, she
offered to settle the obligation with
respondent corporation but the latter
informed her that they would try to collect
from the spouses Azarraga and that she
need not worry about it;

that there has already been a partial

payment in the amount of P17,010.00;

that the interest of 6% per month


compounded at the same rate per month,
as well as the penalty charges of 3% per
month, are usurious and unconscionable;
and

that while she agrees to be liable on the


note but only upon default of the principal
debtor, respondent corporation acted in
bad faith in suing her alone without
including the Azarragas when they were
the only ones who benefited from the
proceeds of the loan.

RTC Iloilo dismissed the complaint without


prejudice to the filing of a separate action for a
sum of money against the spouses Azarraga. It
ruled that the filing of the complaint against
herein petitioner Estrella Palmares, to the
exclusion of the Azarraga spouses, amounted to a
discharge of a prior party; that the offer made by
petitioner to pay the obligation is considered a
valid tender of payment sufficient to discharge a
person's secondary liability on the instrument; as
co-maker, is only secondarily liable on the
instrument; and that the promissory note is a
contract of adhesion.
CA reversed the lower courts decision and
ordered Palmares to pay respondent corporation:
1. The sum of P13,700.00 representing the
outstanding balance still due and owing with
interest at six percent (6%) per month computed
from the date the loan was contracted until fully
paid;
2. The sum equivalent to the stipulated penalty of
three percent (3%) per month, of the outstanding
balance;
3. Attorney's fees at 25% of the total amount due
per stipulations and costs of suit.
CA held that Palmares is a surety since she bound
herself to be jointly and severally or solidarily
liable with the principal debtors. Respondent
court ordered the imposition of the stipulated 6%
interest and 3% penalty charges on the ground
that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally,
it rationalized that even if the promissory note
were to be considered as a contract of adhesion,
the same is not entirely prohibited because the
one who adheres to the contract is free to reject
it entirely; if he adheres, he gives his consent.

The basis of petitioner Palmares' liability under


the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the
above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term
Loan:
That as Co-maker, I am fully aware that I shall be
jointly and severally or solidarily liable with the
above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the
above loan from me in case the principal
maker, Mrs. Merlyn Azarraga defaults in the
payment of the note subject to the same
conditions above-contained.
Petitioner contends that although the second
paragraph says that she is liable as a surety, the
third paragraph defines the nature of her liability
as that of a guarantor. According to petitioner,
these are two conflicting provisions in the
promissory note and the rule is that clauses in
the contract should be interpreted in relation to
one another and not by parts.
Issue: Whether the petitioner Palomares is a
guarantor or a surety.
Ruling: Petitioner is a surety.
Even assuming arguendo that the promissory
note executed between the parties is a contract
of adhesion, it has been the consistent holding of
the Court that contracts of adhesion are not
invalid per se. It is a cardinal rule in the
interpretation of contracts that if the terms of a
contract are clear and leave no doubt upon the
intention of the contracting parties, the literal
meaning of its stipulation shall control. In the
case at bar, petitioner expressly bound herself to
be jointly and severally or solidarily liable with
the principal maker of the note. The terms of the
contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.
Her pretension that the terms "jointly and
severally or solidarily liable" contained in the
second paragraph of her contract are technical
and legal terms which could not be easily
understood by an ordinary layman like her is
contrary to her manifestation in the contract that
she "fully understood the contents" of the
promissory note and that she is "fully aware" of
her solidary liability with the principal maker.

Petitioner admits that she voluntarily affixed her


signature thereto; ergo, she cannot now be heard
to claim otherwise. Any reference to the
existence of fraud is unavailing. Fraud must be
established by clear and convincing evidence,
mere preponderance of evidence not even being
adequate.
Having entered into the contract with full
knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a
misapprehension or in ignorance of their legal
effect, or as to the legal effect of the
undertaking. The rule that ignorance of the
contents of an instrument does not ordinarily
affect the liability of one who signs it also applies
to contracts of suretyship. The mistake of a
surety as to the legal effect of her obligation is
ordinarily no reason for relieving her of liability.
Guarantor vs. Surety
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the
debtor. 17 A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking
that the debtor shall pay. A surety binds himself
to perform if the principal does not, without
regard to his ability to do so. A guarantor, on the
other hand, does not contract that the principal
will pay, but simply that he is able to do so. 20 In
other words, a surety undertakes directly for the
payment and is so responsible at once if the
principal debtor makes default, while a guarantor
contracts to pay if, by the use of due diligence,
the debt cannot be made out of the principal
debtor. 21
The undertaking to pay upon default of the
principal debtor does not automatically remove it
from the ambit of a contract of suretyship. The
second and third paragraphs of the aforequoted
portion of the promissory note do not contain any
other condition for the enforcement of
respondent corporation's right against petitioner.
It has not been shown, either in the contract or
the pleadings, that respondent corporation
agreed to proceed against herein petitioner only
if and when the defaulting principal has become
insolvent. A contract of suretyship, to repeat, is
that wherein one lends his credit by joining in the
principal debtor's obligation, so as to render
himself directly and primarily responsible with
him, and without reference to the solvency of the
principal.
Strictissimi juris not applicable
In a desperate effort to exonerate herself from
liability, petitioner erroneously invokes the rule

on strictissimi juris, which holds that when the


meaning of a contract of indemnity or guaranty
has once been judicially determined, then the
liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended
beyond its strict meaning. 23 The rule, however,
will apply only after it has been definitely
ascertained that the contract is one of suretyship
and not a contract of guaranty. It cannot be used
as an aid in determining whether a party's
undertaking is that of a surety or a guarantor.
It is a well-entrenched rule that in order to judge
the intention of the contracting parties, their
contemporaneous and subsequent acts shall also
be principally considered. 24 Several attendant
factors support the finding that petitioner is a
surety.

When petitioner was informed about the


failure of the principal debtor to pay the
loan, she immediately offered to settle the
account with respondent corporation. She
knew that she was directly and primarily
liable upon default of her principal.

Petitioner presented the receipts of the


payments already made, from the time of
initial payment up to the last, which were
all issued in her name and of the Azarraga
spouses. This can only be construed to
mean that the payments made by the
principal debtors were considered by
respondent corporation as creditable
directly upon the account and inuring to
the benefit of petitioner.

Contract of suretyship begins to exist


simultaneously with principal contract

the complaint was prematurely filed because the


principal debtors cannot as yet be considered in
default, there having been no judicial or
extrajudicial demand made by respondent
corporation. Petitioner has agreed that
respondent corporation may demand payment of
the loan from her in case the principal maker
defaults, subject to the same conditions
expressed in the promissory note. Significantly,
paragraph (G) of the note states that "should I fail
to pay in accordance with the above schedule of
payment, I hereby waive my right to notice and
demand." Hence, demand by the creditor is no
longer necessary in order that delay may exist
since the contract itself already expressly so
declares. As a surety, petitioner is equally bound
by such waiver.
Even if it were otherwise, demand on the sureties
is not necessary before bringing suit against
them, since the commencement of the suit is a
sufficient demand. A surety is not even entitled,
as a matter of right, to be given notice of the
principal's default. Inasmuch as the creditor owes
no duty of active diligence to take care of the
interest of the surety, his mere failure to
voluntarily give information to the surety of the
default of the principal cannot have the effect of
discharging the surety. The surety is bound to
take notice of the principal's default and to
perform the obligation. He cannot complain that
the creditor has not notified him in the absence of
a special agreement to that effect in the contract
of suretyship. The underlying principle therefor is
that a suretyship is a direct contract to pay the
debt of another. As an original promisor and
debtor from the beginning, he is held ordinarily to
know every default of his principal.
Creditor may proceed directly against the surety

A surety is bound equally and absolutely with the


principal, and as such is deemed an original
promisor and debtor from the beginning. This is
because in suretyship there is but one contract,
and the surety is bound by the same agreement
which binds the principal. The contract of a surety
starts with the agreement. It will further be
observed that petitioner's undertaking as comaker immediately follows the terms and
conditions stipulated between the creditor and
the principal obligors. A surety usually enters into
the same obligation as that of his principal, and
the signatures of both usually appear upon the
same instrument, and the same consideration
usually supports the obligation for both the
principal and the surety.

Petitioner questions the propriety of the filing of a


complaint solely against her to the exclusion of
the principal debtors who allegedly were the only
ones who benefited from the proceeds of the
loan. In accordance with the rule that in the
absence of statute or agreement otherwise, a
surety is primarily liable, and with the rule that
his proper remedy is to pay the debt and pursue
the principal for reimbursement, the surety
cannot at law, unless permitted by statute and in
the absence of any agreement limiting the
application of the security, require the creditor or
obligee, before proceeding against the surety, to
resort to and exhaust his remedies against the
principal, particularly where both principal and
surety are equally bound.

Demand not necessary

Mere failure of the respondent corporation to


immediately sue petitioner on her obligation does

There is no merit in petitioner's contention that

not release her from liability. Mere want of


diligence or forbearance does not affect the
creditor's rights vis-a-vis the surety, unless the
surety requires him by appropriate notice to sue
on the obligation. The neglect of the creditor to
sue the principal at the time the debt falls due
does not discharge the surety, even if such delay
continues until the principal becomes insolvent.
And, in the absence of proof of resultant injury, a
surety is not discharged by the creditor's mere
statement that the creditor will not look to the
surety, or that he need not trouble himself. The
consequences of the delay, such as the
subsequent insolvency of the principal or the fact
that the remedies against the principal may be
lost by lapse of time, are immaterial. The raison
d'tre for the rule is that there is nothing to
prevent the creditor from proceeding against the
principal at any time. At any rate, if the surety is
dissatisfied with the degree of activity displayed
by the creditor in the pursuit of his principal, he
may pay the debt himself and become
subrogated to all the rights and remedies of the
creditor.
Leniency shown to a debtor in default by delay
permitted by the creditor without change in the
time when the debt might be demanded does not
constitute an extension of the time of payment,
which would release the surety. In order to
constitute an extension discharging the surety, it
should appear that the extension was for a
definite period, pursuant to an enforceable
agreement between the principal and the
creditor, and that it was made without the
consent of the surety or with a reservation of
rights with respect to him. The contract must be
one which precludes the creditor from, or at least
hinders him in, enforcing the principal contract
within the period during which he could otherwise
have enforced it, and which precludes the surety
from paying the debt.
None of these elements are present in the instant
case. The mere fact that respondent corporation
gave the principal debtors an extended period of
time within which to comply with their obligation
did not effectively absolve herein petitioner from
the consequences of her undertaking. The burden
is on the surety to show that she has been
discharged by some act of the creditor.
Penalty and attorneys fees is unconscionable
The penalty charge of 3% per month and
attorney's fees equivalent to 25% of the total
amount due are highly inequitable and
unreasonable. It must be remembered that from
the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before

the filing of the present case. Article 1229 of the


Civil Code provides that the court shall equitably
reduce the penalty when the principal obligation
has been partly or irregularly complied with by
the debtor. And, even if there has been no
performance, the penalty may also be reduced if
it is iniquitous or leonine. The purpose for which
the penalty interest is intended that is, to
punish the obligor will have been sufficiently
served by the effects of compounded interest.
Accordingly, the penalty interest of 3% per month
being imposed on petitioner should similarly be
eliminated and the award of attorney's fees is
reduced to P10,000.00.

G.R. No. L-20567

July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,


vs.
MANILA SURETY and FIDELITY CO., INC. and
THE COURT OF APPEALS (Second
Division), respondents.
Nature of the Case: Petition for Review on Certiorari on the
Decision of CA
Facts:
PNB opened a letter of credit and advanced
$120,000 to Edgington Oil Refinery for 8,000 tons
of hot asphalt. Of this amount, 2,000 tons worth
P279,000.00 were released and delivered to
Adams & Taguba Corporation (ATACO-the
principal debtor) under a trust receipt guaranteed
by Manila Surety & Fidelity Co. up to the amount
of P75,000. To pay for the asphalt, ATACO
constituted the Bank its assignee and attorney-infact (See Annex) to receive and collect from the
Bureau of Public Works the amount aforesaid out
of funds payable to the assignor under a
Purchase Order.
ATACO delivered to the Bureau of Public Works,
and the latter accepted, asphalt to the total value
of P431,466.52. Of this amount the Bank
regularly collected, from April to November ,
P106,382.01. Thereafter, for unexplained reasons,
the Bank ceased to collect, until in 1952 its
investigators found that more moneys were
payable to ATACO from the Public Works office,
because the latter had allowed mother creditor to
collect funds due to ATACO under the same
purchase order to a total of P311,230.41.
Bank sued both in the Court of First Instance of
Manila to recover the balance of P158,563.18 as
of February 15, 1950, plus interests and costs
RTC Decision: Ordered ATACO and Manila
Surety and Fidelity to pay PNB the sum of

P174,462.34 as of February 24, 1956, minus the


amount of P8,000 which defendant, Manila Surety
Co., Inc. paid from March, 1956 to October, 1956
with interest at the rate of 5% per annum
From said decision, only the defendant Surety
Company has duly perfected its appeal. The
Central Bank of the Philippines did not appeal,
while defendant ATACO failed to perfect its
appeal.
CA Decision: Modified the judgment of the court
of origin as to the surety's liability; Bank to have
been negligent in having stopped collecting from
the Bureau of Public Works the moneys falling
due in favor of ATACO, from and after November
18, 1948, before the debt was fully collected,
thereby allowing such funds to be taken and
exhausted by other creditors to the prejudice of
the surety, and held that the Bank's negligence
resulted in exoneration of Manila Surety & Fidelity
Company. Hence this petition by PNB.
Banks Contentions: (1) Power of attorney
obtained from ATACO was merely in additional
security in its favour; (2) it was the duty of the
surety, and not that of the creditor owed see to it
that the obligor fulfills his obligation, and (3) the
creditor owed the surety no duty of active
diligence to collect any sum from the principal
debtor.
Issue: WON Manila Surety is released from
liability as guarantor of the obligation
Held: YES. Even if the assignment with power of attorney

from the principal debtor were considered as mere additional


security still, by allowing the assigned funds to be
exhausted without notifying the surety, the creditor
deprives the surety of any possibility of recoursing against
that security, and therefore the surety is released. The Bank
thereby exonerated the surety, pursuant to Article 2080 of the
Civil Code
ART. 2080. The guarantors, even though
they be solidary, are released from their
obligation whenever by come act of the
creditor they cannot be subrogated to the
rights, mortgages and preferences of the
latter.
The principal reason is based on the Bank's
negligence which furnishes adequate support to
the decision of the Court of Appeals that the
surety was thereby released.
CA Decision affirmed.
(Annex)The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit
accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed
as our Attorney-in-Fact for us and in our name, place and
stead, to collect and to receive the payments to be made by
virtue of the aforesaid Purchase Order, with full power and
authority to execute and deliver on our behalf, receipt for all
payments made to it; to endorse for deposit or encashment
checks, money order and treasury warrants which said Bank
may receive, and to apply said payments to the settlement of
said credit accommodation.
This power of attorney shall also remain irrevocable until our
total indebtedness to the said Bank have been fully liquidated.

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