CREDIT TRANSACTIONS

1st BATCH OF CASES

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau
of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of
P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949
for breeding purposes subject to a government charge of breeding fee of 10% of the book value
of the bulls. Upon the expiration on 7 May 1949 of the contract, the borrower asked for a renewal
for another period of one year. However, the Secretary of Agriculture and Natural Resources
approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of
Animal Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated
his desire to buy them at a value with a deduction of yearly depreciation to be approved by the
Auditor General. On 19 October 1950 the Director of Animal Industry advised him that the book
value of the three bulls could not be reduced and that they either be returned or their book value
paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls
or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic
of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid
breeding fee in the sum of P199.62, both with interests, and costs; and that other just and
equitable relief be granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that
because of the bad peace and order situation in Cagayan Valley, particularly in the barrio of
Baggao, and of the pending appeal he had taken to the Secretary of Agriculture and Natural
Resources and the President of the Philippines from the refusal by the Director of Animal Industry
to deduct from the book value of the bulls corresponding yearly depreciation of 8% from the date
of acquisition, to which depreciation the Auditor General did not object, he could not return the
animals nor pay their value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the
three bulls plus the breeding fees in the amount of P626.17 with interest on both sums of
(at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted
on 18 October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte
motion filed by the plaintiff on November 1958 for the appointment of a special sheriff to serve
the writ outside Manila. Of this order appointing a special sheriff, on 6 December 1958, Felicidad
M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on 23 October 1951 and
as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging that on
26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry
and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound
inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be
quashed and that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff
objected to her motion. On 6 February 1959 she filed a reply thereto. On the same day, 6
February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to
this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant,
returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station,
Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's
motion to quash the writ of execution the appellee prays "that another writ of execution in the
sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot
be held liable for the two bulls which already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan,
where the animal was kept, and that as such death was due to force majeure she is relieved from
the duty of returning the bull or paying its value to the appellee. The contention is without merit.
The loan by the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding
purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for another
year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of
the book value of the bulls. The appellant contends that the contract was commodatum and that,
for that reason, as the appellee retained ownership or title to the bull it should suffer its loss due
to force majeure. A contract of commodatum is essentially gratuitous.1 If the breeding fee be
considered a compensation, then the contract would be a lease of the bull. Under article 1671 of
the Civil Code the lessee would be subject to the responsibilities of a possessor in bad faith,
because she had continued possession of the bull after the expiry of the contract. And even if the
contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code
provides that a bailee in a contract of commodatum

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used
the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore,
when lent and delivered to the deceased husband of the appellant the bulls had each an
appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the
Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event
the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or
the payment of its value being a money claim should be presented or filed in the intestate
proceedings of the defendant who died on 23 October 1951, is not altogether without merit.
However, the claim that his civil personality having ceased to exist the trial court lost jurisdiction
over the case against him, is untenable, because section 17 of Rule 3 of the Rules of Court
provides that

After a party dies and the claim is not thereby extinguished, the court shall order, upon
proper notice, the legal representative of the deceased to appear and to be substituted for
the deceased, within a period of thirty (30) days, or within such time as may be
granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16
of Rule 3 which provides that

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform
the court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas
had been issue letters of administration of the estate of the late Jose Bagtas and that "all persons
having claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or
implied, whether the same be due, not due, or contingent, for funeral expenses and expenses of
the last sickness of the said decedent, and judgment for monopoly against him, to file said
claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6)
months from the date of the first publication of this order, serving a copy thereof upon the
aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said
deceased," is not a notice to the court and the appellee who were to be notified of the
defendant's death in accordance with the above-quoted rule, and there was no reason for such
failure to notify, because the attorney who appeared for the defendant was the same who
represented the administratrix in the special proceedings instituted for the administration and
settlement of his estate. The appellee or its attorney or representative could not be expected to
know of the death of the defendant or of the administration proceedings of his estate instituted
in another court that if the attorney for the deceased defendant did not notify the plaintiff or its
attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been returned
to the appellee, because it was killed while in the custody of the administratrix of his estate. This
is the amount prayed for by the appellee in its objection on 31 January 1959 to the motion filed
on 7 January 1959 by the appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V.
Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment
rendered in favor of the appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the administratrix appointed by the
court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to
costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Barrera, J., concurs in the result.

G.R. No. L-8321 October 14, 1913

ALEJANDRA MINA, ET AL., plaintiffs-appellants,

vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.

N. Segundo for appellants.

Iigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his
lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of
Ilocos Norte, the property having been awarded to him through its purchase at a public auction
held by the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of
15.

Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the
said lot, embracing 14 meters of its frontage by 11 meters of its depth.

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro
Mina, et al., were recognized without discussion as his heirs.

Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta
Pascual were recognized likes without discussion, though it is not said how, and consequently are
entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths
of one-half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the
remaining one-seventh of the first one-half to the children of one of the plaintiffs, Elena de
Villanueva. The fact is that the plaintiffs and the defendants are virtually, to all appearance, the
owners of the warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot
occupied by that building, as well as of the remainder thereof.

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her
minor children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for
authorization to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters,
together with its lot." The plaintiffs that is Alejandra Mina, et al. opposed the petition of
Ruperta Pascual for the reason that the latter had included therein the lot occupied by the
warehouse, which they claimed was their exclusive property. All this action was taken in a special
proceeding in re guardianship.

The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion,
to decide the question of the ownership of the lot before it pass upon the petition for the sale of
the warehouse. But the court before determining the matter of the ownership of the lot occupied
by the warehouse, ordered the sale of this building, saying:
 While the trial continues with respect to the ownership of the lot, the court orders the sale
at public auction of the said warehouse and of the lot on which it is built, with the present
boundaries of the land and condition of the building, at a price of not less than P2,890
Philippine currency . . . .

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other
defendant in this case, for the price mentioned.

The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court
decided it by holding that this land belonged to the owner of the warehouse which had been built
thereon thirty years before.

The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question. 1

When the judgment became final and executory, a writ of execution issued and the plaintiffs
were given possession of the lot; but soon thereafter the trial court annulled this possession for
the reason that it affected Cu Joco, who had not been a party to the suit in which that writ was
served.

It was then that the plaintiffs commenced the present action for the purpose of having the sale of
the said lot declared null and void and of no force and effect.

An agreement was had ad to the facts, the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the
Supreme Court which found for them by holding that they are the owners of the lot in
question, although there existed and still exists a commodatum by virtue of which the
guardianship (meaning the defendants) had and has the use, and the plaintiffs the
ownership, of the property, with no finding concerning the decree of the lower court that
ordered the sale.

The obvious purport of the cause "although there existed and still exists a commodatum," etc.,
appears to be that it is a part of the decision of the Supreme Court and that, while finding the
plaintiffs to be the owners of the lot, we recognized in principle the existence of a commodatum
under which the defendants held the lot. Nothing could be more inexact. Possibly, also, the
meaning of that clause is that, notwithstanding the finding made by the Supreme Court that the
plaintiffs were the owners, these former and the defendants agree that there existed, and still
exists, a commodatum, etc. But such an agreement would not affect the truth of the contents of
the decision of this court, and the opinions held by the litigants in regard to this point could have
no bearing whatever on the present decision.

Nor did the decree of the lower court that ordered the sale have the least influence in our
previous decision to require our making any finding in regard thereto, for, with or without that
decree, the Supreme Court had to decide the ownership of the lot consistently with its titles and
not in accordance with the judicial acts or proceedings had prior to the setting up of the issue in
respect to the ownership of the property that was the subject of the judicial decree.

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs
have the ownership, and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be
the manner in which the sale was effected, whether judicially or extrajudicially.

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being
a transfer of the ownership of the thing, it is evident that he who has only the mere use of the
thing cannot transfer its ownership. The sale of a thing effected by one who is not its owner is
null and void. The defendants never were the owners of the lot sold. The sale of it by them is
necessarily null and void. On cannot convey to another what he has never had himself.

The returns of the auction contain the following statements:

I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization
conferred upon me on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte,
proceeded with the sale at public auction of the six-sevenths part of the one-half of the
warehouse constructed of rubble stone, etc.

Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the
land and all the rights title, interest, and ownership in the said property to Cu Joco, who
was the highest bidder, etc.

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and
assigns, all the interest, ownership and inheritance rights and others that, as the guardian
of the said minors, I have and may have in the said property, etc.

The purchaser could not acquire anything more than the interest that might be held by a person
to whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is
disposed of. What the minor children of Ruperta Pascual had in their possession was the
ownership of the six-sevenths part of one-half of the warehouse and the use of the lot occupied
by his building. This, and nothing more, could the Chinaman Cu Joco acquire at that sale: not the
ownership of the lot; neither the other half, nor the remaining one-seventh of the said first half,
of the warehouse. Consequently, the sale made to him of this one-seventh of one-half and the
entire other half of the building was null and void, and likewise with still more reason the sale of
the lot the building occupies.

The purchaser could and should have known what it was that was offered for sale and what it
was that he purchased. There is nothing that can justify the acquisition by the purchaser of the
warehouse of the ownership of the lot that this building occupies, since the minors represented
by Ruperta Pascual never were the owners of the said lot, nor were they ever considered to be
such.

The trial court, in the judgment rendered, held that there were no grounds for the requested
annulment of the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk
of the court as the value of the lot in question. The defendants, Ruperta Pascual and the
Chinaman Cu Joco, were absolved from the complaint, without express finding as to costs.

The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to
accept the price set on the lot by expert appraisers, not even though the plaintiffs be considered
as coowner of the warehouse. It would be much indeed that, on the ground of coownership, they
should have to abide by and tolerate the sale of the said building, which point this court does not
decide as it is not a question submitted to us for decision, but, as regards the sale of the lot, it is
in all respects impossible to hold that the plaintiffs must abide by it and tolerate, it, and this
conclusion is based on the fact that they did not give their consent (art. 1261, Civil Code), and
only the contracting parties who have given it are obliged to comply (art. 1091, idem).

The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot;
but subsequently the plaintiffs, through motion, asked for an amendment by their complaint in
the sense that the action should be deemed to be one for the recovery of possession of a lot and
for the annulment of its sale. The plaintiff's petition was opposed by the defendant's attorney,
but was allowed by the court; therefore the complaint seeks, after the judicial annulment of the
sale of the lot, to have the defendants sentenced immediately to deliver the same to the
plaintiffs.

Such a finding appears to be in harmony with the decision rendered by the Supreme Court in
previous suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this
reason steps were taken to give possession thereof to the defendants; but, as the purchaser Cu
Joco was not a party to that suit, the present action is strictly one for recover against Cu Joco to
compel him, once the sale has been annulled, to deliver the lot to its lawful owners, the plaintiffs.

As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating parties, both in this and in the previous suit,
that Andres Fontanilla, the defendants' predecessor in interest, erected the warehouse on
the lot, some thirty years ago, with the explicit consent of his brother Francisco Fontanilla,
the plaintiff's predecessor in interest.

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the
coowners of the warehouse.

3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor
his successors paid any consideration or price whatever for the use of the lot occupied by
the said building; whence it is, perhaps, that both parties have denominated that use a
commodatum.

Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of
the defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the
judicial declaration of ownership made in the previous suit, nor of that of the nullity of the sale of
the lot, made in the present case.

The defendants do not hold lawful possession of the lot in question.1awphil.net

But, although both litigating parties may have agreed in their idea of the commodatum, on
account of its not being, as indeed it is not, a question of fact but of law, yet that denomination
given by them to the use of the lot granted by Francisco Fontanilla to his brother, Andres
Fontanilla, is not acceptable. Contracts are not to be interpreted in conformity with the name
that the parties thereto agree to give them, but must be construed, duly considering their
constitutive elements, as they are defined and denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during the certain period and return it to the
former, in which case it is called commodatum . . . (art. 1740, Civil Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to
another shall for a certain period. Francisco Fontanilla did not fix any definite period or time
during which Andres Fontanilla could have the use of the lot whereon the latter was to erect a
stone warehouse of considerable value, and so it is that for the past thirty years of the lot has
been used by both Andres and his successors in interest. The present contention of the plaintiffs
that Cu Joco, now in possession of the lot, should pay rent for it at the rate of P5 a month, would
destroy the theory of the commodatum sustained by them, since, according to the second
paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and, if what
the plaintiffs themselves aver on page 7 of their brief is to be believed, it never entered
Francisco's mind to limit the period during which his brother Andres was to have the use of the
lot, because he expected that the warehouse would eventually fall into the hands of his son,
Fructuoso Fontanilla, called the adopted son of Andres, which did not come to pass for the reason
that Fructuoso died before his uncle Andres. With that expectation in view, it appears more likely
that Francisco intended to allow his brother Andres a surface right; but this right supposes the
payment of an annual rent, and Andres had the gratuitous use of the lot.

Hence, as the facts aforestated only show that a building was erected on another's ground, the
question should be decided in accordance with the statutes that, thirty years ago, governed
accessions to real estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly
identical with the provisions of articles 361 and 362 of the Civil Code. So, then, pursuant to
article 361, the owner of the land on which a building is erected in good faith has a right to
appropriate such edifice to himself, after payment of the indemnity prescribed in articles 453 and
454, or to oblige the builder to pay him the value of the land. Such, and no other, is the right to
which the plaintiff are entitled.

For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made
by Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter
in the use of the lot until the plaintiffs shall choose one or the other of the two rights granted
them by article 361 of the Civil Code.1awphil.net

The judgment appealed from is reversed and the sale of the lot in question is held to be null and
void and of no force or effect. No special finding is made as to the costs of both instances.

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated
a long time ago can properly be considered res judicata by respondent Court of Appeals in the
present two cases between petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth
Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and
CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed
the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and
Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion
as follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar

Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357
to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of
plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or
insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said
defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R,
in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in
question; that the two lots were possessed by the predecessors-in-interest of private
respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been
in possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated
the trust and when it applied for registration in 1962; that petitioner had just been in possession
as owner for eleven years, hence there is no possibility of acquisitive prescription which requires
10 years possession with just title and 30 years of possession without; that the principle of res
judicata on these findings by the Court of Appeals will bar a reopening of these questions of
facts; and that those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows

... The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic of the
Mountain Province (VICAR for brevity) filed with the Court of First
Instance of Baguio Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at
Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said
Lots being the sites of the Catholic Church building, convents, high
school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the
Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2
and 3, respectively, asserting ownership and title thereto. After trial on
the merits, the land registration court promulgated its Decision, dated
November 17, 1965, confirming the registrable title of VICAR to Lots 1,
2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655)
and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case
No. 3607) appealed the decision of the land registration court to the
then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of
Appeals rendered its decision, dated May 9, 1977, reversing the
decision of the land registration court and dismissing the VICAR's
application as to Lots 2 and 3, the lots claimed by the two sets of
oppositors in the land registration case (and two sets of plaintiffs in the
two cases now at bar), the first lot being presently occupied by the
convent and the second by the women's dormitory and the sister's
convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for

reconsideration praying the Court of Appeals to order the registration
of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May
17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion
for reconsideration praying that both Lots 2 and 3 be ordered
registered in the names of the Heirs of Juan Valdez and Pacita Valdez.
On August 12,1977, the Court of Appeals denied the motion for
reconsideration filed by the Heirs of Juan Valdez on the ground that
there was "no sufficient merit to justify reconsideration one way or the
other ...," and likewise denied that of the Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for
review on certiorari of the decision of the Court of Appeals dismissing
his (its) application for registration of Lots 2 and 3, docketed as G.R.
No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province
vs. Court of Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for

reconsideration the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for review,
docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita
Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and
Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution

both petitions (of VICAR on the one hand and the Heirs of Juan Valdez
and Pacita Valdez on the other) for lack of merit. Upon the finality of
both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L-
46872, the Heirs of Octaviano filed with the then Court of First Instance
of Baguio, Branch II, a Motion For Execution of Judgment praying that
the Heirs of Octaviano be placed in possession of Lot 3. The Court,
presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied
the motion on the ground that the Court of Appeals decision in CA-G.R.
No. 38870 did not grant the Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of

Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R.
No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J.
Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of
Appeals dismissed the petition.
 It was at that stage that the instant cases were filed. The Heirs of
Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for
recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil
Case No. 3655 (429) on September 24, 1979, likewise for recovery of
possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership
of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano
(Exh. C ); his written demand (Exh. BB-4 ) to defendant Vicar for the return of the
land to them; and the reasonable rentals for the use of the land at P10,000.00 per
month. On the other hand, defendant Vicar presented the Register of Deeds for the
Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is
not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs
(Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur
when the plaintiffs admitted that the witness if called to the witness stand, would
testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75)
years continuously and peacefully and has constructed permanent structures
thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in
dispute, submitted the case on the sole issue of whether or not the decisions of the
Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which
in effect declared the plaintiffs the owners of the land constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from
setting up the defense of ownership and/or long and continuous possession of the
two lots in question since this is barred by prior judgment of the Court of Appeals in
CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the
question of possession and ownership have already been determined by the Court
of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme
Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar
maintains that the principle of res judicata would not prevent them from litigating
the issues of long possession and ownership because the dispositive portion of the
prior judgment in CA-G.R. No. 038830-R merely dismissed their application for
registration and titling of lots 2 and 3. Defendant Vicar contends that only the
dispositive portion of the decision, and not its body, is the controlling
pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as
follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ
AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;

6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE
IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830
WAS AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF
LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO
1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS
BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH
WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149,
when it clearly held that it was in agreement with the findings of the trial court that the Decision
of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership
of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not
positively declare private respondents as owners of the land, neither was it declared that they
were not owners of the land, but it held that the predecessors of private respondents were
possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it repudiated the trust by
declaring the properties in its name for taxation purposes. When petitioner applied for
registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven
years. Ordinary acquisitive prescription requires possession for ten years, but always with just
title. Extraordinary acquisitive prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in
CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's
ruling that said findings are res judicata between the parties. They can no longer be altered by
presentation of evidence because those issues were resolved with finality a long time ago. To
ignore the principle of res judicata would be to open the door to endless litigations by continuous
determination of issues without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R.
No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to
register the lands in question under its ownership, on its evaluation of evidence and conclusion
of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession
for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years
possession for ordinary acquisitive prescription because of the absence of just title. The appellate
court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by
purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar
because there was absolutely no documentary evidence to support the same and the alleged
purchases were never mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano.
Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The
predecessors of private respondents, not petitioner Vicar, were in possession of the questioned
lots since 1906.

There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not
Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in
1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The
improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only
in 1947, the church was constructed only in 1951 and the new convent only 2 years before the
trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the
lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of the borrower. The
bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner
came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar
by such adverse claim could not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a
bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-
R. Its findings of fact have become incontestible. This Court declined to review said decision,
thereby in effect, affirming it. It has become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of
discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is
governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No.
05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision
may no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the
Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals
is AFFIRMED, with costs against petitioner.

SO ORDERED.
G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

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

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del
Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between
the plaintiff and the defendant, the former gratuitously granted to the latter the use of the
furniture described in the third paragraph of the stipulation of facts, subject to the condition that
the defendant would return them to the plaintiff upon the latter's demand. The plaintiff sold the
property to Maria Lopez and Rosario Lopez and on September 14, 1936, these three notified the
defendant of the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to return all the
furniture transferred to him for them in the house where they were found. On November
5, 1936, the defendant, through another person, wrote to the plaintiff reiterating that she may
call for the furniture in the ground floor of the house. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that he could not give up the three
gas heaters and the four electric lamps because he would use them until the 15th of the same
month when the lease in due to expire. The plaintiff refused to get the furniture in view of the
fact that the defendant had declined to make delivery of all of them. On November 15th,
before vacating the house, the defendant deposited with the Sheriff all the furniture belonging to
the plaintiff and they are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in
the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the
law: in holding that they violated the contract by not calling for all the furniture on November 5,
1936, when the defendant placed them at their disposal; in not ordering the defendant to pay
them the value of the furniture in case they are not delivered; in holding that they should get all
the furniture from the Sheriff at their expenses; in ordering them to pay-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling that both parties should pay their
respective legal expenses or the costs; and in denying pay their respective legal expenses or the
costs; and in denying the motions for reconsideration and new trial. To dispose of the case, it is
only necessary to decide whether the defendant complied with his obligation to return the
furniture upon the plaintiff's demand; whether the latter is bound to bear the deposit fees
thereof, and whether she is entitled to the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1,
and 1741 of the Civil Code). The obligation voluntarily assumed by the defendant to return the
furniture upon the plaintiff's demand, means that he should return all of them to the plaintiff at
the latter's residence or house. The defendant did not comply with this obligation when he
merely placed them at the disposal of the plaintiff, retaining for his benefit the three gas heaters
and the four eletric lamps. The provisions of article 1169 of the Civil Code cited by counsel for
the parties are not squarely applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to get the furniture when they
were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel her to bear the expenses occasioned by the
deposit of the furniture at the defendant's behest. The latter, as bailee, was not entitled to place
the furniture on deposit; nor was the plaintiff under a duty to accept the offer to return the
furniture, because the defendant wanted to retain the three gas heaters and the four electric
lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because under
paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor admitted the
correctness of the said value. Should the defendant fail to deliver some of the furniture, the value
thereof should be latter determined by the trial Court through evidence which the parties may
desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one who
breached the contract of commodatum, and without any reason he refused to return and deliver
all the furniture upon the plaintiff's demand. In these circumstances, it is just and equitable that
he pay the legal expenses and other judicial costs which the plaintiff would not have otherwise
defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the
latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the
Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both
instances. So ordered.

G.R. No. L-4150 February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,

vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea,
deceased, defendant-appellant.

Matias Hilado, for appellant.

Jose Felix Martinez, for appellee.
TORRES, J.:

On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the
administratrix of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901
Jimenea borrowed and obtained from the plaintiff ten first-class carabaos, to be used at the
animal-power mill of his hacienda during the season of 1901-2, without recompense or
remuneration whatever for the use thereof, under the sole condition that they should be returned
to the owner as soon as the work at the mill was terminated; that Magdaleno Jimenea, however,
did not return the carabaos, notwithstanding the fact that the plaintiff claimed their return after
the work at the mill was finished; that Magdaleno Jimenea died on the 28th of October, 1904,
and the defendant herein was appointed by the Court of First Instance of Occidental Negros
administratrix of his estate and she took over the administration of the same and is still
performing her duties as such administratrix; that the plaintiff presented his claim to the
commissioners of the estate of Jimenea, within the legal term, for the return of the said ten
carabaos, but the said commissioners rejected his claim as appears in their report; therefore, the
plaintiff prayed that judgment be entered against the defendant as administratrix of the estate of
the deceased, ordering her to return the ten first-class carabaos loaned to the late Jimenea, or
their present value, and to pay the costs.

The defendant was duly summoned, and on the 25th of September, 1906, she demurred in
writing to the complaint on the ground that it was vague; but on the 2d of October of the same
year, in answer to the complaint, she said that it was true that the late Magdaleno Jimenea asked
the plaintiff to loan him ten carabaos, but that he only obtained three second-class animals,
which were afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied
the allegations contained in paragraph 3 of the complaint; for all of which she asked the court to
absolve her of the complaint with the cost against the plaintiff.

By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the
defendant and her counsel, Matias Hilado, that he had made an agreement with the plaintiff to
the effect that the latter would not compromise the controversy without his consent, and that as
fees for his professional services he was to receive one half of the amount allowed in the
judgment if the same were entered in favor of the plaintiff.

The case came up for trial, evidence was adduced by both parties, and either exhibits were made
of record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina
Jarra, as administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los
Santos, the remaining six second and third class carabaos, or the value thereof at the rate of
P120 each, or a total of P720 with the costs.

Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January
19, moved for anew trial on the ground that the findings of fact were openly and manifestly
contrary to the weight of the evidence. The motion was overruled, the defendant duly excepted,
and in due course submitted the corresponding bill of exceptions, which was approved and
submitted to this court.

The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten
carabaos which are now claimed by the latter, as shown by two letters addressed by the said
Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the late Jimenea
only obtained three second-class carabaos, which were subsequently sold to him by the owner,
Santos; therefore, in order to decide this litigation it is indispensable that proof be forthcoming
that Jimenea only received three carabaos from his son-in-law Santos, and that they were sold by
the latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient number of
witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested
by his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff,
and that Jimenea received them in the presence of some of said persons, one being a brother of
said Jimenea, who saw the animals arrive at the hacienda where it was proposed to employ
them. Four died of rinderpest, and it is for this reason that the judgment appealed from only
deals with six surviving carabaos.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced
by any trustworthy documents such as those of transfer, nor were the declarations of the
witnesses presented by the defendant affirming it satisfactory; for said reason it can not be
considered that Jimenea only received three carabaos on loan from his son-in-law, and that he
afterwards kept them definitely by virtue of the purchase.

By the laws in force the transfer of large cattle was and is still made by means of official
documents issued by the local authorities; these documents constitute the title of ownership of
the carabao or horse so acquired. Furthermore, not only should the purchaser be provided with a
new certificate or credential, a document which has not been produced in evidence by the
defendant, nor has the loss of the same been shown in the case, but the old documents ought to
be on file in the municipality, or they should have been delivered to the new purchaser, and in
the case at bar neither did the defendant present the old credential on which should be stated
the name of the previous owner of each of the three carabaos said to have been sold by the
plaintiff.

From the foregoing it may be logically inferred that the carabaos loaned or given on
commodatum to the now deceased Magdaleno Jimenea were ten in number; that they, or at any
rate the six surviving ones, have not been returned to the owner thereof, Felix de los Santos, and
that it is not true that the latter sold to the former three carabaos that the purchaser was already
using; therefore, as the said six carabaos were not the property of the deceased nor of any of his
descendants, it is the duty of the administratrix of the estate to return them or indemnify the
owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific
one of commodatum is derived, establishes prescriptions in relation to the last-mentioned
contract by the following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything
not perishable, in order that the latter may use it during a certain period and return it to
the former, in which case it is called commodatum, or money or any other perishable
thing, under the condition to return an equal amount of the same kind and quality, in
which case it is merely called a loan.

Commodatum is essentially gratuitous.

A simple loan may be gratuitous, or made under a stipulation to pay interest.

ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee
acquires the use thereof, but not its fruits; if any compensation is involved, to be paid by
the person requiring the use, the agreement ceases to be a commodatum.
 ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs
of both contracting parties, unless the loan has been in consideration for the person of the
bailee, in which case his heirs shall not have the right to continue using the thing loaned.

The carabaos delivered to be used not being returned by the defendant upon demand, there is
no doubt that she is under obligation to indemnify the owner thereof by paying him their value.

Article 1101 of said code reads:

Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those
who in any manner whatsoever act in contravention of the stipulations of the same, shall
be subjected to indemnify for the losses and damages caused thereby.

The obligation of the bailee or of his successors to return either the thing loaned or its value, is
sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with
precision the legal doctrine touching commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of
the thing loaned, and at the expiration of the period, or after the use for which it was
loaned has been accomplished, it is the imperative duty of the bailee to return the thing
itself to its owner, or to pay him damages if through the fault of the bailee the thing should
have been lost or injured, it is clear that where public securities are involved, the trial
court, in deferring to the claim of the bailor that the amount loaned be returned him by the
bailee in bonds of the same class as those which constituted the contract, thereby
properly applies law 9 of title 11 of partida 5.

With regard to the third assignment of error, based on the fact that the plaintiff Santos had not
appealed from the decision of the commissioners rejecting his claim for the recovery of his
carabaos, it is sufficient to estate that we are not dealing with a claim for the payment of a
certain sum, the collection of a debt from the estate, or payment for losses and damages (sec.
119, Code of Civil Procedure), but with the exclusion from the inventory of the property of the
late Jimenea, or from his capital, of six carabaos which did not belong to him, and which formed
no part of the inheritance.

The demand for the exclusion of the said carabaos belonging to a third party and which did not
form part of the property of the deceased, must be the subject of a direct decision of the court in
an ordinary action, wherein the right of the third party to the property which he seeks to have
excluded from the inheritance and the right of the deceased has been discussed, and rendered in
view of the result of the evidence adduced by the administrator of the estate and of the
claimant, since it is so provided by the second part of section 699 and by section 703 of the Code
of Civil Procedure; the refusal of the commissioners before whom the plaintiff unnecessarily
appeared can not affect nor reduce the unquestionable right of ownership of the latter, inasmuch
as there is no law nor principle of justice authorizing the successors of the late Jimenea to enrich
themselves at the cost and to the prejudice of Felix de los Santos.

For the reasons above set forth, by which the errors assigned to the judgment appealed from
have been refuted, and considering that the same is in accordance with the law and the merits of
the case, it is our opinion that it should be affirmed and we do hereby affirm it with the costs
against the appellant. So ordered.
G.R. No. L-50550-52 October 31, 1979

CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND RICHARD
YAM, petitioners,
vs.
HON. NABDAR J. MALIK, Municipal Judge of Jolo, Sulu (Branch I), THE PEOPLE OF THE
PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO and LT. COL. AGOSTO SAJOR respondents.

Tomas P. Matic, Jr. for petitioners.

Jose E. Fernandez for private respondent.

Office of the Solicitor General for respondent the People of the Philippines.

ABAD SANTOS, J.:

This is a petition for certiorari, prohibition, and mandamus with preliminary injunction. Petitioners
alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without jurisdiction,
in excess of jurisdiction and with grave abuse of discretion when:

(a) he held in the preliminary investigation of the charges of estafa filed by respondents
Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a prima
facie case against the latter;

(b) he issued warrants of arrest against petitioners after making the above determination; and

(c) he undertook to conduct trial on the merits of the charges which were docketed in his court
as Criminal Cases No. M-111, M-183 and M-208.

Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and with
grave abuse of discretion because the facts recited in the complaints did not constitute the crime
of estafa, and assuming they did, they were not within the jurisdiction of the respondent judge.

In a resolution dated May 23, 1979, we required respondents to comment in the petition and
issued a temporary restraining order against the respondent judge from further proceeding with
Criminal Cases Nos. M-111, M-183 and M-208 or from enforcing the warrants of arrest he had
issued in connection with said cases.

Comments by the respondent judge and the private respondents pray for the dismissal of the
petition but the Solicitor General has manifested that the People of the Philippines have no
objection to the grant of the reliefs prayed for, except the damages. We considered the
comments as answers and gave due course to the petition.

The position of the Solicitor General is well taken. We have to grant the petition in order to
prevent manifest injustice and the exercise of palpable excess of authority.

In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee Kiong
and Yam Yap Kieng with estafa through misappropriation of the amount of P50,000.00. But the
complaint states on its face that said petitioners received the amount from respondent Rosalinda
M. Amin "as a loan." Moreover, the complaint in Civil Case No. N-5, an independent action for the
collection of the same amount filed by respondent Rosalinda M. Amin with the Court of First
Instance of Sulu on September 11, 1975, likewise states that the P50,000.00 was a "simple
business loan" which earned interest and was originally demandable six (6) months from July 12,
1973. (Annex E of the petition.)

In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee Kiong, Jose
Y.C. Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa through misappropriation of the
amount of P30,000.00. Likewise, the complaint states on its face that the P30,000.00 was "a
simple loan." So does the complaint in Civil Case No. N-8 filed by respondent Tan Chu Kao on
April 6, 1976 with the Court of First Instance of Sulu for the collection of the same amount.
(Annex D of the petition.).

In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam, Anita
Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa through misappropriation
of the amount of P20,000.00. Unlike the complaints in the other two cases, the complaint in
Criminal Case No. M-208 does not state that the amount was received as loan. However, in a
sworn statement dated September 29, 1976, submitted to respondent judge to support the
complaint, respondent Augusto Sajor states that the amount was a "loan." (Annex G of the
petition.).

We agree with the petitioners that the facts alleged in the three criminal complaints do not
constitute estafa through misappropriation.

Estafa through misappropriation is committed according to Article 315, paragraph 1,

subparagraph (b), of the Revised Penal Code as follows:

Art. 315. Swindling (Estafa). Any person who shall defraud another by any of the
means mentioned herein below shall be punished by:

xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

xxx xxx xxx

b) By misappropriating or converting, to the prejudice of another, money, goods, or

any other personal property received by the offender in trust or on commission, or
for administration, or under any other obligation involving the duty to make delivery
of or to return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such money, goods, or other
property.

In order that a person can be convicted under the abovequoted provision, it must be proven that
he has the obligation to deliver or return the same 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 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 be 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
loam 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.

In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to
refuse to nay his debt or to deny its existence.

We are of the opinion and so decide that when the relation is purely that of debtor
and creditor, the debtor can not be held liable for the crime of estafa, under said
article, by merely refusing to pay or by denying the indebtedness.

It appears that respondent judge failed to appreciate the distinction between the two types of
loan, mutuum and commodatum, when he performed the questioned acts, He mistook the
transaction between petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor
to be commodatum wherein the borrower does not acquire ownership over the thing borrowed
and has the duty to return the same thing to the lender.

Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the Municipal
Court of Jolo is, has jurisdiction over criminal cases where the penalty provided by law does not
exceed prision correccional or imprisonment for not more than six (6) years, or fine not
exceeding P6,000.00 or both, The amounts allegedly misappropriated by petitioners range from
P20,000.00 to P50,000.00. The penalty for misappropriation of this magnitude exceeds prision
correccional or 6 year imprisonment. (Article 315, Revised Penal Code), Assuming then that the
acts recited in the complaints constitute the crime of estafa, the Municipal Court of Jolo has no
jurisdiction to try them on the merits. The alleged offenses are under the jurisdiction of the Court
of First Instance.

Respondents People of the Philippines being the sovereign authority can not be sued for
damages. They are immune from such type of suit.

With respect to the other respondents, this Court is not the proper forum for the consideration of
the claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order previously issued is
hereby made permanent; the criminal complaints against petitioners are hereby declared null
and void; respondent judge is hereby ordered to dismiss said criminal cases and to recall the
warrants of arrest he had issued in connection therewith. Moreover, respondent judge is hereby
rebuked for manifest ignorance of elementary law. Let a copy of this decision be included in his
personal life. Costs against private respondents.

SO ORDERED.

G.R. No. 26085 August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants.

Eusebio Orense for appelle.

JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and
agrees to pay a certain amount per month as rent, may such rent render such a contract
usurious when the amount paid as rent, computed upon the purchase price, amounts to a
higher rate of interest upon said amount than that allowed by law?

(c) May the contract in the present case may be modified by parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice
Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality
of Tarlac of the Province of Tarlac for the price of P25,000, promising to pay therefor in three
installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the
second installment of P8,000 was due on or before 31st day of May, 1921; the balance of
P15,000 at 12 per cent interest was due and payable on or about the 30th day of November,
1922. One of the conditions of that contract of purchase was that on failure of the purchaser
(plaintiffs and appellants) to pay the balance of said purchase price or any of the installments on
the date agreed upon, the property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as
the record shows upon the due dates. The balance of P15,000 due on said contract of purchase
was paid on or about the 1st day of December, 1922, in the manner which will be explained
below. On the date when the balance of P15,000 with interest was paid, the vendor of said
property had issued to the purchasers transfer certificate of title to said property, No. 528. Said
transfer certificate of title (No. 528) was transfer certificate of title from No. 40, which shows that
said land was originally registered in the name of the vendor on the 7th day of November, 1913.
 PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question
wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the
balance of said indebtedness was not paid, an action would be brought for the purpose of
recovering the property, together with damages for non compliance with the condition of the
contract of purchase. The pertinent parts of said letter read as follows:

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente,
procederemos judicialmente contra Vd. para reclamar la devolucion del camarin y
los daos y perjuicios ocasionados a la compaia por su incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

According to Exhibits B and D, which represent the account rendered by the vendor, there was
due and payable upon said contract of purchase on the 30th day of November, 1922, the sum
P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the
purchasers, the appellants herein, realizing that they would be unable to pay the balance due,
began to make an effort to borrow money with which to pay the balance due, began to make an
effort to borrow money with which to pay the balance of their indebtedness on the purchase
price of the property involved. Finally an application was made to the defendant for a loan for the
purpose of satisfying their indebtedness to the vendor of said property. After some negotiations
the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon
condition that the plaintiffs execute and deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the
sum of P16,965.09. The defendant, in addition to said amount paid by check, delivered to the
plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid to the
attorneys for drafting said contract of pacto de retro, making a total paid by the defendant to the
plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery of said contract. Said
contracts was dated the 28th day of November, 1922, and is in the words and figures following:

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores
de edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios
y transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy
Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta
Ciudad de Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en

consideracion a la cantidad de diecisiete mil quinientos pesos (P17,500) moneda
filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don
Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho
Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que,
segun el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador
de Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited"
que al incorporarse se donomino y se denomina "Luzon Rice Mills Inc.," y que esta
corporacion nos ha transferido en venta absoluta, se describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el

Municipio de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E.
con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de un
punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del
mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto
1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al
punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto
S. 2 gds. 42' E., 61.48 m. al punto de partida; midiendo una extension superficcial
de cuatro mil doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos
los puntos nombrados se hallan marcados en el plano y sobre el terreno los puntos
1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los
puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera,
siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de
febrero de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia 1. de diciembre de 1922, devolvemos al expresado Don
Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos
(P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la
finca arriba descrita; pero si transcurre dicho plazo de cinco aos sin ejercitar el
derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en

arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don
Benito Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y
cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don

Benito Gonzalez Sy Chiam, asi como tambien la prima del seguro contra
incendios, si el conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar
dicha finca.

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos
dara lugar a la terminacion de este arrendamieno y a la perdida del derecho
de retracto que nos hemos reservado, como si naturalmente hubiera
expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy
Chiam tomar posesion de la finca y desahuciarnos de la misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta
escritura en los precisos terminos en que la dejan otorgada los conyuges Severino
Tolentino y Potenciana Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por

cuadruplicado en Manila, hoy a 28 de noviembre de 1922.
 (Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

(Fdos.) MOISES M. BUHAIN

B. S. BANAAG

An examination of said contract of sale with reference to the first question above, shows clearly
that it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant
that said contract, standing alone, is a mortgage. The pertinent language of the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia 1. de diciembre de 1922, devolvemos al expresado Don Benito
Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda
obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero
si transcurre dicho plazo de cinco (5) aos sin ejercitar al derecho de retracto que nos
hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation
that there can certainly be not doubt as to the purpose of the plaintiff to sell the property in
question, reserving the right only to repurchase the same. The intention to sell with the right to
repurchase cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which she
became the "tenant" of the purchaser. That contract of rent appears in said quoted document
above as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la

finca arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez
Sy Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al
referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.

From the foregoing, we are driven to the following conclusions: First, that the contract of pacto
de retro is an absolute sale of the property with the right to repurchase and not a mortgage; and,
second, that by virtue of the said contract the vendor became the tenant of the purchaser, under
the conditions mentioned in paragraph 3 of said contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to
declare the same to be a mortgage and not a sale whenever the interpretation of such a contract
justifies that conclusion. There must be something, however, in the language of the contract or in
the conduct of the parties which shows clearly and beyond doubt that they intended the contract
to be a "mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10
Phil., 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415;
Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil.,
757; Villa vs. Santiago, 38 Phil., 157.)

We are not unmindful of the fact that sales with pacto de retro are not favored and that the court
will not construe an instrument to one of sale with pacto de retro, with the stringent and onerous
effect which follows, unless the terms of the document and the surrounding circumstances
require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms
of a contract, but when an issue is squarely presented that a contract does not express the
intention of the parties, courts will, when a proper foundation is laid therefor, hear evidence for
the purpose of ascertaining the true intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto
de retro. They admit that they signed it. They admit they sold the property in question with the
right to repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a
"sale" with pacto de retro, and the plaintiffs have shown no circumstance whatever which would
justify us in construing said contract to be a mere "loan" with guaranty. In every case in which
this court has construed a contract to be a mortgage or a loan instead of a sale with pacto de
retro, it has done so, either because the terms of such contract were incompatible or inconsistent
with the theory that said contract was one of purchase and sale. (Olino vs. Medina, supra;
Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and
De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of
the conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy
Puico, while the vendor used to the terms "sale and transfer with the right to repurchase," yet in
said contract he described himself as a "debtor" the purchaser as a "creditor" and the contract as
a "mortgage". In the case of Rodriguez vs. Pamintuan and De Jesusthe person who executed the
instrument, purporting on its face to be a deed of sale of certain parcels of land, had merely
acted under a power of attorney from the owner of said land, "authorizing him to borrow money
in such amount and upon such terms and conditions as he might deem proper, and to secure
payment of the loan by a mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a
contract purporting to be a deed of sale was executed, the supposed vendor remained in
possession of the land and invested the money he had obtained from the supposed vendee in
making improvements thereon, which fact justified the court in holding that the transaction was
a mere loan and not a sale. In the case of Cuyugan vs. Santos (39 Phil., 970), the purchaser
accepted partial payments from the vendor, and such acceptance of partial payments is
absolutely incompatible with the idea of irrevocability of the title of ownership of the purchaser
at the expiration of the term stipulated in the original contract for the exercise of the right of
repurchase."

Referring again to the right of the parties to vary the terms of written contract, we quote from
the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of the
Philippine Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the
Supreme Court of the United States and the contention of the Chief Justice in his dissenting
opinion was affirmed and the decision of the Supreme Court of the Philippine Islands was
reversed. (See decision of the Supreme Court of the United States, June 3, 1918.) 1 The Chief
Justice said in discussing that question:

According to article 1282 of the Civil Code, in order to judge of the intention of the contracting
parties, consideration must chiefly be paid to those acts executed by said parties which are
contemporary with and subsequent to the contract. And according to article 1283, however
general the terms of a contract may be, they must not be held to include things and cases
different from those with regard to which the interested parties agreed to contract. "The
Supreme Court of the Philippine Islands held the parol evidence was admissible in that case to
vary the terms of the contract between the Government of the Philippine Islands and the
Philippine Sugar Estates Development Co. In the course of the opinion of the Supreme Court of
the United States Mr. Justice Brandeis, speaking for the court, said:

It is well settled that courts of equity will reform a written contract where, owing to mutual
mistake, the language used therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction of a contract presents
a question of law and that, therefore, the mistake was one of law is not a bar to granting
relief. . . . This court is always disposed to accept the construction which the highest court
of a territory or possession has placed upon a local statute. But that disposition may not
be yielded to where the lower court has clearly erred. Here the construction adopted was
rested upon a clearly erroneous assumption as to an established rule of equity. . . . The
burden of proof resting upon the appellant cannot be satisfied by mere preponderance of
the evidence. It is settled that relief by way of reformation will not be granted unless the
proof of mutual mistake be of the clearest and most satisfactory character.

The evidence introduced by the appellant in the present case does not meet with that stringent
requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which
justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale
with the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract
are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its
stipulations shall be followed." Article 1282 provides: "in order to judge as to the intention of the
contracting parties, attention must be paid principally to their conduct at the time of making the
contract and subsequently thereto."

We cannot thereto conclude this branch of our discussion of the question involved, without
quoting from that very well reasoned decision of the late Chief Justice Arellano, one of the
greatest jurists of his time. He said, in discussing the question whether or not the contract, in the
case of Lichauco vs. Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer
declares and states that he is the proprietor in fee simple of two parcels of fallow
unappropriated crown land situated within the district of his pueblo. The first has an area
of 73 quiones, 8 balitas and 8 loanes, located in the sitio of Batasan, and its boundaries
are, etc., etc. The second is in the sitio of Panantaglay, barrio of Calumpang has as area of
73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc., etc."

In the executory part of the said instrument, it is stated:

'That under condition of right to repurchase (pacto de retro) he sells the said
properties to the aforementioned Doa Cornelia Laochangco for P4,000 and upon
the following conditions: First, the sale stipulated shall be for the period of two
years, counting from this date, within which time the deponent shall be entitled to
repurchase the land sold upon payment of its price; second, the lands sold shall,
during the term of the present contract, be held in lease by the undersigned who
shall pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in
sugar at the option of the vendor; third, all the fruits of the said lands shall be
deposited in the sugar depository of the vendee, situated in the district of Quiapo of
this city, and the value of which shall be applied on account of the price of this sale;
fourth, the deponent acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender currency of this
country . . .; fifth, all the taxes which may be assessed against the lands surveyed
by competent authority, shall be payable by and constitute a charge against the
 vendor; sixth, if, through any unusual event, such as flood, tempest, etc., the
properties hereinbefore enumerated should be destroyed, wholly or in part, it shall
be incumbent upon the vendor to repair the damage thereto at his own expense
and to put them into a good state of cultivation, and should he fail to do so he binds
himself to give to the vendee other lands of the same area, quality and value.'

xxx xxx xxx

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's
contract with Laochangco was not one of sale with right of repurchase, but merely one of
loan secured by those properties, and, consequently, that the ownership of the lands in
questions could not have been conveyed to Laochangco, inasmuch as it continued to be
held by Berenguer, as well as their possession, which he had not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the instrument, Exhibit C. Not
because the lands may have continued in possession of the vendor, not because the latter
may have assumed the payment of the taxes on such properties, nor yet because the
same party may have bound himself to substitute by another any one of the properties
which might be destroyed, does the contract cease to be what it is, as set forth in detail in
the public instrument. The vendor continued in the possession of the lands, not as the
owner thereof as before their sale, but as the lessee which he became after its
consummation, by virtue of a contract executed in his favor by the vendee in the deed
itself, Exhibit C. Right of ownership is not implied by the circumstance of the lessee's
assuming the responsibility of the payment is of the taxes on the property leased, for their
payment is not peculiarly incumbent upon the owner, nor is such right implied by the
obligation to substitute the thing sold for another while in his possession under lease,
since that obligation came from him and he continues under another character in its
possessiona reason why he guarantees its integrity and obligates himself to return the
thing even in a case of force majeure. Such liability, as a general rule, is foreign to
contracts of lease and, if required, is exorbitant, but possible and lawful, if voluntarily
agreed to and such agreement does not on this account involve any sign of ownership, nor
other meaning than the will to impose upon oneself scrupulous diligence in the care of a
thing belonging to another.

The purchase and sale, once consummated, is a contract which by its nature transfers the
ownership and other rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the vendee and the vendor,
to the end that the latter may again acquire the ownership of the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method
of loan; it is likewise true that in practice many cases occur where the consummation of
a pacto de retro sale means the financial ruin of a person; it is also, unquestionable that
in pacto de retro sales very important interests often intervene, in the form of the price of
the lease of the thing sold, which is stipulated as an additional covenant. (Manresa, Civil
Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale
with right of repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage
to secure a loan.

We come now to a discussion of the second question presented above, and that is, stating the
same in another form: May a tenant charge his landlord with a violation of the Usury Law upon
the ground that the amount of rent he pays, based upon the real value of the property, amounts
to a usurious rate of interest? When the vendor of property under a pacto de retro rents the
property and agrees to pay a rental value for the property during the period of his right to
repurchase, he thereby becomes a "tenant" and in all respects stands in the same relation with
the purchaser as a tenant under any other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right
to repurchase, or the sum of P375 per month, based upon the value of the property, amounted to
usury. Usury, generally speaking, may be defined as contracting for or receiving something in
excess of the amount allowed by law for the loan or forbearance of moneythe taking of more
interest for the use of money than the law allows. It seems that the taking of interest for the loan
of money, at least the taking of excessive interest has been regarded with abhorrence from the
earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of
England, and especially the English Church, entertained the opinion, then, current in Europe, that
the taking of any interest for the loan of money was a detestable vice, hateful to man and
contrary to the laws of God. (3 Coke's Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we
shall find that there is scarcely any people, ancient or modern, that have not had usury laws. . . .
The Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It
will be deemed a little singular, that the same voice against usury should have been raised in the
laws of China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may
say, in the laws of all nations that we know of, whether Greek or Barbarian."

The collection of a rate of interest higher than that allowed by law is condemned by the
Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a
property to enter into a contract with the tenant for the payment of a specific amount of rent for
the use and occupation of said property, even though the amount paid as "rent," based upon the
value of the property, might exceed the rate of interest allowed by law? That question has never
been decided in this jurisdiction. It is one of first impression. No cases have been found in this
jurisdiction answering that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans'
and declaring the effect of receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money,
goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on
"loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term
is used in the statute, 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. To "loan," in general parlance, is to
deliver to another for temporary use, on condition that the thing or its equivalent be returned; or
to deliver for temporary use on condition that an equivalent in kind shall be returned with a
compensation for its use. The word "loan," however, as used in the statute, has a technical
meaning. It never means the return of the same thing. It means the return of an equivalent only,
but never the same thing loaned. A "loan" has been properly defined as an advance payment 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. Under the contract of "loan," as
used in said statute, the moment the contract is completed the money, goods or chattels given
cease to be the property of the former owner and becomes 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 becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner
of the property does not lose his ownership. He simply loses his control over the property rented
during the period of the contract. In a contract of "loan" the thing loaned becomes the property
of the obligor. In a contract of "rent" the thing still remains the property of the lessor. He simply
loses control of the same in a limited way during the period of the contract of "rent" or lease. In a
contract of "rent" the relation between the contractors is that of landlord and tenant. In a
contract of "loan" of money, goods, chattels or credits, the relation between the parties is that of
obligor and obligee. "Rent" may be defined as the compensation either in money, provisions,
chattels, or labor, received by the owner of the soil from the occupant thereof. It is defined as the
return or compensation for the possession of some corporeal inheritance, and is a profit issuing
out of lands or tenements, in return for their use. It is that, which is to paid for the use of land,
whether in money, labor or other thing agreed upon. A contract of "rent" is a contract by which
one of the parties delivers to the other some nonconsumable thing, in order that the latter may
use it during a certain period and return it to the former; whereas a contract of "loan", as that
word is used in the statute, signifies the delivery of money or other consumable things upon
condition of returning an equivalent amount of the same kind or quantity, in which cases it is
called merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."

From the foregoing it will be seen that there is a while distinction between a contract of "loan," as
that word is used in the statute, and a contract of "rent" even though those words are used in
ordinary parlance as interchangeable terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for
the use and occupation of the property may depend upon a thousand different conditions; as for
example, farm lands of exactly equal productive capacity and of the same physical value may
have a different rental value, depending upon location, prices of commodities, proximity to the
market, etc. Houses may have a different rental value due to location, conditions of business,
general prosperity or depression, adaptability to particular purposes, even though they have
exactly the same original cost. A store on the Escolta, in the center of business, constructed
exactly like a store located outside of the business center, will have a much higher rental value
than the other. Two places of business located in different sections of the city may be constructed
exactly on the same architectural plan and yet one, due to particular location or adaptability to a
particular business which the lessor desires to conduct, may have a very much higher rental
value than one not so located and not so well adapted to the particular business. A very cheap
building on the carnival ground may rent for more money, due to the particular circumstances
and surroundings, than a much more valuable property located elsewhere. It will thus be seen
that the rent to be paid for the use and occupation of property is not necessarily fixed upon the
value of the property. The amount of rent is fixed, based upon a thousand different conditions
and may or may not have any direct reference to the value of the property rented. To hold that
"usury" can be based upon the comparative actual rental value and the actual value of the
property, is to subject every landlord to an annoyance not contemplated by the law, and would
create a very great disturbance in every business or rural community. We cannot bring ourselves
to believe that the Legislature contemplated any such disturbance in the equilibrium of the
business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only
to repurchase. During the period of redemption the purchaser was the absolute owner of the
property. During the period of redemption the vendor was not the owner of the property. During
the period of redemption the vendor was a tenant of the purchaser. During the period of
redemption the relation which existed between the vendor and the vendee was that of landlord
and tenant. That relation can only be terminated by a repurchase of the property by the vendor
in accordance with the terms of the said contract. The contract was one of rent. The contract was
not a loan, as that word is used in Act No. 2655.

As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to
make contracts for parties. They made their own contract in the present case. There is not a
word, a phrase, a sentence or paragraph, which in the slightest way indicates that the parties to
the contract in question did not intend to sell the property in question absolutely, simply with the
right to repurchase. People who make their own beds must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is explicit,
clear, unambiguous and beyond question. It expresses the exact intention of the parties at the
time it was made. There is not a word, a phrase, a sentence or paragraph found in said contract
which needs explanation. The parties thereto entered into said contract with the full
understanding of its terms and should not now be permitted to change or modify it by parol
evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of
the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a
separate action the right guaranteed to them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation
with the law applicable thereto, that the judgment appealed from should be and is hereby
affirmed, with costs. So ordered.

Avancea, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

MALCOLM, J., dissenting:

I regret to have to dissent from the comprehensive majority decision. I stand squarely on the
proposition that the contract executed by the parties was merely a clever device to cover up the
payment of usurious interest. The fact that the document purports to be a true sale with right of
repurchase means nothing. The fact that the instrument includes a contract of lease on the
property whereby the lessees as vendors apparently bind themselves to pay rent at the rate of
P375 per month and whereby "Default in the payment of the rent agreed for two consecutive
months will terminate this lease and will forfeit our right of repurchase, as though the term had
expired naturally" does mean something, and taken together with the oral testimony is indicative
of a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655, sec. 7, as amended;
Padilla vs. Linsangan [1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua [1919], 39 Phil., 552;
Russel vs. Southard [1851], 53 U. S., 139 Monagas vs.Albertucci y Alvarez [1914], 235 U. S., 81;
10 Manresa, Codigo Civil Espaol, 3rd ed., p. 318.) The transaction should be considered as in
the nature of an equitable mortgage. My vote is for a modification of the judgment of the trial
court.

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF
THE PHILIPPINES, represented by the Solicitor General, respondents.

DECISION

ROMERO, J.:

Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch
93, Quezon City, in an information which reads as follows:
That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines and
within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with
unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and feloniously
defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and in the place
aforementioned, said accused received in trust from the offended party cash money amounting
to P536,650.00, Philippine Currency, with the express obligation involving the duty to act as
complainants agent in purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to
resell them to several stores, to give her commission corresponding to 40% of the profits; and to
return the aforesaid amount of offended party, but said accused, far from complying her
aforesaid obligation, and once in possession thereof, misapplied, misappropriated and converted
the same to her personal use and benefit, despite repeated demands made upon her, accused
failed and refused and still fails and refuses to deliver and/or return the same to the damage and
prejudice of the said ISIDORA ROSALES, in the aforementioned amount and in such other amount
as may be awarded under the provision of the Civil Code.

CONTRARY TO LAW.

The antecedent facts are as follows:

Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of
complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying and
selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed. Under their
agreement, Rosales would give the money needed to buy the cigarettes while Liwanag and
Tabligan would act as her agents, with a corresponding 40% commission to her if the goods are
sold; otherwise the money would be returned to Rosales. Consequently, Rosales gave several
cash advances to Liwanag and Tabligan amounting to P633,650.00.

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report
on the progress of the transactions. The visits, however, suddenly stopped, and all efforts by
Rosales to obtain information regarding their business proved futile.

Alarmed by this development and believing that the amounts she advanced were being
misappropriated, Rosales filed a case of estafa against Liwanag.

After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding
Liwanag guilty as charged. The dispositive portion of the decision reads thus:

WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused,
beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an
Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF
PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR
AS MAXIMUM, AND TO PAY THE COSTS.

The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00,
without subsidiary imprisonment, in case of insolvency.

SO ORDERED.

Said decision was affirmed with modification by the Court of Appeals in a decision dated
November 29, 1993, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the
correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8) MONTHS
and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT
(8) MONTHS of reclusion temporal, as maximum. In all other respects, the decision is AFFIRMED.

SO ORDERED.

Her motion for reconsideration having been denied in the resolution of March 16, 1994,
Liwanag filed the instant petition, submitting the following assignment of errors:

1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN AFFIRMING THE CONVICTION OF THE

ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST
(sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN
OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY OF
THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-

PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE EQUIPOISE RULE.

Liwanag advances the theory that the intention of the parties was to enter into a contract of
partnership, wherein Rosales would contribute the funds while she would buy and sell the
cigarettes, and later divide the profits between them. [1] She also argues that the transaction can
also be interpreted as a simple loan, with Rosales lending to her the amount stated on an
installment basis.[2]

The Court of Appeals correctly rejected these pretenses.

While factual findings of the Court of Appeals are conclusive on the parties and not
reviewable by the Supreme Court, and carry more weight when these affirm the factual findings
of the trial court,[3] we deem it more expedient to resolve the instant petition on its merits.

Estafa is a crime committed by a person who defrauds another causing him to suffer
damages, by means of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent
acts.[4]

From the foregoing, the elements of estafa are present, as follows: (1) that the accused
defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable of
pecuniary estimation is caused to the offended party or third party, [5] and it is essential that there
be a fiduciary relation between them either in the form of a trust, commission or administration.
[6]

The receipt signed by Liwanag states thus:

May 19, 1988 Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX
HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip &
Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not sold, the proceeds
of the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount
of P526,650.00 or the said items on or before August 30, 1988.

(SGD & Thumbedmarked) (sic)

 CARMEN LIWANAG

26 H. Kaliraya St.

Quezon City

Signed in the presence of:

(Sgd) Illegible (Sgd) Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to
Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the
cigarettes cannot be sold, the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between
the parties, we have ruled that when money or property have been received by a partner for a
specific purpose (such as that obtaining in the instant case) and he later misappropriated it, such
partner is guilty of estafa.[7]

Neither can the transaction be considered a loan, since in a contract of loan once the money
is received by the debtor, ownership over the same is transferred. [8] Being the owner, the
borrower can dispose of it for whatever purpose he may deem proper.

In the instant petition, however, it is evident that Liwanag could not dispose of the money as
she pleased because it was only delivered to her for a single purpose, namely, for the purchase
of cigarettes, and if this was not possible then to return the money to Rosales. Since in this case
there was no transfer of ownership of the money delivered, Liwanag is liable for conversion
under Art. 315, par. 1(b) of the Revised Penal Code.

WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated
November 29, 1993, is AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June
28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and
consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of
P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's
fees in the amount of P5,000.00. The present appeal is from that judgment.

In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00,
to be used as follows: P250,000.00 for the construction of a factory building (for the manufacture
of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery
and equipment; and P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by
Saura on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and
arrived in Davao City in July 1953; and that to secure its release without first paying the draft,
Saura, Inc. executed a trust receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the
land site thereof, and the machinery and equipment to be installed. Among the other terms
spelled out in the resolution were the following:

1. That the proceeds of the loan shall be utilized exclusively for the following
purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo
and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject
to availability of funds, and as the construction of the factory buildings progresses, to be certified
to by an appraiser of this Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC,
requesting a modification of the terms laid down by it, namely: that in lieu of having China
Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription
with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put
up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca
would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the
latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all
the aspects of this approved loan ... with special reference as to the advisability of financing this
particular project based on present conditions obtaining in the operations of jute mills, and to
submit his findings thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as
co-signer for the loan, and asked that the necessary documents be prepared in accordance with
the terms and conditions specified in Resolution No. 145. In connection with the reexamination of
the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties
named their respective committees of engineers and technical men to meet with each other and
undertake the necessary studies, although in appointing its own committee Saura, Inc. made the
observation that the same "should not be taken as an acquiescence on (its) part to novate, or
accept new conditions to, the agreement already) entered into," referring to its acceptance of the
terms and conditions mentioned in Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of
mortgage, which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on
June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to
reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s.,
authorizing the re-examination of all the various aspects of the loan granted the Saura Import &
Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute
sacks in Davao, with special reference as to the advisability of financing this particular project
based on present conditions obtaining in the operation of jute mills, and after having heard
Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation
of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED
from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be
necessary from time to time to place the factory in actual operation: PROVIDED that all terms
and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and
effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for
China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of
the loan and therefore considered the same as cancelled as far as it was concerned. A follow-up
letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted.
The request was denied by RFC, which added in its letter-reply that it was "constrained to
consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China
Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that
China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC
releases to us the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original
amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the
promissory notes jointly with the borrower-corporation," but with the following proviso:

That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to the
following:

1. That the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for

the requirements of the factory."

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

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the
first place, and to require, in its Resolution No. 9083, a certification from the Department of
Agriculture and Natural Resources as to the availability of local raw materials to provide
adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand
impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by
the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably
even next year;" (2) requesting "assurances (from RFC) that my company and associates will be
able to bring in sufficient jute materials as may be necessary for the full operation of the jute
mill;" and (3) asking that releases of the loan be made as follows:

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-

ment per attached list to enable the jute
mill to operate 182,413.91

c) For raw materials and labor 67,586.09

 1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival

of raw jute.

3) P17,586.09 to be released as soon as the

mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in our
letter of December 22, 1954, the releases of the loan, if revived, are
proposed to be made from time to time, subject to availability of funds
towards the end that the sack factory shall be placed in actual
operating status. We shall be able to act on your request for revised
purpose and manner of releases upon re-appraisal of the securities
offered for the loan.

With respect to our requirement that the Department of Agriculture

and Natural Resources certify that the raw materials needed are
available in the immediate vicinity and that there is prospect of
increased production thereof to provide adequately the requirements
of the factory, we wish to reiterate that the basis of the original
approval is to develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you will have to
rely on the importation of jute and your request that we give you
assurance that your company will be able to bring in sufficient jute
materials as may be necessary for the operation of your factory, would
not be in line with our principle in approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the
matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC
executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as
president of Saura, Inc.

It appears that the cancellation was requested to make way for the registration of a mortgage
contract, executed on August 6, 1954, over the same property in favor of the Prudential Bank
and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within
which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for
failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15,
1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC
(as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of
the loan applied for and approved, thereby preventing the plaintiff from completing or paying
contractual commitments it had entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract
between the parties and that the defendant was guilty of breach thereof. The defendant pleaded
below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that
its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that
assuming there was, the plaintiff itself did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of
the Civil Code, which provides:

ART. 1954. An accepted promise to deliver something, by way of commodatum or

simple loan is binding upon the parties, but the commodatum or simple loan itself
shall not be perferted until the delivery of the object of the contract.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan
of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage
was executed and registered. But this fact alone falls short of resolving the basic claim that the
defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

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

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had
been going on for the implementation of the agreement reached an impasse. Saura, Inc.
obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting
that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled,
which was done on June 15, 1955. The action thus taken by both parties was in the nature cf
mutual desistance what Manresa terms "mutuo disenso" 1 which is a mode of extinguishing
obligations. It is a concept that derives from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its extinguishment. 2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any
alleged breach of contract by RFC, or even point out that the latter's stand was legally
unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights
it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with
DBP for another loan to finance a rice and corn project, which application was disapproved. It was
only in 1964, nine years after the loan agreement had been cancelled at its own request, that
Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt
that the said agreement had been extinguished by mutual desistance and that on the initiative
of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other
issues raised in the respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs
against the plaintiff-appellee.
G.R. No. L-1927 May 31, 1949

CRISTOBAL ROO, petitioner,

vs.
JOSE L. GOMEZ, ET AL., respondents.

Alfonso Farcon for petitioner.

Capistrano & Azores for respondents.

BENGZON, J.:

This petition to review a decision of the Court of Appeals was admitted mainly because it
involves one phase of the vital contemporary question: the repayment of loans given in Japanese
fiat currency during the last war of the Pacific.

On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese fiat
money from Jose L. Gomez. He informed the later that he would use the money to purchase a
jitney; and he agreed to pay that debt one year after date in the currency then prevailing. He
signed a promissory note of the following tenor:

For value received, I promise to pay one year after date the sum of four thousand pesos
(4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the payment
It is agreed that this will not earn any interest and the payment prevailing by the end of
the stipulated period of one year.

In consideration of this generous loan, I renounce any right that may come to me by
reason of any postwar arrangement, of privilege that may come to me by legislation
wherein this sum may be devalued. I renounce flatly and absolutely any condition, term
right or privilege which in any way will prejudice the right engendered by this agreement
wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I
affirm the legal tender, currency or any medium of exchange, or money in this sum of
P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944.

On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna Court of
First Instance. His main defense was his liability should not exceed the equivalent of 4,000 pesos
"mickey mouse" money and could not be 4,000 pesos Philippine currency, because the
contract would be void as contrary to law, public order and good morals.

After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the
defendant Roo to pay four thousand pesos in Philippine currency with legal interest from the
presentation of the complaint plus costs.

On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment
with costs. It declared being a mechanic who knew English was not deceived into signing the
promissory note, and that the contents of the same had not been misrepresented to him. It
pronounced the contract valid and enforceable according to its terms and conditions.

One basic principle of the law on contracts of the Civil Code is that "the contracting parties may
establish any pacts, clauses and conditions they may deem advisable, provided they are not
contrary to law, morals or public order." (Article 1255.) Another principle is that "obligations
arising from contracts shall have the force of law between the contracting parties and must be
performed in accordance with their stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury law, because on
the basis of calculations by Government experts he only received the equivalent of one hundred
Philippine pesos and now he is required to disgorge four thousand pesos or interest greatly in
excess of the lawful rates.

But he is not paying interest. Precisely the contract says that the money received "will not earn
any interest." Furthermore, he received four thousand pesos; and he is required to pay four
thousand pesos exactly. The increased intrinsic value and purchasing power of the current
money is consequence of an event (change of currency) which at the time of the contract neither
party knew would certainly happen within the period of one year. They both elected to subject
their rights and obligations to that contingency. If within one year another kind of currency
became legal tender, Gomez would probably get more for his money. If the same Japanese
currency continued, he would get less, the value of Japanese money being then on the
downgrade.

Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their validity
(see art. 1790 and Manresa's comment thereon) on a par with insurance policies and life
annuities.

The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws.
Interest is some additional money to be paid in any event, which is not the case herein, because
Gomez might have gotten less if the Japanese occupation had extended to the end of 1945 or if
the liberation forces had chosen to permit the circulation of the Japanese notes.

Moreover, Roo argues, the deal was immoral because taking advantage of his superior
knowledge of war developments Gomez imposed on him this onerous obligation. In the first
place, the Court of Appeals found that he voluntary agreed to sign and signed the document
without having been misled as to its contents and "in so far as knowledge of war events was
concerned" both parties were on "equal footing". In the second place although on October 5,
1944 it was possible to surmise the impending American invasion, the date of victory or
liberation was anybody's guess. In the third place there was the possibility that upon-re-
occupation the Philippine Government would not invalidate the Japanese currency, which after all
had been forced upon the people in exchange for valuable goods and property. The odds were
about even when Roo and Gomez played their bargaining game. There was no overreaching,
nor unfair advantage.

Again Roo alleges it is immoral and against public order for a man to obtain four thousand
pesos in return for an investment of forty pesos (his estimate of the value of the Japanese money
he borrowed). According to his line of reasoning it would be immoral for the homeowner to
recover ten thousand pesos (P10,000, when his house is burned, because he invested only about
one hundred pesos for the insurance policy. And when the holder of a sweepstakes ticket who
paid only four pesos luckily obtains the first prize of one hundred thousand pesos or over, the
whole business is immoral or against public order.

In this connection we should explain that this decision does not cover situations where borrowers
of Japanese fiat currency promised to repay "the same amount" or promised to return the same
number of pesos "in Philippines currency" or "in the currency prevailing after the war." There may
be room for argument when those litigations come up for adjudication. All we say here and now
is that the contract in question is legal and obligatory.

A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine with
the Court of Appeals that the matter involve a defect in procedure which does not amount to
prejudicial error.

Wherefore, the appealed judgment will be affirmed with costs. So ordered.

Moran, C.J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.

Separate Opinions

FERIA, J., concurring:

I concur in the decision of the majority, with the additional reason that in the case of Hilado vs.
De la Costa, G.R. No. L-150,
1
decided on April 30, 1949, we have already held the following in support of the decision in this
case:

Even if we consider arguendo the deposits under consideration as a loan from the plaintiff
to the defendant bank, the deposit liability of the latter to the former after liberation for
the credit balance of P15,023.01 as of December 26, 1944, would be less than P200 in
Philippine currency, and therefore could not make up the difference between the lowers
minimum balance of P578.37 and the sum of P3,678.27 in which, according to the lower
court, the defendant bank is indebted to the plaintiff. Contracts stipulating for payments
presumably in Japanese war notes may be enforced in our courts after the liberation to the
extent of the just obligation of the contracting parties, and, as said notes have become
worthless, in order that justice may be done and the party entitled to be paid can recover
their actual value in Philippine currency, what the debtor or defendant bank should return
or pay is the value of the Japanese Military notes in relation to the peso in Philippine
currency obtaining on the date when and at the place where the obligation was incurred,
unless the parties had agreed otherwise. In the absence of evidence of the value of the
Japanese war notes in terms of Philippine currency, and for the purpose of this decision,
we may adopt the Ballantine scale of values for the Commonwealth (now Republic) peso in
terms of the peso in Japanese war notes during the occupation, . . . .

The writer of the dissenting opinion quotes the abovequoted decision in support of his conclusion
that payment of obligations contracted in Japanese war notes during the Japanese occupation
must be paid after the liberation at its value in Philippine currency, "and in the absence of
evidence of the value of the Japanese war notes in terms of Philippine currency we may adopt
the Ballantine scale of values." The dissenter overlooked that in said Hilado case we have ruled,
as can be seen from the above quoted excerpt of our decision, that "what the debtor should pay
is the value of the Japanese war notes in relations to the peso of Philippine currency obtaining on
the date when and at the place where the obligation was incurred, unless the parties had agreed
otherwise." In the present case there is an agreement to the contrary between the parties to the
effect that "the payment will be made in currency that will be prevailing at the end of the
stipulated period of one year;" and the currency prevailing at the end of the stipulated period
was Philippine currency.

Besides, in the same communications which was submitted to the President of the
Commonwealth, Mr. Ballantine says the following:

In determining the present liability of the debts in Commonweath peso with respect to
debts incurred during the occupation and still outstanding in whole or part, the unpaid
portion of the debt might be revalued on a basis of the ratio that the Japanese war note
here to the Commonwealth peso on the date the debt was originally incurred. It is not
believed, however, that debts incurred during the occupation which specifically provide for
payment in a consideration other than currency, should be affected by the provisions of
any legislative enactment.
PERFECTO, J., concurring:

We are of opinion that there is nothing immoral or against the law or public order in the
promissory note in question. In view of the uncertainly of life during those days, the lender took
the chance of not being able to collect any part of the loan, either because he or all the members
of his family might have been liquidated or the debtor might have been killed.

In writing this brief concurring opinion, our main purpose is to take exception to the
pronouncement in the majority decision defending the morality of sweepstakes. We have already
publicly condemned in more than one occasion the sweepstakes undertaken by the government
as highly immoral as Jai-alai, horse racing, cock-fighting, prize fighting, and the other forms of
gambling that are expressly prohibited and punished by law. There is no reason why we are to
change now this point of view. Sweepstakes are not only immoral but highly demoralizing to the
people, and the government policy of trying to raise revenue through such form of gambling is
absolutely defenseless.

PARAS, J., dissenting:

On October 5, 1944, Cristobal Roo obtained a loan of P4,000 (in Japanese war notes) from Jose
L. Gomez, as evidence of which Roo executed the following promissory note:

For value received, I promise to pay one year after date the sum of four thousand pesos
(P4,000) to Jose L. Gomez. It is agreed that this will not earn any interest and the payment
will be made in currency that will be prevailing by the end of the stipulated period of one
year.

In consideration of this generous loan, I renounce any right that may come to me by
reason of any postwar arrangement, or privilege that may come time by legislation
wherein this sum may be devalued. I renounce flatly and absolutely any condition, term,
right or privilege which in any way will prejudice the right engendered by this agreement
wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. I
affirm that the legal tender, currency or any medium of exchange, or money in this sum of
P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, 1944.

The loan was payable one year after October 5, 1944. Upon default of Cristobal Roo, an action
was filed against him by Jose L. Gomez and his wife, Sinforosa A. de Gomez, on October 15,1945,
in the Court of First Instance of Laguna to enforce the collection of the sum of P 4,000 in
Philippine currency. Judgment was rendered against Cristobal Roo who, however, appealed to
the court of appeals. The latter court of First Instance of Laguna.

The principal defense set up by Roo is that the notes is contrary to law, morals or public order.
This defense was flatly overruled in the court of origin, seconded by the Court of Appeals. The
judgement of the latter court is now before us upon appeal by certiorari of Cristobal Roo.

The situation is one which a borrower of P4,000 in Japanese war notes is made to pay the same
amount in currency of the present Philippine Republic. In otherwords, the borrower of P4,000
during the latter part of the Japanese military occupation which, in ordinary practical terms,
could hardly purchase a cavan of rice, is now compelled to pay P4,000 in actual Philippine
currency which, in the same ordinary practical terms, may be held equivalent to at least 100
cavanes of rice. Said borrower is compelled to do so, merely because in his promissory note he
agreed to pay after one year in pesos of the Philippine currency, and expressly waived any
postwar arrangement devaluating the amount borrowed in October, 1944.

The Court of Appeals held that the commitment of Cristobal Roo to settle his indebtedness in
the legal tender at the time of payment is not against the law, morals or public order. We readily
acquiesce in the proposition that the contract is not contrary to law or public order, for we are
aware of no statute or public policy which prohibits a person from bringing about or causing his
own financial reverses. But we are of the opinion that, if enforced to the letter, it is against
morals. If the contract was entered into in times of peace, its obligations should have the force of
law between the parties and must be performed in accordance with their stipulations (art. 1091,
Civil Code). But when as in the case at bar, the borrower had to obtain a loan during war time,
when living conditions were abnormal and oppressive, everything was uncertain, and everybody
was fighting for his survival, our conscience and common sense demand that his acts be judged
by compatible standards.

The Court of Appeals found that everybody was aware of the developments of the war outside of
official propaganda and that, in so far as knowledge of war events is concerned, Roo was more
or less on an equal footing with Gomez. This means that all knew the bombings by the American
air forces of various parts of the Islands in September, 1944, and of the decisive defeats of the
Axis powers in Europe, and that the mighty forces of the Allies would soon, as in fact they did,
concentrate on and crush Japan, with the result that the Japanese war notes would accordingly
become worthless. It may of course be supposed that Roo knowingly bound himself to his pact.
But this is true merely in theory. Although, as found also by the Court of Appeals, Roo was not
entirely an ignorant man because he is a mechanic and knows English, the fact nevertheless
remains that the lender, Jose L. Gomez, was a lawyer, and the exaggerated way the promissory
note is worded plainly shows that the latter must have thoroughly studied the transaction with
Roo and imposed the conditions evidenced therein to his one-sided advantage. It is needless to
say that borrowers are always at the mercy of unscrupulous money lenders. "Necessitous men
are not, truly speaking, free men; but, to answer a present emergency, will submit to any terms
that the crafty may impose upon them." (Marquez vs. Valencia, 77 Phil., 782, quoting
Villa vs. Santiago, 38 Phil., 157, 164.) We cannot believe, as intimated in the testimony of
Sinforosa A. de Gomez (wife of Jose L. Gomez), that Roo informed them that he would use the
money to purchase a jitney, for the simple reason that, in view of the inflated value of the
Japanese war notes in October, 1944, the amount of P4,000 could not possibly purchase a jitney.
At any rate, even accepting the conjecture that said amount was invested by Roo in his
business, the circumstance still makes him a necessitous man that had to submit to the terms of
his lender. That a contract like the one in question is shocking to the conscience and therefore
immoral becomes patent when we resort to the example of a borrower of P2,000 just before the
liberation, when a kilo of sugar already cost P2,000, being compelled to pay the same in
Philippine currency now when a kilo of sugar hardly costs P0.50. Where is the conscience of
anyone who will collect P2,000 for a loan of virtually fifty centavos?

The Court of Appeals argued that the parties took equal risks, since it was impossible to predict
the exact time at which the Philippines would be liberated and that, supposing that the liberation
had been delayed for more than one year, Gomez might have been the loser and Roo the
winner, for the Japanese currency might have further diminished in value. To this we would
answer that Gomez would then be paid in the same currency that was borrowed and during the
same war time when the loan was extended. This would not be unusual, as the parties are still
under the very environments that surrounded the execution of the contract.

In another case now submitted to us for decision (G.R. No. L-1826). Jose L. Gomez is also
featured as having granted loans to one Miguela Tabia during the Japanese occupation, which
goes to demonstrate that Gomez was more or less a professional money lender who would take
advantage of other's pressing needs, it appearing that in said case the contract had to be in the
nature of a sale with right of repurchase, providing that the redemption was to be made at the
same price (sa ganito ding halaga) of the purchase. Luckily, however, for the borrower Miguela
Tabia, the Court of Appeals (through another division) only sentenced and we think correctly
Tabia to pay an amount in Philippine currency equivalent to the obligation in accordance with the
Ballantine table.

We are sure that at the present time Gomez, or anybody for that matter, will not dare lend
P4,000 to one belonging to the class of Roo without interest and security. The record does not
reveal any special relationship between Gomez and Roo that can justify the apparent
"generosity" of the former. The point that we want to underscore is that the transaction in
question was made possible, undoubtedly because P4,000 in October, 1944, represented so little
an actual value that Roo (or any of his kind) did not hesitate to borrow some such amount,
which Gomez (or any of his kind) did not in turn lose time to give in the desire of converting what
would soon be valueless into good Philippine money.

Roo should not altogether be released from his obligation under the promissory note, for that
would also be unconscionable; but he should be freed from the burden of returning the full
P4,000 in actual Philippine currency. In other words, Roo's contract should be considered merely
as one for a payment presumably in Japanese war notes which may be enforced in our courts
after the liberation to the extent of his just obligation, at its actual value in Philippine currency
and, in the absence of evidence of the value of the Japanese war notes in terms of Philippine
currency, we may adopt the Ballantine scale of values (Hilado vs. De la Costa, 83 Phil., 471),
under which P4,000 in October, 1944, are equivalent to P100, Philippine currency.

The appealed decision should, therefore, be reversed and Cristobal Roo sentenced to pay to
Jose L. Gomez and his wife only the sum of P100, with legal interest from the date of the filing of
the complaint, plus the costs.

Pablo, M., Concurro con esta opinion.

EQUITABLE PCI BANK,* G.R. No. 171545

AIMEE YU and BEJAN
LIONEL APAS,
Petitioners, Present:
PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
NG SHEUNG NGOR** doing
business under the name
and style KEN MARKETING, Promulgated:
KEN APPLIANCE DIVISION,
INC. and BENJAMIN E. GO,
Respondents. December 19, 2007

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

DECISION

CORONA, J.:
This petition for review on certiorari [1] seeks to set aside the decision [2] of the Court of Appeals

(CA) in CA-G.R. SP No. 83112 and its resolution [3] denying reconsideration.

On October 7, 2001, respondents Ng Sheung Ngor, [4] Ken Appliance Division, Inc. and

Benjamin E. Go filed an action for annulment and/or reformation of documents and

contracts[5] against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu and

Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City. [6] They claimed that

Equitable induced them to avail of its peso and dollar credit facilities by offering low interest

rates[7] so they accepted Equitable's proposal and signed the bank's pre-printed promissory notes

on various dates beginning 1996. They, however, were unaware that the documents contained

identical escalation clauses granting Equitable authority to increase interest rates without their

consent.[8]

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and

conditions contained in the promissory notes. [9] In fact, they continuously availed of and

benefited from Equitable's credit facilities for five years. [10]

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,

Equitable restructured respondents' loans amounting to US$228,200 and P1,000,000.[11] The trial

court, however, invalidated the escalation clause contained therein because it violated the

principle of mutuality of contracts.[12] Nevertheless, it took judicial notice of the steep

depreciation of the peso during the intervening period [13] and declared the existence of

extraordinary deflation.[14] Consequently, the RTC ordered the use of the 1996 dollar exchange

rate in computing respondents' dollar-denominated loans. [15] Lastly, because the business

reputation of respondents was (allegedly) severely damaged when Equitable froze their

accounts,[16] the trial court awarded moral and exemplary damages to them. [17]

The dispositive portion of the February 5, 2004 RTC decision [18] provided:
WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of [respondents']

deposit placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos

as moral damages;
 C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos
as exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay

[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos as
moral and exemplary damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally,
to pay [respondents'] attorney's fees in the sum of P300,000; litigation
expenses in the sum of P50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable]

the unpaid principal obligation for the peso loan as well as the unpaid
obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]
interest as follows:

1) 12% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the
dollar obligation is the conversion rate of P26.50 per dollar availed of at
the time of incurring of the obligation in accordance with Article 1250 of
the Civil Code of the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the

aforestated unpaid principal loan obligations and interest.

SO ORDERED.[19]

Equitable and respondents filed their respective notices of appeal. [20]

In the March 1, 2004 order of the RTC, both notices were denied due course because Equitable

and respondents failed to submit proof that they paid their respective appeal fees. [21]

WHEREFORE, premises considered, the appeal interposed by defendants

from the Decision in the above-entitled case is DENIED due course. As of
February 27, 2004, the Decision dated February 5, 2004, is considered
final and executory in so far as [Equitable, Aimee Yu and Bejan Lionel
Apas] are concerned.[22] (emphasis supplied)

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC [23] on the ground

that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for the issuance

of a writ of execution.[24]

On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for

reconsideration for lack of merit[25] and ordered the issuance of a writ of execution in favor of
respondents.[26] According to the RTC, because respondents did not move for the reconsideration

of the previous order (denying due course to the parties notices of appeal), [27] the February 5,

2004 decision became final and executory as to both parties and a writ of execution against

Equitable was in order.[28]

A writ of execution was thereafter issued [29] and three real properties of Equitable were levied

upon.[30]

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004 order.
[31]
It, however, withdrew that petition on March 30, 2004 [32] and instead filed a petition for

certiorari with an application for an injunction in the CA to enjoin the implementation and

execution of the March 24, 2004 omnibus order. [33]

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary

injunction was correspondingly issued.[34]

Notwithstanding the writ of injunction, the properties of Equitable previously levied upon were

sold in a public auction on July 1, 2004. Respondents were the highest bidders and certificates of

sale were issued to them.[35]

On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the

sheriffs who conducted the sale in contempt for proceeding with the auction despite the

injunction order of the CA.[36]

On October 28, 2005, the CA dismissed the petition for certiorari. [37] It found Equitable guilty of

forum shopping because the bank filed its petition for certiorari in the CA several hours before

withdrawing its petition for relief in the RTC. [38] Moreover, Equitable failed to disclose, both in the

statement of material dates and certificate of non-forum shopping (attached to its petition for

certiorari in the CA), that it had a pending petition for relief in the RTC. [39]

Equitable moved for reconsideration [40] but it was denied.[41] Thus, this petition.

Equitable asserts that it was not guilty of forum shopping because the petition for relief was

withdrawn on the same day the petition for certiorari was filed.[42] It likewise avers that its
petition for certiorari was meritorious because the RTC committed grave abuse of discretion in

issuing the March 24, 2004 omnibus order which was based on an erroneous assumption. The

March 1, 2004 order denying its notice of appeal for non payment of appeal fees was erroneous

because it had in fact paid the required fees. [43] Thus, the RTC, by issuing its March 24, 2004

omnibus order, effectively prevented Equitable from appealing the patently wrong February 5,

2004 decision.[44]

This petition is meritorious.

EQUITABLE WAS NOT GUILTY OF FORUM

SHOPPING

Forum shopping exists when two or more actions involving the same transactions, essential facts

and circumstances are filed and those actions raise identical issues, subject matter and causes of

action.[45] The test is whether, in two or more pending cases, there is identity of parties, rights or

causes of actions and reliefs.[46]

Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have

identical causes of action. The petition for relief from the denial of its notice of appeal was based

on the RTCs judgment or final order preventing it from taking an appeal by fraud, accident,

mistake or excusable negligence. [47] On the other hand, its petition for certiorari in the CA, a

special civil action, sought to correct the grave abuse of discretion amounting to lack of

jurisdiction committed by the RTC.[48]

In a petition for relief, the judgment or final order is rendered by a court with competent

jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of its

jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum shopping when it moved

to withdraw its petition for relief in the RTC on the same day (in fact just four hours and forty

minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to disclose that

it had a pending petition for relief in the RTC, it rectified what was doubtlessly a careless
oversight by withdrawing the petition for relief just a few hours after it filed its petition for

certiorari in the CA a clear indication that it had no intention of maintaining the two actions at

the same time.

THE TRIAL COURT COMMITTED GRAVE

ABUSE OF DISCRETION IN ISSUING ITS
MARCH 1, 2004 AND MARCH 24, 2004
ORDERS

Section 1, Rule 65 of the Rules of Court provides:

Section 1. Petition for Certiorari. When any tribunal, board or officer exercising
judicial or quasi-judicial function has acted without or in excess of its or
his jurisdiction, or with grave abuse of discretion amounting to lack or
excess of jurisdiction, and there is no appeal, nor any plain, speedy or
adequate remedy in the ordinary course of law, a person aggrieved thereby
may file a verified petition in the proper court, alleging the facts with certainty and
praying that judgment be rendered annulling or modifying the proceedings of such
tribunal, board or officer, and granting such incidental reliefs as law and justice may
require.

The petition shall be accompanied by a certified true copy of the judgment, order or
resolution subject thereof, copies of all pleadings and documents relevant and
pertinent thereto, and a sworn certificate of non-forum shopping as provided in the
third paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial

functions acted without or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in the
ordinary course of law.

For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must

show that the public respondent patently and grossly abused his discretion and that abuse

amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law or

to act at all in contemplation of law, as where the power was exercised in an arbitrary and

despotic manner by reason of passion or hostility. [49]

The March 1, 2004 order denied due course to the notices of appeal of both Equitable and

respondents. However, it declared that the February 5, 2004 decision was final and executory
only with respect to Equitable. [50] As expected, the March 24, 2004 omnibus order denied

Equitable's motion for reconsideration and granted respondents' motion for the issuance of a writ

of execution.[51]

The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to

prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The

execution of the decision was undertaken with indecent haste, effectively obviating or defeating

Equitable's right to avail of possible legal remedies. No matter how we look at it, the RTC

committed grave abuse of discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary

course of law, we hold that there was none. The RTC denied due course to its notice of appeal in

the March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus order. Hence,

there was no way Equitable could have possibly appealed the February 5, 2004 decision. [52]

Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was not

a plain, speedy and adequate remedy in the ordinary course of law. [53] A petition for relief under

Rule 38 is an equitable remedy allowed only in exceptional circumstances or where there is no

other available or adequate remedy.[54]

Thus, we grant Equitable's petition for certiorari and consequently give due course to its appeal.

EQUITABLE RAISED PURE QUESTIONS OF

LAW IN ITS PETITION FOR REVIEW

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law. [55] There is a

question of law when the doubt or controversy concerns the correct application of law or

jurisprudence to a certain set of facts; or when the issue does not call for the probative value of

the evidence presented, the truth or falsehood of facts being admitted. [56]

Equitable does not assail the factual findings of the trial court. Its arguments essentially focus on

the nullity of the RTCs February 5, 2004 decision. Equitable points out that that decision was
patently erroneous, specially the exorbitant award of damages, as it was inconsistent with

existing law and jurisprudence.[57]

THE PROMISSORY NOTES WERE VALID

The RTC upheld the validity of the promissory notes despite respondents assertion that

those documents were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are drafted by one party.
[58]
The participation of the other party is limited to affixing his signature or his adhesion to the

contract.[59] For this reason, contracts of adhesion are strictly construed against the party who

drafted it.[60]

It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are, on

the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject it. A

contract of adhesion becomes void only when the dominant party takes advantage of the

weakness of the other party, completely depriving the latter of the opportunity to bargain on

equal footing.[61]

That was not the case here. As the trial court noted, if the terms and conditions offered by

Equitable had been truly prejudicial to respondents, they would have walked out and negotiated

with another bank at the first available instance. But they did not. Instead, they continuously

availed of Equitable's credit facilities for five long years.

While the RTC categorically found that respondents had outstanding dollar- and peso-

denominated loans with Equitable, it, however, failed to ascertain the total amount due

(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not explain how it

arrived at the amounts of US$228,200 and P1,000,000.[62] In Metro Manila Transit Corporation v.

D.M. Consunji,[63] we reiterated that this Court is not a trier of facts and it shall pass upon them

only for compelling reasons which unfortunately are not present in this case. [64] Hence, we

ordered the partial remand of the case for the sole purpose of determining the amount of actual

damages.[65]
ESCALATION CLAUSE VIOLATED THE
PRINCIPLE OF MUTUALITY OF CONTRACTS

Escalation clauses are not void per se. However, one which grants the creditor an unbridled right

to adjust the interest independently and upwardly, completely depriving the debtor of the right

to assent to an important modification in the agreement is void. Clauses of that nature violate

the principle of mutuality of contracts. [66] Article 1308[67] of the Civil Code holds that a contract

must bind both contracting parties; its validity or compliance cannot be left to the will of one of

them.[68]

For this reason, we have consistently held that a valid escalation clause provides:

1. that the rate of interest will only be increased if the applicable

maximum rate of interest is increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary Board (de-
escalation clause).[69]

The RTC found that Equitable's promissory notes uniformly stated:

If subject promissory note is extended, the interest for subsequent extensions shall
be at such rate as shall be determined by the bank. [70]

Equitable dictated the interest rates if the term (or period for repayment) of the loan was

extended. Respondents had no choice but to accept them. This was a violation of Article 1308 of

the Civil Code. Furthermore, the assailed escalation clause did not contain the necessary

provisions for validity, that is, it neither provided that the rate of interest would be increased only

if allowed by law or the Monetary Board, nor allowed de-escalation. For these reasons, the

escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National

Bank[71] we held that, because the escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate of interest. Upon maturity, the amount due was

subject to legal interest at the rate of 12% per annum. [72]

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their dollar-

denominated loans and 20% p.a. for their peso-denominated loans from January 10, 2001 to July

9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all amounts due.

THERE WAS NO
EXTRAORDINARY DEFLATION

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of

currency (that is, beyond the common fluctuation in the value of currency) and such decrease

could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at

the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse

situation.[73]

Article 1250 of the Civil Code provides:

Article 1250. In case an extraordinary inflation or deflation of the currency

stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary.

For extraordinary inflation (or deflation) to affect an obligation, the following requisites

must be proven:
1. that there was an official declaration of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas (BSP);[74]

2. that the obligation was contractual in nature; [75] and

3. that the parties expressly agreed to consider the effects of the

extraordinary inflation or deflation.[76]

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary

inflation. Moreover, although the obligation in this instance arose out of a contract, the parties

did not agree to recognize the effects of extraordinary inflation (or deflation). [77] The RTC never

mentioned that there was a such stipulation either in the promissory note or loan agreement.
Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by

the BSP on the date of maturity.[78]

THE AWARD OF MORAL AND EXEMPLARY

DAMAGES LACKED BASIS

Moral damages are in the category of an award designed to compensate the claimant for actual

injury suffered, not to impose a penalty to the wrongdoer. [79] To be entitled to moral damages, a

claimant must prove:

1. That he or she suffered besmirched reputation, or physical, mental or

psychological suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the
damages the claimant sustained;

4. The case is predicated on any of the instances expressed or envisioned by

Article 2219[80] and 2220[81]. [82]

In culpa contractual or breach of contract, moral damages are recoverable only if the

defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.
[83]
The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive. [84]

The RTC found that respondents did not pay Equitable the interest due on February 9, 2001 (or

any month thereafter prior to the maturity of the loan) [85] or the amount due (principal plus

interest) due on July 9, 2001.[86] Consequently, Equitable applied respondents' deposits to their

loans upon maturity.

The relationship between a bank and its depositor is that of creditor and debtor. [87] For this

reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor's

indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable had the option to

exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it now

appears, deliberately) concluded that Equitable acted fraudulently or in bad faith or in wanton
disregard of its contractual obligations despite the absence of proof. The undeniable fact was

that, whatever damage respondents sustained was purely the consequence of their failure

to pay their loans. There was therefore absolutely no basis for the award of moral damages to

them.

Neither was there reason to award exemplary damages. Since respondents were not entitled to

moral damages, neither should they be awarded exemplary damages. [89] And if respondents were

not entitled to moral and exemplary damages, neither could they be awarded attorney's fees and

litigation expenses.[90]

ACCORDINGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in CA-G.R.

SP No. 83112 are hereby REVERSED and SET ASIDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in Civil Case

No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of discretion

amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant thereto are

likewise declared null and void.

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case No. CEB-

26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee Yu and Bejan

Lionel Apas is therefore given due course.

The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil Case

No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:

1. ordering respondents Ng Sheung Ngor, doing business under the name and

style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay

petitioner Equitable PCI Bank the principal amount of their dollar- and peso-

denominated loans;
 2. ordering respondents Ng Sheung Ngor, doing business under the name and

style of Ken Marketing, Ken Appliance Division, Inc. and Benjamin E. Go to pay

petitioner Equitable PCI Bank interest at:

a) 12.66% p.a. with respect to their dollar-denominated loans from

January 10, 2001 to July 9, 2001;

b) 20% p.a. with respect to their peso-denominated loans from January 10,

2001 to July 9, 2001;[91]

c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,

[92]
the total amount due on July 9, 2001 shall earn legal interest at

12% p.a. from the time petitioner Equitable PCI Bank demanded payment,

whether judicially or extra-judicially; and

d) after this Decision becomes final and executory, the applicable rate

shall be 12% p.a. until full satisfaction;

3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact

amounts due on the respective dollar-denominated and peso-denominated loans, as of July 9,

2001, of respondents Ng Sheung Ngor, doing business under the name and style of Ken

Marketing, Ken Appliance Division and Benjamin E. Go.

SO ORDERED.

RENATO C. CORONA

Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Associate Justice
 TERESITA J. LEONARDO-DE CASTRO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

G.R. No. L-1328 September 9, 1949

MARIANO NEPOMUCENO and AGUEDA G. DE NEPOMUCENO, plaintiffs-appellants,

vs.
EDILBERTO A. NARCISO and MAURA SUAREZ, defendants-appellees.

Higinio Gopez for appellants.

Fausto, Solima and Gotiangco for appellees.

OZAETA, J.:

On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of the
appellees on a parcel of land situated in the municipality of Angeles, Province of Pampanga, to
secure the payment within the period of seven years from the date of the mortgage of the sum
of P24,000 together with interest thereon at the rate of 8 per cent per annum.

On September 30, 1943, that is to say, more than two years before the maturity of said
mortgage, the parties executed a notarial document entitled "Partial Novation of Contract"
whereby they modified the terms of said mortgage as follows:

(1) From December 8, 1941, to January 1, 1944, the interest on the mortgage shall be at 6
per cent per annum, unpaid interest also paying interest also paying interest at the same
rate.

(2) From January 1, 1944, up to the end of the war, the mortgage debt shall likewise bear
interest at 6 per cent. Unpaid interest during this period shall however not bear any
interest.

(3) At the end of the war the interest shall again become 8 per cent in accordance with the
original contract of mortgage.

(4) While the war goes on, the mortgagor, his administrators or assigns, cannot redeem
the property mortgaged.
 (5) When the mortgage lapses on November 14, 1945, the mortgage may continue for
another ten years if the mortgagor so chooses, but during this period he may pay only one
half of the capital.

On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de Nepomuceno
filed their complaint in this case against the mortgagees, which compplaint, as amended on
September 7, 1944, alleged the execution of the contract of mortgage and its principal novation
as above indicated, and

7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the
property mortgaged while the war goes on; and that notwithstanding the said provision
the herein plaintiffs-mortgagors are now willing to pay the amount of the indebtedness
together with the corresponding interest due thereon;

8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the mortgagees-
defendants to tender payment of the balance of the mortgage debt with their
corresponding interest, but said spouses defendants refuse and still refuse to accept
payment;

9. That because of this refusal of the defendants to accept tender of payment on the
mortgage consideration, the plaintiffs suffered and still suffer damages in the amount of
P5,000;

10. That the plaintiffs are now and have deposited with the Clerk of Court of First Instance
of Pampanga the amount of P22,356 for the payment of the mortgage debt and the
interest due thereon;

Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in
the following tenor:

(a) Ordering the defendants to accept tender of payment from the plaintiffs;

(b) Ordering defendants to execute the corresponding deed of release of mortgage;

(c) Ordering defendants to pay damages in the amount of P5,000; and

(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the costs of
suit and any other remedy just and equitable in the premises.

After the trial the court sustained the defense that the complaint had been prematurely
presented and dismissed it with costs.

Appellants contend that the stipulation in the contract of September 30, 1943, that "while the
war goes on the mortgagor, his administrators or assigns cannot redeem the property
mortgaged," is against public policy and therefore null and void. They cite and rely on article
1255 of the Civil Code, which provides:

ART. 1255. The contracting parties may establish any pacts, clauses, and conditions
they may deem advisable, provided they are not contrary to law, morals, or public order.

They argue that "it would certainly be against public policy and a restraint on the freedom of
commerce to compel a debtor not to release his property from a lien even if he wanted to by
the payment of the indebtedness while the war goes on, which was undoubtedly of a very
uncertain duration."

The first two paragraphs of article 1125 of the Civil Code provide:

ART. 1125. Obligation for the performance of which a day certain has been fixed shall be
demandable only when the day arrives.

A day certain is understood to be one which must necessarily arrive, even though its date
be unknown.

Article 1127 says:

ART. 1127. Whenever a term for the performance of an obligation is fixed, it is presumed to
have been established for the benefit of the creditor and that of the debtor, unless from its
tenor or from other circumstances it should appear that the term was established for the
benefit of one or the other.

It will be noted that the original contract of mortgage provided for interest at 8 per cent per
annum and that the principal together with the interest was payable within the period of seven
years from November 14, 1938. But by mutual agreement of the parties that term was modified
on September 30, 1943, by reducing the interest to 6 per cent per annum from December 8,
1941, until the end of the war and by stipulating that the mortgagor shall not pay off the
mortgage while the war went on.

We find nothing immoral or violative of public order in that stipulation. The mortgagees
apparently did not want to have their prewar credit paid with Japanese military notes, and the
mortgagor voluntarily agreed not to do so in consideration of the reduction of the rate of interest.

It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil
Code hereinabove quoted.

Appellants were bound by said contract and appellees were not obligated to receive the payment
before it was due. Hence the latter had reason not to accept the tender of payment made to
them by the former.

The judgment is affirmed, with costs against the appellants.

HEIRS OF ZOILO ESPIRITU AND G.R . No. 169617

PRIMITIVA ESPIRITU,
Petitioners,
Present:

YNARES-SANTIAGO, J.,
- versus - Chairperson,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
CHICO-NAZARIO, and
NACHURA, JJ.
SPOUSES MAXIMO LANDRITO
 AND PAZ LANDRITO, Represented
by ZOILO LANDRITO, as their
Attorney-in-Fact, Promulgated:
Respondents.
April 4, 2007
x--------------------------------------------------x

DECISION

CHICO-NAZARIO, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision of the Court of Appeals, [1] dated 31 August 2005, reversing the Decision rendered by the
trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed the interest
rate of the loan between the parties at 12% per annum, and ordered the
Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject property to the
Spouses Landrito conditioned upon the payment of the loan.

Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed ESPIRITU,
are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu, who both died
during the pendency of the case before the Honorable Court of Appeals. [2]

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein represented by
their son and attorney-in-fact, Zoilo Landrito.[3]

On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount
of P350,000.00 payable in three months. To secure the loan, the Spouses Landritoexecuted a real
estate mortgage over a five hundred forty (540) square meter lot located in Alabang, Muntinlupa,
covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses Espiritu. From
the P350,000.00 that the Landritos were supposed to receive, P17,500.00 was deducted as
interest for the first month which was equivalent to five percent of the principal debt,
and P7,500.00 was further deducted as service fee. Thus, they actually received a net amount
of P325,000.00. The agreement, however, provided that the principal indebtedness earns
interest at the legal rate.[4]

After three months, when the debt became due and demandable, the
Spouses Landrito were unable to pay the principal, and had not been able to make any interest
payments other than the amount initially deducted from the proceeds of the loan. On 29
December 1986, the loan agreement was extended to 4 January 1987 through an Amendment of
Real Estate Mortgage. The loan was restructured in such a way that the unpaid interest became
part of the principal, thus increasing the principal to P385,000. The new loan agreement adopted
all other terms and conditions contained in first agreement. [5]

Due to the continued inability of the Spouses Landritos to settle their obligations with the
Spouses Espiritu, the loan agreement was renewed three more times. In all these subsequent
renewals, the same terms and conditions found in the first agreement were retained. On 29 July
1987, the principal was increased to P507,000.00 inclusive of running interest. On 11 March
1988, it was increased to P647,000.00. And on 21 October 1988, the principal was increased
to P874,125.00.[6] At the hearing before the trial court, ZoiloEspiritu testified that the increase in
the principal in each amendment of the loan agreement did not correspond to the amount
delivered to the Spouses Landrito. Rather, the increase in the principal had been due to unpaid
interest and other charges.[7]

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the
mortgaged property on 31 October 1990. During the auction sale, the property was sold to the
Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale was
annotated on the title of the mortgaged property, giving the Spouses Landritountil 8 January
[8]
1992 to redeem the property.

The Spouses Landrito failed to redeem the subject property although they alleged that
they negotiated for the redemption of the property as early as 30 October 1991.While the
negotiated price for the land started at P1,595,392.79, it was allegedly increased by the
Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two managers checks
and some cash, totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992, but the latter
refused to accept the same. They also alleged that the Spouses Espiritu increased the amount
demanded to P2.5 Million and gave them until July 1992 to pay the said amount. However, upon
inquiry, they found out that on 24 June 1992, the Spouses Espiritu had already executed an
Affidavit of Consolidation of Ownership and registered the mortgaged property in their name, and
that the Register of Deeds of Makatihad already issued Transfer Certificate of Title No. 179802 in
the name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented by their
son ZoiloLandrito, filed an action for annulment or reconveyance of title, with damages against
the Spouses Espiritu before Branch 146 of the Regional Trial Court of Makati.[9] Among the
allegations in their Complaint, they stated that the Spouses Espiritu, as creditors and
mortgagees, imposed interest rates that are shocking to ones moral senses. [10]

The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The trial
court ordered in its Decision, dated 13 December 1995:[11]

WHEREFORE, all the foregoing premises considered, the herein complaint is hereby
dismissed forthwith.
 Without pronouncements to costs.

The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997
Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial
courts decision, decreeing that the five percent (5%) interest imposed by the Spouses Espiritu on
the first month and the varying interest rates imposed for the succeeding months contravened
the provisions of the Real Estate Mortgage contract which provided that interest at the legal
rate, i.e., 12% per annum, would be imposed. It also ruled that although the Usury Law had been
rendered ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling rates
prescribed for interests, thus, allowing parties to freely stipulate thereon, the courts may render
void any stipulation of interest rates which are found iniquitous or unconscionable. As a result,
the Court of Appeals set the interest rate of the loan at the legal rate, or 12% per annum. [12]

Furthermore, the Court of Appeals held that the action for reconveyance, filed by the
Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem the
property within the one-year redemption period provided by law, the action
for reconveyance remained as a remedy available to a landowner whose property was wrongfully
registered in anothers name since the subject property has not yet passed to an innocent
purchaser for value.[13]

In the decretal portion of its Decision, the Court of Appeals ruled [14]:

WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision

dated December 13, 1995 of the Regional Trial Court of Makati, Branch 146 in Civil
Case No. 92-2920 is hereby REVERSED and SET ASIDE, and a new one is hereby
entered as follows: (1) The legal rate of 12% per annum is hereby FIXED to be
applied as the interest of the loan; and (2) Conditioned upon the payment of the
loan, defendants-appellees spouses Zoilo and Primitiva Espiritu are hereby ordered
to reconvey Transfer Certificate of Title No. S-48948 to appellant
spouses Maximo and Paz Landrito.

The case is REMANDED to the Trial Court for the above determination.

Hence, the present petition. The following issues were raised:[15]

I
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE
THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN PETITIONERS TO
RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN RESPONDENTS,
WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.

II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONERS
UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE ALLEGEDLY
UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.
 III
THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN
RESPONDENTS ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE AND
PROSECUTE THIS CASE.

The petition is without merit.

The Real Estate Mortgage executed between the parties specified that the principal
indebtedness shall earn interest at the legal rate. The agreement contained no other provision on
interest or any fees or charges incident to the debt. In at least three contracts, all designated as
Amendment of Real Estate Mortgage, the interest rate imposed was, likewise,
unspecified. During his testimony, Zoilo Espiritu admitted that the increase in the principal in
each of the Amendments of the Real Estate Mortgage consists of interest and charges. The
Spouses Espiritu alleged that the parties had agreed on the interest and charges imposed in
connection with the loan, hereunder enumerated:

1. P17,500.00 was the interest charged for the first month and P7,500.00 was
imposed as service fee.
2. P35,000.00 interest and charges, or the difference between
the P350,000.00 principal in the Real Estate Mortgage dated 5 September 1986 and
the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29
December 1986.

3. P132,000.00 interest and charges, or the difference between

the P385,000.00 principal in the Amendment of the Real Estate Mortgage dated 29
December 1986 and the P507,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 July 1987.

4. P140,000.00 interest and charges, or the difference between

the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29
July 1987 and the P647,000.00 principal in the Amendment of the Real Estate
Mortgage dated 11 March 1988.

5. P227,125.00 interest and charges, or the difference between

the P647,000.00 principal in the Amendment of the Real Estate Mortgage dated 11
March 1988 and the P874,125 principal in the Amendment of the Real Estate
Mortgage dated 21 October 1988.
The total interest and charges amounting to P559,125.00 on the original principal of P350,000
was accumulated over only two years and one month. These charges are not found in any
written agreement between the parties. The records fail to show any computation on how much
interest was charged and what other fees were imposed. Not only did lack of transparency
characterize the aforementioned agreements, the interest rates and the service charge imposed,
at an average of 6.39% per month, are excessive.

In enacting Republic Act No. 3765, known as the Truth in Lending Act, the State seeks to
protect its citizens from a lack of awareness of the true cost of credit by assuring the full
disclosure of such costs. Section 4, in connection with Section 3(3) [16] of the said law, gives a
detailed enumeration of the specific information required to be disclosed, among which are the
interest and other charges incident to the extension of credit. Section 6[17] of the same law
imposes on anyone who willfully violates these provisions, sanctions which include civil liability,
and a fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had already
prescribed, this Court frowns upon the underhanded manner in which the
Spouses Espiritu imposed interest and charges, in connection with the loan. This is aggravated
by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead
ignorance of the requirements of the law in connection with the transparency of credit
transactions. In addition, the Civil Code clearly provides that:

Article 1956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate which was
actually imposed, in contravention of the law, manifested bad faith.

In several cases, this Court has been known to declare null and void stipulations on
interest and charges that were found excessive, iniquitous, and unconscionable. In the case
of Medel v. Court of Appeals,[18] the Court declared an interest rate of 5.5% per month on
a P500,000.00 loan to be excessive, iniquitous, unconscionable and exorbitant.Even if the parties
themselves agreed on the interest rate and stipulated the same in a written agreement, it
nevertheless declared such stipulation as void and ordered the imposition of a 12% yearly
interest rate. In Spouses Solangon v. Salazar,[19] 6% monthly interest on a P60,000.00 loan was
likewise equitably reduced to a 1% monthly interest or 12% per annum. In Ruiz v. Court of
Appeals,[20] the Court found a 3% monthly interest imposed on four separate loans with a total
of P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or 12% per
annum.

In declaring void the stipulations authorizing excessive interest and charges, the Court
declared that although the Usury Law was suspended by Central Bank Circular No. 905, s. 1982,
effective on 1 January 1983, and consequently parties are given a wide latitude to agree on any
interest rate, nothing in the said Circular grants lenders carte blancheauthority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
[21]

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not

against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from
the beginning. They cannot be ratified nor the right to set up their illegality as a defense be
waived.[22] The nullity of the stipulation on the usurious interest does not, however, affect the
lenders right to recover the principal of the loan. [23] Nor would it affect the terms of the real
estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right
can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be
considered without the stipulation of the excessive interest. A legal interest of 12% per annum
will be added in place of the excessive interest formerly imposed.

While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings
held on 31 Ocotber 1990 cannot be given effect. In the Notice of SheriffsSale [24] dated 5 October
1990, and in the Certificate of Sale [25] dated 31 October 1990, the amount designated as
mortgage indebtedness amounted to P874,125.00. Likewise, in the demand letter[26] dated 12
December 1989, Zoilo Espiritu demanded from the Spouses Landrito the amount
of P874,125.00 for the unpaid loan. Since the debt due is limited to the principal
of P350,000.00 with 12% per annum as legal interest, the previous demand for payment of the
amount of P874,125.00 cannot be considered as a valid demand for payment. For an obligation
to become due, there must be a valid demand. [27] Nor can the foreclosure proceedings be
considered valid since the total amount of the indebtedness during the foreclosure proceedings
was pegged at P874,125.00 which included interest and which this Court now nullifies for being
excessive, iniquitous and exorbitant. If the foreclosure proceedings were considered valid, this
would result in an inequitable situation wherein the Spouses Landrito will have their land
foreclosed for failure to pay an over-inflated loan only a small part of which they were obligated
to pay.

Moreover, it is evident from the facts of the case that despite considerable effort on their
part, the Spouses Landrito failed to redeem the mortgaged property because they were unable
to raise the total amount, which was grossly inflated by the excessive interest imposed. Their
attempt to redeem the mortgaged property at the inflated amount of P1,595,392.79, as early
as 30 October 1991, is reflected in a letter, which creditor-
mortgagee Zoilo Landrito acknowledged to have received by affixing his signature herein. [28]They
also attached in their Complaint copies of two checks in the amounts
of P770,000.00 and P995,087.00, both dated 13 January 1992, which were allegedly refused by
the Spouses Espiritu.[29] Lastly, the Spouses Espiritu even attached in their exhibits a copy of a
handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the
Spouses Espiritu, wherein the former offered to pay the latter the sum of P2,000,000.00.[30] In all
these instances, the Spouses Landrito had tried, but failed, to pay an amount way over the
indebtedness they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it
is only proper that the Spouses Landrito be given the opportunity to repay the real amount of
their indebtedness.
 Since the Spouses Landrito, the debtors in this case, were not given an opportunity to
settle their debt, at the correct amount and without the iniquitous interest imposed, no
foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned
upon a finding on the correct amount of the unpaid obligation and the failure of the debtor to pay
the said amount.[31] In this case, it has not yet been shown that the Spouses Landrito had already
failed to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be
conducted in order to answer for the unpaid debt. The foreclosure sale conducted upon their
failure to pay P874,125 in 1990 should be nullified since the amount demanded as the
outstanding loan was overstated; consequently it has not been shown that the mortgagors the
Spouses Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of
the sale together with its reasonable rates of interest were applied to the obligation, only a small
part of its original loans would actually remain outstanding, but because of the unconscionable
interest rates, the larger part corresponded to said excessive and iniquitous interest.

As a result, the subsequent registration of the foreclosure sale cannot transfer any rights
over the mortgaged property to the Spouses Espiritu. The registration of the foreclosure sale,
herein declared invalid, cannot vest title over the mortgaged property. The Torrens system does
not create or vest title where one does not have a rightful claim over a real property. It only
confirms and records title already existing and vested. It does not permit one to enrich oneself at
the expense of another.[32] Thus, the decree of registration, even after the lapse of one (1) year,
cannot attain the status of indefeasibility.

Significantly, the records show that the property mortgaged was purchased by the
Spouses Espiritu and had not been transferred to an innocent purchaser for value. This means
that an action for reconveyance may still be availed of in this case.[33]

Registration of property by one person in his or her name, whether by mistake or fraud,
the real owner being another person, impresses upon the title so acquired the character of a
constructive trust for the real owner, which would justify an action for reconveyance.[34] This is
based on Article 1465 of the Civil Code which states that:

Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is,
by force of law, considered a trustee of an implied trust for benefit of the person
from whom the property comes.

The action for reconveyance does not prescribe until after a period of ten years from the date of
the registration of the certificate of sale since the action would be based on implied trust.
[35]
Thus, the action for reconveyance filed on 31 October 1992, more than one year after the
Sheriffs Certificate of Sale was registered on 9 January 1991, was filed within the prescription
period.
 It should, however, be reiterated that the provisions of the Real Estate Mortgage are not
annulled and the principal obligation stands. In addition, the interest is not completely removed;
rather, it is set by this Court at 12% per annum. Should the Spouses Landrito fail to pay the
principal, with its recomputed interest which runs from the time the loan agreement was entered
into on 5 September 1986 until the present, there is nothing in this Decision which prevents the
Spouses Espiritu from foreclosing the mortgaged property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to
file the action for reconveyance filed before the trial court or even to file the appeal from the
judgment of the trial court, by virtue of the Special Power of Attorney dated 30 September
1992. They further noted that the trial court and the Court of Appeals failed to rule on this issue.
[36]

The Special Power of Attorney[37] dated 30 September 1992 was executed

by Maximo Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged
property. It authorized Zoilo Landrito:

2. To make, sign, execute and deliver corresponding pertinent contracts,

documents, agreements and other writings of whatever nature or kind and to sue
or file legal action in any court of the Philippines, to collect, ask
demands, encash checks, and recover any and all sum of monies, proceeds, interest
and other due accruing, owning, payable or belonging to me as such owner of the
afore-mentioned property. (Emphasis provided.)

Zoilo Landritos authority to file the case is clearly set forth in the Special Power of
Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landritofiled
the reconveyance case with the full authority of his mother, Paz Landrito, who attended the
hearings of the case, filed in her behalf, without making any protest. [38] She even testified in the
same case on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she had
authorized her son to file the action for reconveyance, in her behalf, before the trial court.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the
assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing the interest
rate of the loan between the parties at 12% per annum, and ordering the
Spouses Espiritu to reconvey the subject property to the Spouses Landritoconditioned upon the
payment of the loan together with herein fixed rate of interest. Costs against the petitioners.

SO ORDERED.
G.R. Nos. L-43697 and L-442200 March 31, 1938

In re Liquidation of the Mercantile Bank of China,

GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants,
vs.
PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees.

A.M. Zarate for appellants Gopoco Grocery et al.

Laurel, Del Rosario and Sabido for appellant Tiong-Chui Gion.
Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.

DIAZ, J.:

On petition of the Bank Commissioner who alleged to have found, after an investigation, that the
Mercantile Bank of China could not continue operating as such without running the risk of
suffering losses and prejudice its depositors and customers; and that with the requisite approval
of the corresponding authorities, he had taken charge of all the assets thereof; the Court of First
Instance of Manila declared the said bank in liquidation; approved all the acts theretofore
executed by the commissioner; prohibited the officers and agents of the bank from interfering
with said commissioner in the possession of the assets thereof, its documents, deed, vouchers,
books of account, papers, memorandum, notes, bond, bonds and accounts, obligations or
securities and its real and personal properties; required its creditors and all those who had any
claim against it, to present the same in writing before the commissioner within ninety days; and
ordered the publication, as was in fact done, of the order containing all these provisions, for the
two consecutive weeks in two news-papers of general circulation in the City of Manila, at the
expenses of the aforesaid bank. After these publications, and within the period of ninety days,
the following creditors, among others, presented their presented their claims:

Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella
Tondea.

I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he deposited said
sum in the bank under liquidation on current account.
II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. It described its
claim as follows:
Balance due on open account subject P4,927.9
to check 5
Interest on c/a 4,53

4,932.48
Surety deposit 460.00
III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as follows:
Balance due on open account subject P7,610.4
to check L-759 4
Savings account No. 156 (foreign) 8.22
with Mercantile Bank of China L-1611
Amoy $15,000,00 Interest on said
Savings Account No. 156
 Interest on checking a/c 10.54

7,624.20
IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written claim
appearing in the record on appeal as follows:
Balance due on open subject to check P6,961.0
L-845 1
Interest on checking a/c 11.37
6,972.83
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as follows:
Balance due on open account subject P6,224.3
to check L-718 4
Interest on checking a/c 8.54

6,232.88
VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as follows:
Balance due on open account subject P1910.5
to check 9
Interest on account 2.20

1,912.79

To better resolve not only these claims but also the many others which were presented against
the bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as commissioner and
referee to receive the evidence which the interested parties may desire to present; and the
commissioner and referee thus named, after qualifying for the office and receiving the evidence
presented to him, resolved the aforesaid six claims by recommending that the same be
considered as an ordinary credit only, and not as a preferred credit as the interested parties
wanted, because they were at the same time debtors of the bank.

The evidence adduced and the very admissions of the said interested parties in fact show that
(a) the claimant Tiong Chui Gion, while he was a creditor of the Mercantile Bank of China in the
sum of P10,285.27 which he deposited on current account, was also a debtor not only in the sum
of P633.76 but also in the sum of P664.77, the amount of a draft which he accepted, plus interest
thereon and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco) had a
current account in the bank in the sum of P5,392.48, but it is indebted to it, in Turn, in the sum of
$2,334.80, the amount of certain drafts which it had accepted; (c) the claimant Tan Locko had a
deposit of P7,624.20, but he owed $1,378.90, the amount of a draft which he also accepted; (d)
the claimant Woo & Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of
$3,464.84, the amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and
Sy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two drafts accepted
by them and already due; and (f) the claimant La Bella Tondea had, in turn, a deposit of
P1,912.79, but it was, in turn, indebted in the sum of $565.40 including interest and other
expenses, the amount of two drafts drawn upon and accepted by it.

The lower court approved all the recommendations of The commissioner and referee as to claims
of the six appellants as follows; (1) To approve the claim of Tiong Chui Gion (P10,285.27) but only
as an ordinary credit, minus the amount of the draft for P664.77; (2) to approve the claim of
Gopoco Grocery (Gopoco) but also as an ordinary credit only (P5,387.95 according to the
referee), minus its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the claim of
Tan Locko but as an ordinary credit only (P7,610.44 according to the referee), deducting
therefrom his obligation amounting to $1,378.90 or P2,757.80; to approve the claim of Woo & Lo
& Co. but only as an ordinary credit (P6,961.01 according to the referee). after deducting its
obligation to the bank, amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy
Guan Huat but only as an ordinary credit (P6,224.34 according to the referee), after deducting
his obligation amounting to $3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la
Bella Tondea but also as an ordinary credit only (1,917.50 according to the referee), after
deducting it obligation amounting to $565.40 or P1,130.80; but he expressly refused to authorize
the payment of the interest by reason of impossibility upon the ground set out in the decision.
Not agreeable to the decision of the lower court, each of the interested parties appealed
therefrom and thereafter filed their respective briefs.

Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court erred:

1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China, constitutes an
ordinary credit only and not a preferred credit.

2. In holding as preferred credits the drafts and checks issued by the bank under
liquidation in payment of the drafts remitted to it for collection from merchants residing in
the country, by foreign entities or banks; and in not holding that the deposits on current
account in said bank should enjoy preference over said drafts and checks; and

3. In holding that the amount of P633.76 (which should be understood as P664.77), which
the claimant owes to the bank under liquidation, be deducted from his current account
deposit therein, amounting to P10,285.27, upon the distribution of the assets of the bank
among its various creditors, instead of holding that, after deducting the aforesaid sum of
P633.76 (should be P664.77) from his aforesaid deposit, there be turned over to him the
balance together with the dividends or shares then corresponding to him, on the basis of
said amount.

The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan Huat and
La Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No. 43697, that the
lower court erred:

1. In not first deducting from their respective deposits in the bank under liquidation, whose
payment they claim, their respective obligation thereto.

2. In not holding that their claims constitute a preferred credit.

3. In holding that the drafts and checks issued by the bank under liquidation in payment of
the drafts remitted to it by foreign entitles and banks for collection from the certain
merchant residing in the country, are preferred credits; and in not holding that the
deposits made by each of them enjoy preference over said drafts and checks, and

4. In denying their motion for a new trial base on the proposition that the appealed
decision is not in accordance with law and is contrary to the evidence adduced at the trial.

The questions raised by the appellant in case G. R. No. 44200 and by appellants in case G.R.
43697 being identical in nature, we believe it practical and proper to resolve said questions
jointly in one decision. Before proceeding, however, it is convenient to note that the
commissioner and referee, classifying the various claims presented against the bank, placed
under one group those partaking of the same nature, the classification having resulted in six
groups.

In the first group he included all the claims for current account, savings and fixed deposits.

In the second group he included the claims for checks or drafts sold by the bank under
liquidation and not paid by the agents or banks in whose favor they had been issued.

In the third group he included the claims checks or drafts issued by the bank under liquidation in
payment or reimbursement of the drafts or goods remitted to it for collection, from resident
merchants and entitles, by foreign banks and entities.

In the fourth group he included the claims for drafts or securities to be collected from resident
merchants and entities to be collected from resident merchants and entities which were pending
collection on the date payments were suspended.

In the fifth group he included the claims of certain depositors or creditors of the bank who were
at the same time debtors thereof; and he considered of this class the claims of the appellants in
these two cases, and

In the sixth group he included the other claims different in nature from the of the aforesaid five
claims.

I. Now, then, should the appellants' deposits on current account in the bank now under
liquidation be considered preferred credits, and not otherwise, or should they be considered
ordinary credits only? The appellants contend that they are preferred credits only? The
appellants contend that they are preferred credits because they are deposits in contemplation of
law, and as such should be returned with the corresponding interest thereon. In support thereof
they cite Manresa (11 Manresa, Civil Code, page 663), and what has been insinuated in the case
of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing the said commentator who maintains that,
notwithstanding the provisions of articles 1767 and 1768 and others of the aforesaid Code, from
which it is inferred that the so-called irregular deposits no longer exist, the fact is that said
deposits still exist. And they contend and argue that what they had in the bank should be
considered as of this character. But it happens that they themselves admit that the bank owes
them interest which should have been paid to them before it was declared in a state of
liquidation. This fact undoubtedly destroys the character which they nullifies their contention
that the same be considered as irregular deposits, because the payment of interest only takes
place in the case of loans. On the other hand, as we stated with respect to the claim of Tan Tiong
Tick (In re Liquidation of Mercantile Bank of China, G.R. No. 43682), the provisions of the Code of
Commerce, and not those of the Civil Code, are applicable to cases of the nature of those at bar,
which have to do with parties who are both merchants. (Articles 303 and 309, Code of
Commerce.) We there said, and it is not amiss to repeat now, that the so-called current account
and savings deposits have lost their character of deposits, properly so-called and are convertible
into simple commercial loans because, in cases of such deposits, the bank has made use thereof
in the ordinary course of its transactions as an institution engaged in the banking business, not
because it so wishes, but precisely because of the authority deemed to have been granted to it
by the appellants to enable them to collect the interest which they had been and they are now
collecting, and by virtue further of the authority granted to it by section 125 of the Corporation
Law (Act No. 1459), as amended by Acts Nos. 2003 and 3610 and section 9 of the Banking Law
(Act No. 3154), without considering of course the provisions of article 1768 of the Civil Code.
Wherefore, it is held that the deposits on current account of the appellants in the bank under
liquidation, with the right on their right on their part to collect interest, have not created and
could not create a juridical relation between them except that of creditors and debtor, they being
the creditors and the bank the debtor.
What has so far been said resolves adversely the contention of the appellants, the question
raised in the first and second assigned errors Tiong Chui Gion in case G. R. No. 44200, and the
appellants' second and third assigned errors in case G. R. No. 43697.

II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and by
the other appellants in theirs, respectively, it should be stated that the question of set-off raised
by them cannot be resolved a like question in the said case, G. R. No. 43682, entitled "In
re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that set-offs be
made, inasmuch as the appellants and the bank being reciprocally debtors and creditors, the
same is only just and according to law (art. 1195, Civil Code), particularly as none of the
appellants falls within the exceptions mentioned in section 58 of the Insolvency Law (Act No.
1956), reading:

SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account
between them shall be stated, and one debt set off against the other, and the balance only shall
be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its nature not
provable against the estate: Provided, That no set-off on counterclaim shall be allowed in favor of
any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty
days immediately preceding the filing, or after the filing of the petition by or against the
insolvent.

It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1,
pages 776 and 784) that:

The rules of law as to the right of set-off between the bank and its depositors are not different
from those applicable to other parties. (Page 776.)

Where the bank itself stops payment and becomes insolvent, the customer may avail himself in
set-off against his indebtedness to the bank of any indebtedness of the bank to himself, as, for
example, the balance due him on his deposit account. (Page 784.)

But if set-offs are proper in these cases, when and how should they be made, considering that
the appellants ask for the payment of interest? Are they by any chance entitled to interest? If
they are, when and until what time should they be paid the same?

The question of whether they are entitled to interest should be resolved in the same way that we
resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No. 43682. The
circumstances in these two cases are certainly the same as those in the said case with reference
to the said question. The Mercantile Bank of China owes to each of the appellants the interest
claimed by them, corresponding to the year ending December 4, 1931, the date it was declared
in a state of liquidation, but not which the appellants claim should be earned by their deposits
after said date and until the full amounts thereof are paid to them. And with respect to the
question of set-off, this should be deemed made, of course, as of the date when the Mercantile
Bank of China was declared in a state of liquidation, that is, on December 4, 1931, for then there
was already a reciprocal concurrence of debts, with respect to said bank and the appellants.
(Arts. 1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.)

III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we hold, in
view of the considerations set out in resolving the other assignments of errors, that the lower
court properly denied the motion for new trial of said appellants.

In view of the foregoing, we modify the appealed judgments by holding that the deposits claimed
by the appellants, and declared by the lower court to be ordinary credits are for the following
amounts: P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of
Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La Bella
Tondea, plus their corresponding interest up to December 4, 1931; that their obligations to the
bank under liquidation which should be set off against said deposits, are respectively for the
following amounts: P664.77 of Tiong Chui Gion; P4,669.60 of Gopoco Grocery (Gopoco);
P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo & Co.; P6,214.74 of Sy Huat; and P1,130.80 of La
Bella Todea; and we order that the set-offs in question be made in the manner stated in this
decision, that is, as of the date already indicated, December 4, 1931. In all other respects, we
affirm the aforesaid judgments, without special pronouncement as to costs. So ordered.

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.

MAKASIAR, Actg. C.J.:+.wph!1

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 on March 26, 1982.

On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a
temporary restraining order was duly issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their (respondents') orders or in their place
or stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the
Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent
Clement David filed a motion to lift restraining order which was denied in the resolution of this
Court dated May 18, 1983.

As can be gleaned from the above, the instant petition seeks to prohibit public respondents from
proceeding with the preliminary investigation of I.S. No. 81-31938, 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.

For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General
in its Comment dated June 28,1982, as follows:t.hqw

On December 23,1981, private respondent David filed I.S. No. 81-31938 in the
Office of the City Fiscal of Manila, which case was assigned to respondent Lota for
preliminary investigation (Petition, p. 8).

In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall
and the following directors of the Nation Savings and Loan Association, Inc., namely
Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and
violation of Central Bank Circular No. 364 and related Central Bank regulations on
foreign exchange transactions, allegedly committed as follows (Petition, Annex
"A"):t.hqw

"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account
deposits (jointly with his sister, Denise Kuhne), US$10,000.00 on time
deposit, US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with
Denise Kuhne), that David was induced into making the aforestated
investments by Robert Marshall an Australian national who was
allegedly a close associate of petitioner Guingona Jr., then NSLA
President, petitioner Martin, then NSLA Executive Vice-President of
NSLA and petitioner Santos, then NSLA General Manager; that on
March 21, 1981 N LA was placed under receivership by the Central
Bank, so that David filed claims therewith for his investments and
those of his sister; that on July 22, 1981 David received a report from
the Central Bank that only P305,821.92 of those investments were
entered in the records of NSLA; that, therefore, the respondents in I.S.
No. 81-31938 misappropriated the balance of the investments, at the
same time violating Central Bank Circular No. 364 and related Central
Bank regulations on foreign exchange transactions; that after
demands, petitioner Guingona Jr. paid only P200,000.00, thereby
reducing the amounts misappropriated to P959,078.14 and
US$75,000.00."

Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in
which they stated the following.t.hqw

"That Martin became President of NSLA in March 1978 (after the

resignation of Guingona, Jr.) and served as such until October 30, 1980,
while Santos was General Manager up to November 1980; that
because NSLA was urgently in need of funds and at David's insistence,
his investments were treated as special- accounts with interest above
the legal rate, an recorded in separate confidential documents only a
portion of which were to be reported because he did not want the
Australian government to tax his total earnings (nor) to know his total
investments; that all transactions with David were recorded except the
sum of US$15,000.00 which was a personal loan of Santos; that
David's check for US$50,000.00 was cleared through Guingona, Jr.'s
dollar account because NSLA did not have one, that a draft of
US$30,000.00 was placed in the name of one Paz Roces because of a
pending transaction with her; that the Philippine Deposit Insurance
Corporation had already reimbursed David within the legal limits; that
majority of the stockholders of NSLA had filed Special Proceedings No.
82-1695 in the Court of First Instance to contest its (NSLA's) closure;
that after NSLA was placed under receivership, Martin executed a
promissory note in David's favor and caused the transfer to him of a
nine and on behalf (9 1/2) carat diamond ring with a net value of
P510,000.00; and, that the liabilities of NSLA to David were civil in
nature."
 Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:t.hqw

"That he had no hand whatsoever in the transactions between David

and NSLA since he (Guingona Jr.) had resigned as NSLA president in
March 1978, or prior to those transactions; that he assumed a portion
o; the liabilities of NSLA to David because of the latter's insistence that
he placed his investments with NSLA because of his faith in Guingona,
Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D")
he (Guingona, Jr.) bound himself to pay David the sums of P668.307.01
and US$37,500.00 in stated installments; that he (Guingona, Jr.)
secured payment of those amounts with second mortgages over two
(2) parcels of land under a deed of Second Real Estate Mortgage
(Petition, Annex "E") in which it was provided that the mortgage over
one (1) parcel shall be cancelled upon payment of one-half of the
obligation to David; that he (Guingona, Jr.) paid P200,000.00 and
tendered another P300,000.00 which David refused to accept, hence,
he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First
Instance of Rizal at Quezon City, to effect the release of the mortgage
over one (1) of the two parcels of land conveyed to David under
second mortgages."

At the inception of the preliminary investigation before respondent Lota, petitioners

moved to dismiss the charges against them for lack of jurisdiction because David's
claims allegedly comprised a purely civil obligation which was itself novated. Fiscal
Lota denied the motion to dismiss (Petition, p. 8).

But, after the presentation of David's principal witness, petitioners filed the instant
petition because: (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil obligations on
the part of NSLA which were novated when Guingona, Jr. and Martin assumed them;
and (b) David's principal witness allegedly testified that the duplicate originals of
the aforesaid instruments of indebtedness were all on file with NSLA, contrary to
David's claim that some of his investments were not record (Petition, pp. 8-9).

Petitioners alleged that they did not exhaust available administrative remedies
because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.].

As correctly pointed out by the Solicitor General, the sole issue for resolution is 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.

There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa.

A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City
Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I.
Martin and Teresita G. Santos, together with one Robert Marshall and the other directors of the
Nation Savings and Loan Association, will show that from March 20, 1979 to March, 1981, 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 (p. 17, rec.).

Moreover, the records reveal that when the aforesaid bank was placed under receivership on
March 21, 1981, 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 (p. 80, rec.). This promissory note was based on the statement
of account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). 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.

Thereafter, or on July 17, 1981, 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 (p. 25,
rec.). The aforesaid promissory notes were executed as a result of deposits made by Clement
David and Denise Kuhne with the Nation Savings and Loan Association.

Furthermore, the various pleadings and documents filed by private respondent David, before this
Court indisputably show that he has indeed invested his money on time and savings deposits
with the Nation Savings and Loan Association.

It must be pointed out that 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:t.hqw

Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.

In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:t.
hqw

It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are hat true deposits. are considered simple loans and, as such,
are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik
of China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast
Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National
Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil.
443)."

This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96
SCRA 102 [1980]) that:t.hqw

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 (Art. 1980 Civil
Code Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are
loans to a bank because it can use the same. The petitioner here in making time
deposits that earn interests will 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 its obligation as a debtor and not a breach of trust arising from a
depositary's failure to return the subject matter of the deposit (Emphasis supplied).

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.

WE have already laid down the rule that:t.hqw

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 receivedPetitioners 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.t.
hqw

"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.

Moreover, while it is true that novation does not extinguish criminal liability, it may however,
prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal
information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.
hqw

As pointed out in People vs. Nery, novation prior to the filing of the criminal
information as in the case at bar may convert the relation between the parties
into an ordinary creditor-debtor relation, and place the complainant in estoppel to
insist on the original transaction or "cast doubt on the true nature" thereof.

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ),
this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that:t.
hqw

The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the original
trust relation may be converted by the parties into an ordinary creditor-debtor
situation, thereby placing the complainant in estoppel to insist on the original trust.
But after the justice authorities have taken cognizance of the crime and instituted
action in court, the offended party may no longer divest the prosecution of its power
to exact the criminal liability, as distinguished from the civil. The crime being an
offense against the state, only the latter can renounce it (People vs. Gervacio, 54
Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).

It may be observed in this regard that novation is not one of the means recognized
by the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be to either prevent the rise of criminal habihty or to cast doubt
on the true nature of the original basic transaction, whether or not it was such that
its breach would not give rise to penal responsibility, as when money loaned is
made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs.
People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming the obligation of the bank to private respondent
David; while the criminal complaint for estafa was filed on December 23, 1981 with the Office of
the City Fiscal. Hence, it is clear that novation occurred long before the filing of the criminal
complaint with the Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still
be a civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No.
364 and other related regulations regarding foreign exchange transactions by accepting foreign
currency deposit in the amount of US$75,000.00 without authority from the Central Bank. They
contend however, that the US dollars intended by respondent David for deposit were all
converted into Philippine currency before acceptance and deposit into Nation Savings and Loan
Association.

Petitioners' contention is worthy of behelf for the following reasons:

1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into Philippine currency. Accordingly,
the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited
it to his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely
accommodated the request of the Nation Savings and loan Association in order to clear the bank
draft through his dollar account because the bank did not have a dollar account. Immediately
after the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan
Association to withdraw the same in order to be utilized by the bank for its operations.

2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they
were accepted and deposited in Nation Savings and Loan Association, because the bank is
presumed to have followed the ordinary course of the business which is to accept deposits in
Philippine currency only, and that the transaction was regular and fair, in the absence of a clear
and convincing evidence to the contrary (see paragraphs p and q,Sec. 5, Rule 131, Rules of
Court).

3. Respondent David has not denied the aforesaid contention of herein petitioners despite the
fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment
and in the July 27, 1982 reply to public respondents' comment and reiterated in petitioners'
memorandum filed on October 30, 1982, thereby adding more support to the conclusion that the
US$75,000.00 were really converted into Philippine currency before they were accepted and
deposited into Nation Savings and Loan Association. Considering that this might adversely affect
his case, respondent David should have promptly denied petitioners' allegation.

In conclusion, considering that the liability of the petitioners is purely civil in nature and that
there is no clear showing that they engaged in foreign exchange transactions, We hold that the
public respondents acted without jurisdiction when they investigated the charges against the
petitioners. Consequently, public respondents should be restrained from further proceeding with
the criminal case for to allow the case to continue, even if the petitioners could have appealed to
the Ministry of Justice, would work great injustice to petitioners and would render meaningless
the proper administration of justice.

While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and
injunction in extreme cases, thus:t.hqw
 On the issue of whether a writ of injunction can restrain the proceedings in Criminal
Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be
blocked by court prohibition or injunction." Exceptions, however, are allowed in the
following instances:t.hqw

"1. for the orderly administration of justice;

"2. to prevent the use of the strong arm of the law in an oppressive
and vindictive manner;

"3. to avoid multiplicity of actions;

"4. to afford adequate protection to constitutional rights;

"5. in proper cases, because the statute relied upon is unconstitutional

or was held invalid" ( Primicias vs. Municipality of Urdaneta,
Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25
SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).

Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that:t.
hqw

The writs of certiorari and prohibition, as extraordinary legal remedies, are in the
ultimate analysis, intended to annul void proceedings; to prevent the unlawful and
oppressive exercise of legal authority and to provide for a fair and orderly
administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took
cognizance of a petition for certiorari and prohibition although the accused in the
case could have appealed in due time from the order complained of, our action in
the premises being based on the public welfare policy the advancement of public
policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain
the prosecution of certain chiropractors although, if convicted, they could have
appealed. We gave due course to their petition for the orderly administration of
justice and to avoid possible oppression by the strong arm of the law. And
in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the
trial court's action admitting an amended information was sustained despite the
availability of appeal at the proper time.

WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING ORDER

PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE RESPONDENT.