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THIRD DIVISION G.R. No. 180165 April 7, 2009 METROPOLITAN BANK & TRUST COMPANY, Petitioner, - versus HON.

SECRETARY OF JUSTICE RAUL M. GONZALES, OLIVER T. YAO and DIANA T. YAO, Respondents. DECISION CHICO-NAZARIO, J.: Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court filed by petitioner Metropolitan Bank and Trust Company, seeking to reverse and set aside the Decision[1] dated 30 March 2007and the Resolution[2] dated 16 October 2007 of the Court of Appeals in CA-G.R. SP No. 91892. In its assailed Decision and Resolution, the appellate court affirmed the Resolution[3] of the Secretary of Justice directing the City Prosecutor of Manila to move for the withdrawal of the Informations for Estafa filed against private respondents Oliver T. Yao and Diana T. Yao. The factual and procedural antecedents of this present petition are as follows: Petitioner is a banking institution duly authorized to engage in the banking business under Philippine laws. Private respondents were the duly authorized representatives of Visaland Inc. (Visaland), likewise a domestic corporation engaged in the real estate development business. In order to finance the importation of materials necessary for the operations of its sister company, Titan Ikeda Construction and Development Corporation (TICDC), private respondents, on behalf of Visaland, applied with petitioner for 24 letters of credit, the aggregate amount of which reached the sum of P68,749,487.96. Simultaneous with the issuance of the letters of credit, private respondents signed trust receipts[4] in favor of petitioner. Private respondents bound themselves to sell the goods covered by the letters of credit and to remit the proceeds to petitioner, if sold, or to return the goods, if not sold, on or before their agreed maturity dates. When the trust receipts matured, private respondents failed to return the goods to petitioner, or to return their value

amounting to P68,749,487.96 despite demand. Thus, petitioner filed a criminal complaint[5] for estafa[6] against Visaland and private respondents with the Office of the City Prosecutor of Manila (City Prosecutor).[7] In their Counter-Affidavit,[8] private respondents denied having entered into trust receipt transactions with petitioner. Instead, private respondents claimed that the contract entered into by the parties was a Contract of Loan secured by a Real Estate Mortgage over two parcels of land situated at Tagaytay City and registered under the name of the spouses Wilbert and Isabelita King (the spouses King).[9] According to private respondents, petitioner made them sign documents bearing fine prints without apprising them of the real nature of the transaction involved. Private respondents came to know of the trust receipt transaction only after they were served a copy of the AffidavitComplaint of the petitioner. After the requisite preliminary investigation, the City Prosecutor found that no probable cause existed and dismissed Information Sheet (I.S.) No. 02G-30918 in a Resolution[10] dated 23 January 2003. While the City Prosecutor was not persuaded by the defense proffered by private respondents that no trust receipt transaction existed, it nonetheless, dismissed the case for lack of evidence that prior demand was made by petitioner. The City Prosecutor underscored that for a charge of estafa with grave abuse of confidence to prosper, previous demand is an indispensable requisite. To prove that a demand was made prior to the institution of the criminal complaint, petitioner attached to its Motion for Reconsideration a copy of a letter-demand[11] dated 27 February 2001, addressed to private respondents. After the element of prior demand was satisfied, the City Prosecutor issued a Resolution[12] dated 11 October 2004 finding probable cause for estafa under Article 315, paragraph 1(b)[13] of the Revised Penal Code, in relation to Presidential Decree No. 115.[14] Accordingly, 23 separate Informations[15] for estafa were filed before the Regional Trial Court (RTC) of Manila against private respondents. The cases were docketed as Criminal Cases No. 04231721-44 and raffled to Branch 17 of the said court. In the interim, private respondents appealed the investigating prosecutors Resolution to the Secretary of

Justice. In a Resolution[16] dated 31 March 2005, the Secretary of Justice ruled that there was no probable cause to prosecute private respondents for estafa in relation to Presidential Decree No. 115. The Secretary of Justice declared that the legitimate transactional relationship between the parties being merely a contract of loan, violations of the terms thereunder were not covered by Presidential Decree No. 115. Thus, the Secretary of Justice directed the City Prosecutor of Manila to move for the withdrawal of the Informations. In a subsequent Resolution[17] dated 30 August 2005, the Secretary of Justice denied petitioners Motion for Reconsideration, for the matters raised therein had already been passed upon in his prior resolution. Acting on the directive of the Secretary of Justice, the City Prosecutor moved for the withdrawal of the Informations which was granted by the RTC in an Order[18] dated 29 July 2005. Consequently, Criminal Cases No. 04-231721 to No. 04231744 were withdrawn. The RTC refused to reconsider its earlier resolution in an Order[19] dated 3 February 2006, thereby denying petitioners Motion for Reconsideration. From the adverse Resolutions of the Secretary of Justice, petitioner elevated its case before the Court of Appeals by filing a Petition for Certiorari,[20] which was docketed as CAG.R. SP No. 91892. Petitioner averred in its Petition that the Secretary of Justice abused his discretion in ignoring the established facts and legal principles when he ruled that probable cause for the crime of estafa was absent. The Court of Appeals, however, in its Decision[21] dated 30 March 2007, dismissed petitioners Petition for Certiorari after finding that the Secretary of Justice committed no grave abuse of discretion in ruling against the existence of probable cause to prosecute private respondents. In arriving at its assailed decision, the appellate court recognized the authority of the Secretary of Justice to control and supervise the prosecutors, which includes the power to reverse or modify their decisions without committing grave abuse of discretion. Similarly ill-fated was Petitioners Motion for Reconsideration in a Resolution[22] dated 16 October 2007. Unfazed by the turn of events, petitioner now comes before this Court urging us to reverse the Court of Appeals Decision and Resolution and to direct the filing of Informations

against private respondents. Court is the sole issue of:

For the disposition of this

WHETHER OR NOT PROBABLE CAUSE EXISTS FOR THE PROSECUTION OF PRIVATE RESPONDENTS FOR THE CRIME OF ESTAFA IN RELATION TO P.D. NO. 115. Petitioner impugns the findings of the appellate court sustaining the non-existence of probable cause as found by the Secretary of Justice. Petitioner insists that the allegations in its complaint, together with the pieces of evidence appended thereon, are sufficient to sustain a finding of probable cause in preliminary investigation. Asserting their innocence, private respondents continue to argue that the agreement contracted by parties is one of loan, and not of trust receipt. To buttress their contention, private respondents aver that a contract of mortgage was executed by the spouses King to secure private respondents loan obligation with petitioner, the proceeds of which were the ones utilized to finance the importation of materials.[23] Private respondents likewise defend the assailed Court of Appeals Decision and assert that the Secretary of Justice was justified in overruling the investigating prosecutors findings, as sanctioned by Section 12 of DOJ Department Order No. 70.[24] The present petition bears impressive merits. Probable cause has been defined as the existence of such facts and circumstances as would excite the belief in a reasonable mind, acting on the facts within the knowledge of the prosecutor, that the person charged was guilty of the crime for which he was prosecuted. Probable cause is a reasonable ground of presumption that a matter is, or may be, well founded on such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe, or entertain an honest or strong suspicion, that a thing is so.[25] The term does not mean actual or positive cause nor does it import absolute certainty. It is merely based on opinion and reasonable belief. Thus, a finding of probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged. Precisely, there is a trial for the reception of evidence of the prosecution in support of the charge.[26]

To determine the existence of probable cause, there is need to conduct preliminary investigation. A preliminary investigation constitutes a realistic judicial appraisal of the merits of a case.[27] Its purpose is to determine whether (a) a crime has been committed; and (b) whether there is a probable cause to believe that the accused is guilty thereof. [28] It is a means of discovering which person or persons may be reasonably charged with a crime. The conduct of preliminary investigation is executive in nature. The Court may not be compelled to pass upon the correctness of the exercise of the public prosecutors function unless there is a showing of grave abuse of discretion or manifest error in his findings.[29] Grave abuse of discretion implies a capricious and whimsical exercise of judgment tantamount to lack or excess of jurisdiction.[30] The exercise of power must have been done in an arbitrary or a despotic manner by reason of passion or personal hostility. It must have been so patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform the duty enjoined or to act at all in contemplation of law.[31] In the present case, the abuse of discretion is patent in the act of the Secretary of Justice holding that the contractual relationship forged by the parties was a simple loan, for in so doing, the Secretary of Justice assumed the function of the trial judge of calibrating the evidence on record, done only after a full-blown trial on the merits. The fact of existence or non-existence of a trust receipt transaction is evidentiary in nature, the veracity of which can best be passed upon after trial on the merits, for it is virtually impossible to ascertain the real nature of the transaction involved based solely on the self-serving allegations contained in the opposing parties pleadings. Clearly, the Secretary of Justice is not in a competent position to pass judgment on substantive matters. The bases of a partys accusation and defenses are better ventilated at the trial proper than at the preliminary investigation. We need not overemphasize that in a preliminary investigation, the public prosecutor merely determines whether there is probable cause or sufficient ground to engender a well-founded belief that a crime has been committed, and that the respondent is probably guilty thereof and should be held for trial. It does not call for the application of rules and standards of proof that a judgment

of conviction requires after trial on the merits. The complainant need not present at this stage proof beyond reasonable doubt. A preliminary investigation does not require a full and exhaustive presentation of the parties evidence.[32] Precisely, there is a trial to allow the reception of evidence for both parties to substantiate their respective claims. Having said the foregoing, this Court now proceeds to determine whether probable cause exists for holding private respondents liable for estafa in relation to Presidential Decree No. 115. Trust receipt transactions are governed by the provisions of Presidential Decree No. 115 which defines such a transaction as follows: Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a trust receipt wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any one of the following: 1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or transship or otherwise

deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments, a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their presentation, collection or renewal. The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt agreement. The entrustee is obliged to (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owed to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or the proceeds therefrom whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree.[33] The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owed to the entruster or as appears in the trust receipt; or to the return of the goods, documents or instruments in case of non-sale; and to the enforcement of all other rights conferred on him in the trust receipt, provided these are not contrary to the provisions of the document.[34] A violation of any of these undertakings constitutes estafa defined

under Article 315(1)(b) of the Revised Renal Code, as provided by Section 13 of Presidential Decree No. 115 viz: Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. Apropos thereto, Article 315(1)(b) of the Revised Renal Code punishes estafa committed as follows: ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: 1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In such case, and in connection with the accessory penalties which may be imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision mayor to reclusion temporal, as the case may be. 2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos; 3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the following means; x x x. As found in the Complaint-Affidavit of petitioner, private respondents were charged with failing to account for or turn over to petitioner the merchandise or goods covered by the trust receipts or the proceeds of the sale thereof in payment of their obligations thereunder. The following pieces of evidence adduced from the affidavits and documents submitted before the City Prosecutor are sufficient to establish the existence of probable cause, to wit: First, the trust receipts[35] bearing the genuine signatures of private respondents; second, the demand letter[36] of petitioner addressed to respondents; and third, the initial admission by private respondents of the receipt of the imported goods from petitioner.[37] Prescinding from the foregoing, we conclude that there is ample evidence on record to warrant a finding that there is a probable cause to warrant the prosecution of private respondents for estafa. It must be once again stressed that probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged. That private respondents did not sell the goods under the trust receipt but allowed it to be used by their sister company is of no moment. The offense punished under Presidential Decree No. 115 is in the nature of malum prohibitum. A mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes a criminal offense that causes prejudice not only to another, but more to the public interest.[38] Even more incredible is the contention of private respondents that they did not give much significance to the documents they signed, considering the enormous value of the transaction involved. Thus, it is highly improbable to mistake trust receipt documents for a contract of loan when the heading thereon printed in bold and legible letters reads: Trust Receipts. We are not prejudging this case on the merits. However, by merely glancing at the documents submitted by petitioner entitled Trust Receipts and the arguments advanced by private respondents, we are convinced that there is probable cause to file the case and to hold them for trial.

All told, the evidentiary measure for the propriety of filing criminal charges has been reduced and liberalized to a mere probable cause. As implied by the words themselves, probable cause is concerned with probability, not absolute or moral certainty.[39] WHEREFORE, premises considered, the instant Petition is GRANTED. The Decision dated 30 March 2007 and the Resolution dated 16 October 2007 of the Court of Appeals in CA-G.R. SP No. 91892 are REVERSED and SET ASIDE. The Secretary of Justice is hereby ORDERED to direct the Office of the City Prosecutor of Manila to forthwith FILE Informations for estafa against private respondents Oliver T. Yao and Diana T. Yao before the appropriate court. SO ORDERED. -------------------------------------------------------------------------------* Associate Justice Renato C. Corona was designated to sit as additional member replacing Associate Justice Diosdado M. Peralta per Raffle dated 16 March 2008. ** Per Special Order No. 602, dated 20 March 2009, signed by Chief Justice Reynato S. Puno, designating Associate Justice Conchita Carpio Morales to replace Associate Justice Ma. Alicia AustriaMartinez, who is on official leave. [1] Penned by Associate Justice Normandie B. Pizzaro with Associate Justices Edgardo P. Cruz and Fernanda Lampas-Peralta, concurring. Rollo, pp. 61-70. [2] [3] Id. at 59-60. Records, pp. 268-274.

[4] Rollo, pp. 119-142. A commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of his liability with the bank. (Villanueva, Commercial Law Review [2004 Edition].) [5] [6] Records, pp. 102-128. Under Article 315 (1)(b) of the Revised Penal Code.

[7] Under Section 13 of Presidential Decree No. 115 (Trust Receipts Law), the failure of the entrustee to return the goods covered by the trust receipt or the proceeds from the sale thereof shall constitute the crime of estafa. [8] [9] Visaland. [10] [11] [12] [13] Records, 117-128. The records do not show how the spouses King are related to private respondents or to Rollo, pp. 271-278. Id. at 186-188. Id. at 204. 1. With unfaithfulness or abuse of confidence, namely: xxxx (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. [14] [15] Otherwise known as the Trust Receipts Law. Rollo, pp. 205-252.

[16] [17] [18] [19] [20] [21] [22] [23]

Records, pp. 268-274. Id. at 301-302. Id. at 288. Id. at 360. CA rollo, pp. 1-28. Rollo, pp. 61-70. Id. at 59-60. A copy of the alleged Real Estate Mortgage, however, is not found in the records.

[24] Section 12 Disposition of the appeal The Secretary may reverse, affirm or modify the resolution. He may, motu proprio or upon motion, dismiss the petition for review on any of the following grounds: That the petition was filed beyond the period prescribed in Section 3 hereof; That the procedure or any of the requirements herein provided has not been complied with; x x x. [25] [26] [27] Yu v. Sandiganbayan, 410 Phil. 619, 627 (2001). Pilapil v. Sandiganbayan, G.R. No. 101978, 7 April 1993, 221 SCRA 349, 360. Villanueva v. Ople, G.R. No. 165125, 18 November 2005, 475 SCRA 539, 553.

[28] Gonzalez v. Hongkong & Shanghai Banking Corporation, G.R. No. 164904, 19 October 2007, 537 SCRA 255, 269. [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] Ang v. Lucero, G.R. No. 143169, 21 January 2005, 449 SCRA 157, 168. Soria v. Desierto, G.R. Nos. 153524-25, 31 January 2005, 450 SCRA 339, 345. Id. Ang v. Lucero, supra note 29. Ching v. Secretary of Justice, G.R. No. 164317, 6 February 2006, 481 SCRA 609, 631. Id. Rollo, pp. 119-142. Id. at 186-188. Paragraph h, Counter-Affidavit; CA rollo, p. 146. Kilosbayan, Inc. v. Commission on Elections, 345 Phil. 1141, 1174 (1997).

[39] Galario v. Office of the Ombudsman (Mindanao), G.R. No. 166797, 10 July 2007, 527 SCRA 190, 204.

THIRD DIVISION G.R. No. 155647 November 23, 2007

DIV88-1925NC[8] 508,252.16[9] DIV88-1926NC[10] 626,165.28[11] DIV88-1924NC[12] 452,289.55[13] DIV88-1930NC[14] 660,348.00[15] DIV88-1931NC[16] 594,313.20[17] DIV88-1923NC[18] 358,113.33[19] DIV88-1951NC[20] P1,720,882.07[21] DIV88-1932NC[22] 244,250.26[23] DIV88-1952NC[24] P1,413,999.11[25]

March 07, 1989 March 07, 1989 March 14, 1989 April 04, 1989 April 04, 1989 April 10, 1989 April 12, 1989 April 19, 1989 May 25, 1989

P P P P P P

METROPOLITAN BANK & TRUST COMPANY, Petitioner, - versus JIMMY GO and BEMJAMIN GO BAUTISTA alias BENJAMIN GO, Respondents. DECISION NACHURA, J.: Petitioner Metropolitan Bank & Trust Company (Metrobank) urges this Court to review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure the Decision dated August 15, 2002 and the Resolution dated October 15, 2002, both of the Court of Appeals in CA-G.R. SP No. 61544.[1] The Facts of the Case On September 30, 1988, Metrobank, through its Assistant Vice- President Leonardo B. Lejano, executed a Credit Line Agreement[2] in favor of its client, BGB Industrial Textile Mills, Inc. (BGB) in the total amount of P10,000,000.00. As security for the obligation, private respondent Benjamin Go (now deceased), being an officer of BGB, executed a Continuing Surety Agreement[3] in favor of Metrobank, binding himself solidarily with BGB to pay Metrobank the said amount of P10,000,000.00. In November 1988, private respondent Jimmy Go, as general manager of BGB, applied for eleven (11) commercial letters of credit to cover the shipment of raw materials and spare parts. Accordingly, Metrobank issued the 11 irrevocable letters of credit to BGB. The merchandise/shipments were delivered to and accepted by BGB on different dates. Consequently, 11 trust receipts were executed by BGB thru Jimmy Go and Benjamin Go, as entrustees, in favor of Metrobank as entruster. The letters of credit and their corresponding trust receipts are listed below:
Letter of Credit No . Expiry Date of Trust Receipt Amount of Trust Receipt

By the terms of the trust receipts, BGB agreed to hold the goods in trust for Metrobank and, in case of sale of the goods, to hand the proceeds to the bank to be applied against the total obligation object of the trust receipts. On maturity dates of the trust receipts, because the goods remained unsold, BGB and Jimmy and Benjamin Go failed to satisfy their obligation. Metrobank filed three (3) separate complaints against BGB, for collection of sum of money equivalent to the value of the goods subject of the trust receipts. The cases were filed with the Makati Regional Trial Court and docketed as Civil Case Nos. 93-496, 93-509, and 93-910. Later, Metrobank instituted 11 criminal charges against Jimmy and Benjamin Go for violation of Presidential Decree No. 115 (Trust Receipts Law) before the Office of the City Prosecutor of Manila. After preliminary investigation, the Office of the City Prosecutor of Manila issued a Resolution[26] in I.S. Nos. 94D-09945-55 dated May 31, 1995 recommending the dismissal of the case, viz.: The liability of respondents is only civil in nature in the absence of commission and misappropriation. Respondents are liable ex-contractu for breach of the Letters of Credit Trust Receipt.

DIV88-1941NC[4] P1,625,395.38[5] DIV88-1940NC[6] P3,011,249.71[7]

Feb.

18, 1989

March 04, 1989

In the instant case, the goods subject of the trust receipts have not been sold, so there is (sic) no proceeds to deliver to the bank. Granting for the sake of argument that respondents failed to account for said goods, the failure is only a mere disputable presumption which has been overturned by the submission of an inventory showing that the goods are intact and in the warehouse in Bataan. Considering that the goods are still intact in the [respondents] warehouse at the Bataan Export Processing Zone, considering further the fact that the goods were never processed, and considering finally that the goods have not been sold, ergo, there is no violation of [the] Presidential Decree. As already stated, respondents liability is only civil in nature. On June 22, 1995, Metrobank filed a motion for reconsideration, but the same was denied for lack of merit in the Review Resolution[27] dated October 25, 1999. Metrobank appealed to the Department of Justice. On September 5, 2000, then Acting Secretary of Justice, Ramon J. Liwag, rendered a Resolution[28] dismissing the appeal on two grounds: (1) the resolution issued by the City Fiscal is in accord with law and evidence; and (2) Metrobank failed to submit proof of service of a copy of the appeal to the prosecutor either by personal service or registered mail as required by Section 3 of Department Order No. 223. Metrobank went to the Court of Appeals via a petition for certiorari under Rule 65 of the 1997 Rules of Civil Procedure. However, the Court of Appeals dismissed the petition for lack of merit. Metrobank moved to reconsider the dismissal, but the motion was denied. Hence, this petition. The Issues The reasons given by Metrobank for the allowance of its petition are as follows: First Reason BOTH THE RESOLUTION AND THE DECISION OF THE COURT OF APPEALS DELIBERATELY IGNORED THE GLARING VIOLATION COMMITTED BY THE RESPONDENTS OF BOTH THE PROVISIONS OF THE SUBJECT TRUST RECEIPTS AND OF PRESIDENTIAL DECREE NO. 115.

Second Reason BOTH THE RESOLUTION AND THE DECISION OF THE COURT OF APPEALS DELIBERATELY IGNORED THE FACT THAT THE OFFER MADE BY THE RESPONDENTS TO ALLEGEDLY RETURN THE SUBJECT MERCHANDISE IS A MERE AFTERTHOUGHT.

Third Reason BOTH THE RESOLUTION AND THE DECISION DELIBERATELY IGNORED THE FACT THAT A VIOLATION OF PRESIDENTIAL DECREE NO. 115, AS SETTLED JURISPRUDENCE HOLD, IS AN OFFENSE AGAINST PUBLIC ORDER AND NOT MERELY AGAINST PROPERTY.[29] Petitioner Metrobank ascribed error to the Office of the City Prosecutor of Manila when it found that the liability of respondents Jimmy and Benjamin Go was only civil in nature, i.e., to return the merchandise subject of the 11 trust receipts, considering that they were never sold, and to pay their obligation under the letters of credit. Citing jurisprudence,[30] it contends that Section 13,[31] the penal provision of the Trust Receipts Law, encompasses any act violative of an obligation covered by the trust receipt and is not limited to transactions in goods which are to be sold (retailed), reshipped, stored, and processed as a component of a product ultimately sold. It posits that a violation of the Trust Receipts Law can be committed by mere failure of the entrustee to discharge any of the obligations imposed upon him under Section 9[32] of the said law. According to Metrobank, Jimmy and Benjamin Gos offer to deliver the merchandise subject of the trust receipts cannot exculpate them from criminal liability because they failed to offer to surrender and to actually surrender the goods upon maturity of the trust receipts and even when several demands were made upon them. Stated differently, it was Metrobanks position that there was already a violation of the Trust Receipts Law committed by Jimmy and Benjamin Go even before they made their offer to return the merchandise to Metrobank in their pleadings before the Office of the City Prosecutor of Manila. Metrobank claimed that the belated offer of Jimmy and Benjamin Go to return the goods was a mere afterthought in order to evade indictment and prosecution.

Metrobank further argues that the dismissal by the Office of the City Prosecutor of Manila of the 11 criminal charges for violation of the Trust Receipts Law against Jimmy and Benjamin Go for want of probable cause, grounded on the absence of conversion or misappropriation, is tantamount to holding that a violation of the Trust Receipts Law is merely a crime against property and not against public order, contrary to prevailing jurisprudence. The Ruling of the Court After a judicious study of the records of this case, this Court does not find any cogent reason to reverse the assailed Decision and Resolution of the Court of Appeals, and the Resolutions of the Office of the City Prosecutor of Manila and of the Secretary of Justice. First. The issues raised in this petition are substantially factual. Essentially, Metrobank urges this Court to determine whether or not Jimmy and Benjamin Go failed to turn over the proceeds of the sale of the goods or to return them, if unsold, in accordance with the terms of the 11 trust receipts. This failure, Metrobank adds, amounts to a violation of Section 13 of the Trust Receipts Law and warrants the prosecution of respondents for estafa under Article 315, paragraph 1(b)[33] of the Revised Penal Code. In an appeal via certiorari, only questions of law may be raised because this Court is not a trier of facts.[34] Metrobank wants to make this case an exception to the rule, as it attributes to the Office of the City Prosecutor of Manila, the Secretary of Justice, and the Court of Appeals a misapprehension of the facts. Unfortunately, there is no adequate support for this imputation. In order that respondents Jimmy and Benjamin Go may be validly prosecuted for estafa under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Section 13 of the Trust Receipts Law, the following elements must be established: (a) they received the subject goods in trust or under the obligation to sell the same and to remit the proceeds thereof to Metrobank, or to return the goods if not sold; (b) they misappropriated or converted the goods and/or the proceeds of the sale; (c) they performed such acts with abuse of confidence to the damage and prejudice of Metrobank; and (d) demand was made on them by Metrobank for the remittance of the proceeds or the return of the unsold goods.[35]

The Office of the City Prosecutor and the Secretary of Justice had identical findings that the element of misappropriation or conversion is absent, and that Jimmy and Benjamin Go could not deliver the proceeds of the sale of the merchandise to Metrobank because the goods remained unsold. Both offices similarly found that the failure of the respondents to account for the proceeds of the sale or of the goods only created a disputable presumption that either the proceeds or the goods themselves were converted or misappropriated, but the presumption was overturned when the goods were offered to be inventoried and returned as they remained intact in the warehouse at the Bataan Export Processing Zone. Accordingly, they both ruled that the liability of Jimmy and Benjamin Go was merely civil in nature, and the criminal complaints were dismissed for lack of probable cause. Declaring that the Office of the City Prosecutor did not commit grave abuse of discretion, the Court of Appeals likewise made a factual finding that Jimmy and Benjamin Go offered to return the goods even prior to the filing of the civil cases against them, although the offer was not accepted because Metrobank appeared more interested in collecting the amount it advanced under the letters of credit. It also found that Metrobank failed to prove its demand for the return of the goods. Thus, even if we accommodate the petitioners plea to review the cases factual milieu, we still have to agree with the findings of fact of the Office of the City Prosecutor and of the Court of Appeals. These findings appear to be supported by the evidence on record. The prosecution for estafa under Article 315, paragraph 1(b) of the Revised Penal code, cannot prosper because the second (misappropriation/conversion) and the fourth (demand) elements of the offense are not present. Under the pro-forma trust receipts subject of this case, Jimmy and Benjamin Go, as entrustees, agreed to hold the goods (whether in their original, processed or manufactured state, and irrespective of the fact that a different merchandise is used in completing such manufacture) in trust for Metrobank, as its exclusive property, with liberty to sell them for cash only for the latters account, but without authority to make any other disposition whatsoever of the said goods or any part (or the proceeds) thereof by way of conditional sale, pledge, or

otherwise. They further agreed that in case of sale of the goods, or if the goods are used for the manufacture of finished products and are sold, they will turn over the proceeds to Metrobank to be applied against their total obligation under the trust receipts and for the payment of other debts to Metrobank. It is noteworthy that Jimmy and Benjamin Go processed the goods into textiles, to be sold for cash only, and that not all of the merchandise were sold such that they were able to remit only enough proceeds to fully settle their accounts under Letters of Credit-Trust Receipt Nos. 1922 and 1939, which were not subject of the 11 criminal complaints filed by Metrobank. Metrobank wants us to interpret this as confirmation that Jimmy and Benjamin Go had sold all the other merchandise but deliberately failed to turn over their corresponding proceeds. However, the Court sees this circumstance for what it simply and truly is, i.e., that Jimmy and Benjamin Go exerted efforts to comply with their obligation to sell the merchandise and remit the proceeds thereof. Unfortunately, the rest of the merchandise remained unsold in the warehouse at the Bataan Export Processing Zone, such that no proceeds thereof could be remitted to Metrobank. This Court also observes that the same trust receipts provide that Metrobank has the option to take possession of the goods upon default of Jimmy and Benjamin Go on any of their obligations and to sell them, with the proceeds thereof to be applied to the principal obligation and also to the expenses to be incurred by Metrobank in selling the same. [36] But Metrobank did not exercise this option. Instead, it filed three (3) complaints to collect the value of the merchandise. Jimmy and Benjamin Go offered to return the merchandise to Metrobank even before these civil cases were filed. Then, Jimmy and Benjamin Go reiterated the offer to return the goods in their answer to the civil complaints. Again, Metrobank did not accept the offer, and instead filed the 11 criminal complaints for alleged violation of the Trust Receipts Law to be prosecuted as estafa under Article 315, paragraph 1(b) of the Revised Penal Code. This chain of events validates the finding of the Court of Appeals that Metrobank is not interested in the return of the goods but only in collecting the money it extended to the respondents.

Furthermore, the trust receipts uniformly contain the following provision: Failure on the part of the ENTRUSTEE to account to the BANK/ENTRUSTER for the goods/documents/instruments received in trust and/or for the proceeds of the sale thereof within thirty (30) days from demand made by the BANK/ENTRUSTER shall constitute an admission that the ENTRUSTEE has converted or misappropriated said goods/documents/instruments for the personal benefit of the ENTRUSTEE and to the detriment and prejudice of the BANK/ENTRUSTER, and the BANK/ENTRUSTER is forthwith authorized to file and prosecute the corresponding and appropriate action, civil or criminal, against the ENTRUSTEE. [37] Yet, not one of the 11 criminal complaints was accompanied by a demand letter to show that Metrobank demanded the remittance of the proceeds of the sale of the goods or the return of goods, if unsold. We find this deficiency exceptionally revealing, especially considering that the said trust receipts had different maturity dates. Second. The trust receipts subject of this case partake of the nature of contracts of adhesion. A contract of adhesion is defined as one in which one party imposes a ready-made form of contract which the other party may accept or reject, but which the latter cannot modify; one party prepares the stipulations in the contract, while the other party merely affixes his signature or his adhesion thereto, giving no room for negotiation, and resulting in deprivation of the latter of the opportunity to bargain on equal footing.[38] In this case, the trust receipts were prepared solely by Metrobank with Jimmy and Benjamin Go having no choice but to adhere entirely to their provisions. In fact, the trust receipts stipulated that the goods subject thereof were the exclusive property of Metrobank, contrary to the essence of a trust receipt. A trust receipt is considered a security transaction designed to provide financial assistance to importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. It is a document in which is expressed a security

10

transaction where the lender, having no prior title to the goods on which the lien is to be constituted, and not having possession over the same since possession thereof remains in the borrower, lends his money to the borrower on security of the goods which the borrower is privileged to sell, clear of the lien, with an agreement to pay all or part of the proceeds of the sale to the lender. It is a security agreement pursuant to which a bank acquires a security interest in the goods. It secures a debt, and there can be no such thing as security interest that secures no obligation. [39] The subject trust receipts, being contracts of adhesion, are not per se invalid and inefficacious. But should there be ambiguities therein, such ambiguities are to be strictly construed against Metrobank, the party that prepared them. [40] There is no doubt as to the obligation of Jimmy and Benjamin Go to turn over the proceeds of the sale of the goods or to return the unsold goods. However, an ambiguity exists as to when this obligation arises, whether upon maturity of the trust receipts or upon demand by Metrobank. A strict construction of the provisions of the contracts of adhesion dictates that the reckoning point should be the demand made by Metrobank. As already discussed above, Jimmy and Benjamin Go turned over the proceeds of the goods sold under the two letters of credit/trust receipts which were not subject of the criminal cases. They also made the offer to return the unsold goods covered by the eleven trust receipts even before the three civil cases were filed against them. The offer was reiterated in their answer. More importantly, the unsold goods remained intact, contrary to the claim of Metrobank that they had misappropriated or converted the same. While there was a stipulation of a presumptive admission on the part of Jimmy and Benjamin Go of misappropriation or conversion upon failure to account for the goods or for the proceeds of the sale thereof within 30 days from demand, which will authorize Metrobank to pursue legal remedies in court, the fact of demand made by Metrobank was not established by competent evidence. Except for the bare allegation that it did so in the 11 criminal complaints, no letter of demand accompanied all of the criminal complaints.

As to the other obligations under the trust receipts adapted from Section 9 of the Trust Receipts Law, there is no sufficient evidence proffered by Metrobank that Jimmy and Benjamin Go had actually violated them. What the law punishes is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another, whether the latter is the owner.[41] The malum prohibitum nature of the offense notwithstanding, the intent to misuse or misappropriate the goods or their proceeds on the part of Jimmy and Benjamin Go should have been proved. Unfortunately, no such proof appears on record.[42] In the prosecution of criminal cases, it is the complainant who has the burden to prove the elements of the crime which the respondents are probably guilty of.[43] Obviously, Metrobank failed to discharge this burden. Indeed, there is neither error nor grave abuse of discretion which can be attributed to the Office of the City Prosecutor of Manila when it dismissed the criminal complaints for lack of probable cause. In the absence of grave abuse of discretion on the part of the Office of the City Prosecutor of Manila, this Court must not interfere in its findings, considering that full discretionary authority has been delegated to the latter in determining whether or not a criminal charge should be instituted.[44] With greater reason should we respect this finding, as it had been uniformly affirmed not only by the reviewing prosecutor but also by the Secretary of Justice and by the Court of Appeals. WHEREFORE, the petition is DENIED for lack of merit. Accordingly, the assailed Decision dated August 15, 2002 and the Resolution dated October 15, 2002 of the Court of Appeals in CA-G.R. SP No. 61544 are AFFIRMED. SO ORDERED.
-------------------------------------------------------------------------------[1] [2] [3] [4] [5] [6] [7] [8] [9] Petition dated December 1, 2002; rollo, pp. 12-47. Rollo, p. 71. Id. at 72. Id. at 130. Id. at 133. Id. at 73. Id. at 76. Id. at 148. Id. at 151.

11

[10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29]

Id. at 82. Id. at 85. Id. at 139. Id. at 142. Id. at 158. Id. at 161. Id. at 102. Id. at 105. Id. at 121. Id. at 124. Id. at 91. Id. at 96. Id. at 169. Id. at 173. Id. at 111. Id. at 121. Id. at 62-65 Id. at 66-67. Id. at 60-61. Id. at 27-28.

[35] [36] [37] [38]

Ching v. Court of Appeals, 387 Phil. 28, 40 (2000). 3rd paragraph of the trust receipts, supra. 14th paragraph of the trust receipts, supra. Philippine Commercial International Bank v. Court of Appeals, 325 Phil. 588, 597 (1996).

[39] Ching v. Court of Appeals, supra note 35, at 43-44, citing Samo v. People, 5 SCRA 354 (1962) and Vintola v. Insular Bank of Asia and America, 150 SCRA 578 (1987). [40] Pilipino Telephone Corporation v. Tecson, G.R. No. 156966, May 7, 2004, 428 SCRA 378, 380; National Development Company v. Madrigal Wan Hai Lines Corporation, 458 Phil. 1038, 10501051 (2003). [41] [42] [43] Metropolitan Bank and Trust Company v. Tonda, 392 Phil. 797, 813 (2000). Colinares v. Court of Appeals, 394 Phil. 106, 123 (2000). Kilosbayan, Inc. v. COMELEC, 345 Phil. 1140, 1176 (1997).

[44] Serapio v. Sandiganbayan, 444 Phil. 499, 528-529 (2003); Metropolitan Bank and Trust Company v. Tonda, supra note 41, at 814.

[30] Allied Banking Corporation v. Ordoez, G.R. No. 82495, December 10, 1990, 192 SCRA 246, 254-255. [31] SECTION 13. Penalty clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents, or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents, or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied) [32] SECTION 9. Obligations of the entrustee. The entrustee shall (1) hold the goods, documents, or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage, or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents, or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree. [33] Art. 315. Swindling (estafa) x x x

With unfaithfulness or abuse of confidence, namely: xxxx (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 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. (Emphasis supplied.) [34] Bank of Commerce v. Serrano, G.R. No. 151895, February 16, 2005, 451 SCRA 484, 492; Milestone Realty and Co., Inc. v. Court of Appeals, 431 Phil. 119, 132 (2002).

12

THIRD DIVISION G.R. No. 173905 April 23, 2010

ANTHONY L. NG, Petitioner, vs. PEOPLE OF THE PHILIPPINES, Respondent. DECISION VELASCO, JR. The Case This is a Petition for Review on Certiorari under Rule 45 seeking to reverse and set aside the August 29, 2003 Decision1 and July 25, 2006 Resolution of the Court of Appeals (CA) in CA-G.R. CR No. 25525, which affirmed the Decision2 of the Regional Trial Court (RTC), Branch 95 in Quezon City, in Criminal Case No. Q-99-85133 for Estafa under Article 315, paragraph 1(b) of the Revised Penal Code (RPC) in relation to Section 3 of Presidential Decree No. (PD) 115 or the Trust Receipts Law. The Facts Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business of building and fabricating telecommunication towers under the trade name "Capitol Blacksmith and Builders," applied for a credit line of PhP 3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrusts credit investigation, petitioner voluntarily submitted the following documents: (1) the contracts he had with Islacom, Smart, and Infocom; (2) the list of projects wherein he was commissioned by the said telecommunication companies to build several steel towers; and (3) the collectible amounts he has with the said companies.3 On May 30, 1997, Asiatrust approved petitioners loan application. Petitioner was then required to sign several documents, among which are the Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt Agreements,4 and Promissory Notes. Though the Promissory Notes matured on September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not bear any maturity dates as they were left unfilled or in blank by Asiatrust.5

After petitioner received the goods, consisting of chemicals and metal plates from his suppliers, he utilized them to fabricate the communication towers ordered from him by his clients which were installed in three project sites, namely: Isabel, Leyte; Panabo, Davao; and Tongonan. As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust. Asiatrust then conducted a surprise ocular inspection of petitioners business through Villarva S. Linga, Asiatrusts representative appraiser. Linga thereafter reported to Asiatrust that he found that approximately 97% of the subject goods of the Trust Receipts were "sold-out and that only 3 % of the goods pertaining to PN No. 1963 remained." Asiatrust then endorsed petitioners account to its Account Management Division for the possible restructuring of his loan. The parties thereafter held a series of conferences to work out the problem and to determine a way for petitioner to pay his debts. However, efforts towards a settlement failed to be reached. On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-Affidavit before the Office of the City Prosecutor of Quezon City. Consequently, on September 12, 1999, an Information for Estafa, as defined and penalized under Art. 315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or the Trust Receipts Law, was filed with the RTC. The said Information reads: That on or about the 30th day of May 1997, in Quezon City, Philippines, the above-named petitioner, did then and there willfully, unlawfully, and feloniously defraud Ma. Girlie C. Bernardez by entering into a Trust Receipt Agreement with said complainant whereby said petitioner as entrustee received in trust from the said complainant various chemicals in the total sum of P4.5 million with the obligation to hold the said chemicals in trust as property of the entruster with the right to sell the same for cash and to remit the proceeds thereof to the entruster, or to return the said chemicals if unsold; but said petitioner once in possession of the same, contrary to his aforesaid obligation under the trust receipt agreement with intent to defraud did then and there misappropriated, misapplied and converted the said amount to his own personal use and benefit and despite repeated demands made upon him, said petitioner refused and failed and still refuses and fails to make good of his obligation, to the damage and prejudice of the said Ma.

13

Girlie C. Bernardez in the amount of P2,971,650.00, Philippine Currency. CONTRARY TO LAW. Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-blown trial ensued. During the pendency of the abovementioned case, conferences between petitioner and Asiatrusts Remedial Account Officer, Daniel Yap, were held. Afterward, a Compromise Agreement was drafted by Asiatrust. One of the requirements of the Compromise Agreement was for petitioner to issue six (6) postdated checks. Petitioner, in good faith, tried to comply by issuing two or three checks, which were deposited and made good. The remaining checks, however, were not deposited as the Compromise Agreement did not push through. For his defense, petitioner argued that: (1) the loan was granted as his working capital and that the Trust Receipt Agreements he signed with Asiatrust were merely preconditions for the grant and approval of his loan; (2) the Trust Receipt Agreement corresponding to Letter of Credit No. 1963 and the Trust Receipt Agreement corresponding to Letter of Credit No. 1964 were both contracts of adhesion, since the stipulations found in the documents were prepared by Asiatrust in fine print; (3) unfortunately for petitioner, his contract worth PhP 18,000,000 with Islacom was not yet paid since there was a squabble as to the real ownership of the latters company, but Asiatrust was aware of petitioners receivables which were more than sufficient to cover the obligation as shown in the various Project Listings with Islacom, Smart Communications, and Infocom; (4) prior to the Islacom problem, he had been faithfully paying his obligation to Asiatrust as shown in Official Receipt Nos. 549001, 549002, 565558, 577198, 577199, and 594986,6 thus debunking Asiatrusts claim of fraud and bad faith against him; (5) during the pendency of this case, petitioner even attempted to settle his obligations as evidenced by the two United Coconut Planters Bank Checks7 he issued in favor of Asiatrust; and (6) he had already paid PhP 1.8 million out of the PhP 2.971 million he owed as per Statement of Account dated January 26, 2000. Ruling of the Trial Court

After trial on the merits, the RTC, on May 29, 2001, rendered a Decision, finding petitioner guilty of the crime of Estafa. The fallo of the Decision reads as follows: WHEREFORE, judgment is hereby rendered finding the petitioner, Anthony L. Ng GUILTY beyond reasonable doubt for the crime of Estafa defined in and penalized by Article 315, paragraph 1(b) of the Revised Penal Code in relation to Section 3 of Presidential Decree 115, otherwise known as the Trust Receipts Law, and is hereby sentenced to suffer the indeterminate penalty of from six (6) years, eight (8) months, and twenty one (21) days of prision mayor, minimum, as the minimum penalty, to twenty (20) years of reclusion temporal maximum, as the maximum penalty. The petitioner is further ordered to return to the Asiatrust Development Bank Inc. the amount of Two Million, Nine Hundred Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal rate of interest computed from the filing of the information on September 21,1999 until the amount is fully paid. IT IS SO ORDERED. In rendering its Decision, the trial court held that petitioner could not simply argue that the contracts he had entered into with Asiatrust were void as they were contracts of adhesion. It reasoned that petitioner is presumed to have read and understood and is, therefore, bound by the provisions of the Letters of Credit and Trust Receipts. It said that it was clear that Asiatrust had furnished petitioner with a Statement of Account enumerating therein the precise figures of the outstanding balance, which he failed to pay along with the computation of other fees and charges; thus, Asiatrust did not violate Republic Act No. 3765 (Truth in Lending Act). Finally, the trial court declared that petitioner, being the entrustee stated in the Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipts; otherwise, he is obliged to return the goods in the event of non-sale or upon demand of the entruster, failing thus, he evidently violated the Trust Receipts Law. Ruling of the Appellate Court Petitioner then elevated the case to the CA by filing a Notice of Appeal on August 6, 2001. In his Appellants Brief dated March 25, 2002, petitioner argued that the court a quo

14

erred: (1) in changing the name of the offended party without the benefit of an amendment of the Information which violates his right to be informed of the nature and cause of accusation against him; (2) in making a finding of facts not in accord with that actually proved in the trial and/or by the evidence provided; (3) in not considering the material facts which if taken into account would have resulted in his acquittal; (4) in being biased, hostile, and prejudiced against him; and (5) in considering the prosecutions evidence which did not prove the guilt of petitioner beyond reasonable doubt.1avvphi1 On August 29, 2003, the CA rendered a Decision affirming that of the RTC, the fallo of which reads: WHEREFORE, the foregoing considered, the instant appeal is DENIED. The decision of the Regional Trial Court of Quezon City, Branch 95 dated May 29, 2001 is AFFIRMED. SO ORDERED. The CA held that during the course of the trial, petitioner knew that the complainant Bernardez and the other cowitnesses are all employees of Asiatrust and that she is suing in behalf of the bank. Since petitioner transacted with the same employees for the issuance of the subject Trust Receipts, he cannot feign ignorance that Asiatrust is not the offended party in the instant case. The CA further stated that the change in the name of the complainant will not prejudice and alter the fact that petitioner was being charged with the crime of Estafa in relation to the Trust Receipts Law, since the information clearly set forth the essential elements of the crime charged, and the constitutional right of petitioner to be informed of the nature and cause of his accusations is not violated.8 As to the alleged error in the appreciation of facts by the trial court, the CA stated that it was undisputed that petitioner entered into a trust receipt agreement with Asiatrust and he failed to pay the bank his obligation when it became due. According to the CA, the fact that petitioner acted without malice or fraud in entering into the transactions has no bearing, since the offense is punished as malum prohibitum regardless of the existence of intent or malice; the mere failure to deliver the proceeds of the sale or the goods if not sold constitutes the criminal offense. With regard to the failure of the RTC to consider the fact that petitioners outstanding receivables are sufficient to

cover his indebtedness and that no written demand was made upon him hence his obligation has not yet become due and demandable, the CA stated that the mere query as to the whereabouts of the goods and/or money is tantamount to a demand.9 Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner, the CA said that petitioner failed to present any substantial proof to support the aforementioned allegations against the RTC. After the receipt of the CA Decision, petitioner moved for its reconsideration, which was denied by the CA in its Resolution dated July 25, 2006. Thereafter, petitioner filed this Petition for Review on Certiorari. In his Memorandum, he raised the following issues: Issues: 1. The prosecution failed to adduce evidence beyond a reasonable doubt to satisfy the 2nd essential element that there was misappropriation or conversion of subject money or property by petitioner. 2. The state was unable to prove the 3rd essential element of the crime that the alleged misappropriation or conversion is to the prejudice of the real offended property. 3. The absence of a demand (4th essential element) on petitioner necessarily results to the dismissal of the criminal case. The Courts Ruling We find the petition to be meritorious. Essentially, the issues raised by petitioner can be summed up into onewhether or not petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115. It is a well-recognized principle that factual findings of the trial court are entitled to great weight and respect by this Court, more so when they are affirmed by the appellate court. However, the rule is not without exceptions, such as: (1) when the conclusion is a finding grounded entirely on speculations, surmises, and conjectures; (2) the inferences made are manifestly mistaken; (3) there is grave abuse of discretion; and (4) the judgment is based on misapprehension of facts or premised on the absence of

15

evidence on record.10 Especially in criminal cases where the accused stands to lose his liberty by virtue of his conviction, the Court must be satisfied that the factual findings and conclusions of the lower courts leading to his conviction must satisfy the standard of proof beyond reasonable doubt. In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115. The RPC defines Estafa as: ART. 315. Swindling (estafa).Any person who shall defraud another by any of the means mentioned hereinbelow x x x 1. With unfaithfulness or abuse of confidence, namely: a. x x x 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 x x x.11 Based on the definition above, the essential elements of Estafa are: (1) that money, goods or other personal property is received by the offender in trust or on commission, or for administration, or under any obligation involving the duty to make delivery of or to return it; (2) that there be misappropriation or conversion of such money or property by the offender, or denial on his part of such receipt; (3) that such misappropriation or conversion or denial is to the prejudice of another; and (4) there is demand by the offended party to the offender.12 Likewise, Estafa can also be committed in what is called a "trust receipt transaction" under PD 115, which is defined as: Section 4. What constitutes a trust receipts transaction.A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the

same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents: (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied full with his obligation under the trust receipt; or (c) to load, unload, ship or transship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments: (a) to sell or procure their sale or exchange; or (b) to deliver them to a principal; or (c) to effect the consummation of some transactions involving delivery to a depository or register; or (d) to effect their presentation, collection or renewal. The sale of good, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree.

16

In other words, a trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are, therefore, two obligations in a trust receipt transaction: the first refers to money received under the obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the second refers to the merchandise received under the obligation to "return" it (devolvera) to the owner.13 A violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as provided in Sec. 13 of PD 115, viz: Section 13. Penalty Clause.The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. x x x (Emphasis supplied.) A thorough examination of the facts obtaining in the instant case, however, reveals that the transaction between petitioner and Asiatrust is not a trust receipt transaction but one of simple loan. PD 115 Does Not Apply It must be remembered that petitioner was transparent to Asiatrust from the very beginning that the subject goods were not being held for sale but were to be used for the fabrication of steel communication towers in accordance with his contracts with Islacom, Smart, and Infocom. In these contracts, he was commissioned to build, out of the materials received, steel communication towers, not to sell them. The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115 which states that a trust receipt is to be utilized "as a convenient business device to assist importers and merchants solve their financing problems." Obviously, the State, in enacting the law, sought

to find a way to assist importers and merchants in their financing in order to encourage commerce in the Philippines. As stressed in Samo v. People,14 a trust receipt is considered a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. Similarly, American Jurisprudence demonstrates that trust receipt transactions always refer to a method of "financing importations or financing sales."15 The principle is of course not limited in its application to financing importations, since the principle is equally applicable to domestic transactions.16 Regardless of whether the transaction is foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved sales. Following the precept of the law, such transactions affect situations wherein the entruster, who owns or holds absolute title or security interests over specified goods, documents or instruments, releases the subject goods to the possession of the entrustee. The release of such goods to the entrustee is conditioned upon his execution and delivery to the entruster of a trust receipt wherein the former binds himself to hold the specific goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to the entruster or the goods, documents or instruments themselves if they are unsold. Similarly, we held in State Investment House v. CA, et al. that the entruster is entitled "only to the proceeds derived from the sale of goods released under a trust receipt to the entrustee."17 Considering that the goods in this case were never intended for sale but for use in the fabrication of steel communication towers, the trial court erred in ruling that the agreement is a trust receipt transaction. In applying the provisions of PD 115, the trial court relied on the Memorandum of Asiatrusts appraiser, Linga, who stated that the goods have been sold by petitioner and that only 3% of the goods remained in the warehouse where it was previously stored. But for reasons known only to the trial

17

court, the latter did not give weight to the testimony of Linga when he testified that he merely presumed that the goods were sold, viz: COURT (to the witness) Q So, in other words, when the goods were not there anymore. You presumed that, that is already sold? A Yes, your Honor. Undoubtedly, in his testimony, Linga showed that he had no real personal knowledge or proof of the fact that the goods were indeed sold. He did not notify petitioner about the inspection nor did he talk to or inquire with petitioner regarding the whereabouts of the subject goods. Neither did he confirm with petitioner if the subject goods were in fact sold. Therefore, the Memorandum of Linga, which was based only on his presumption and not any actual personal knowledge, should not have been used by the trial court to prove that the goods have in fact been sold. At the very least, it could only show that the goods were not in the warehouse. Having established the inapplicability of PD 115, this Court finds that petitioners liability is only limited to the satisfaction of his obligation from the loan. The real intent of the parties was simply to enter into a simple loan agreement. To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased." Since Asiatrust knew that petitioner was neither an importer nor retail dealer, it should have known that the said agreement could not possibly apply to petitioner. Moreover, this Court finds that petitioner is not liable for Estafa both under the RPC and PD 115. Goods Were Not Received in Trust The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the money, goods or other personal property must be 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 it. But as we already discussed, the goods received by petitioner were not held in trust. They were also not intended for sale and neither did petitioner have the duty to return them. They were only intended for use in the fabrication of steel communication towers. No Misappropriation of Goods or Proceeds The second element of Estafa requires that there be misappropriation or conversion of such money or property by the offender, or denial on his part of such receipt. This is the very essence of Estafa under Art. 315, par. 1(b). The words "convert" and "misappropriated" connote an act of using or disposing of anothers property as if it were ones own, or of devoting it to a purpose or use different from that agreed upon. To misappropriate for ones own use includes not only conversion to ones personal advantage, but also every attempt to dispose of the property of another without a right.18 Petitioner argues that there was no misappropriation or conversion on his part, because his liability for the amount of the goods subject of the trust receipts arises and becomes due only upon receipt of the proceeds of the sale and not prior to the receipt of the full price of the goods. Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115 apply, petitioner is not liable for Estafa because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to turn over the proceeds of the sale of the goods x x x covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt x x x in accordance with the terms of the trust receipt." The trust receipt entered into between Asiatrust and petitioner states: In case of sale I/we agree to hand the proceeds as soon as received to the BANK to apply against the relative acceptance (as described above) and for the payment of any other indebtedness of mine/ours to ASIATRUST DEVELOPMENT BANK.19 (Emphasis supplied.) Clearly, petitioner was only obligated to turn over the proceeds as soon as he received payment. However, the evidence reveals that petitioner experienced difficulties in collecting payments from his clients for the communication

18

towers. Despite this fact, petitioner endeavored to pay his indebtedness to Asiatrust, which payments during the period from September 1997 to July 1998 total approximately PhP 1,500,000. Thus, absent proof that the proceeds have been actually and fully received by petitioner, his obligation to turn over the same to Asiatrust never arose. What is more, under the Trust Receipt Agreement itself, no date of maturity was stipulated. The provision left blank by Asiatrust is as follows: x x x and in consideration thereof, I/we hereby agree to hold said goods in Trust for the said Bank and as its property with liberty to sell the same for its account within ________ days from the date of execution of the Trust Receipt x x x20 In fact, Asiatrust purposely left the space designated for the date blank, an action which in ordinary banking transactions would be noted as highly irregular. Hence, the only way for the obligation to mature was for Asiatrust to demand from petitioner to pay the obligation, which it never did. Again, it also makes the Court wonder as to why Asiatrust decided to leave the provisions for the maturity dates in the Trust Receipt agreements in blank, since those dates are elemental part of the loan. But then, as can be gleaned from the records of this case, Asiatrust also knew that the capacity of petitioner to pay for his loan also hinges upon the latters receivables from Islacom, Smart, and Infocom where he had ongoing and future projects for fabrication and installation of steel communication towers and not from the sale of said goods. Being a bank, Asiatrust acted inappropriately when it left such a sensitive bank instrument with a void circumstance on an elementary but vital feature of each and every loan transaction, that is, the maturity dates. Without stating the maturity dates, it was impossible for petitioner to determine when the loan will be due. Moreover, Asiatrust was aware that petitioner was not engaged in selling the subject goods and that petitioner will use them for the fabrication and installation of communication towers. Before granting petitioner the credit line, as aforementioned, Asiatrust conducted an investigation, which showed that petitioner fabricated and installed communication towers for well-known communication companies to be installed at designated project sites. In fine, there was no abuse of confidence to

speak of nor was there any intention to convert the subject goods for another purpose, since petitioner did not withhold the fact that they were to be used to fabricate steel communication towers to Asiatrust. Hence, no malice or abuse of confidence and misappropriation occurred in this instance due to Asiatrusts knowledge of the facts. Furthermore, Asiatrust was informed at the time of petitioners application for the loan that the payment for the loan would be derived from the collectibles of his clients. Petitioner informed Asiatrust that he was having extreme difficulties in collecting from Islacom the full contracted price of the towers. Thus, the duty of petitioner to remit the proceeds of the goods has not yet arisen since he has yet to receive proceeds of the goods. Again, petitioner could not be said to have misappropriated or converted the proceeds of the transaction since he has not yet received the proceeds from his client, Islacom. This Court also takes judicial notice of the fact that petitioner has fully paid his obligation to Asiatrust, making the claim for damage and prejudice of Asiatrust baseless and unfounded. Given that the acceptance of payment by Asiatrust necessarily extinguished petitioners obligation, then there is no longer any obligation on petitioners part to speak of, thus precluding Asiatrust from claiming any damage. This is evidenced by Asiatrusts Affidavit of Desistance21 acknowledging full payment of the loan. Reasonable Doubt Exists In the final analysis, the prosecution failed to prove beyond reasonable doubt that petitioner was guilty of Estafa under Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of PD 115 or the Trust Receipts Law; thus, his liability should only be civil in nature. While petitioner admits to his civil liability to Asiatrust, he nevertheless does not have criminal liability. It is a wellestablished principle that person is presumed innocent until proved guilty. To overcome the presumption, his guilt must be shown by proof beyond reasonable doubt. Thus, we held in People v. Mariano22 that while the principle does not connote absolute certainty, it means the degree of proof which produces moral certainty in an unprejudiced mind of the culpability of the accused. Such proof should convince and satisfy the reason and conscience of those who are to act upon it that the accused is in fact guilty. The

19

prosecution, in this instant case, failed to rebut the constitutional innocence of petitioner and thus the latter should be acquitted. At this point, the ruling of this Court in Colinares v. Court of Appeals is very apt, thus: The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation x x x.23 Such is the situation in this case. Asiatrusts intention became more evident when, on March 30, 2009, it, along with petitioner, filed their Joint Motion for Leave to File and Admit Attached Affidavit of Desistance to qualify the Affidavit of Desistance executed by Felino H. Esquivas, Jr., attorney-in-fact of the Board of Asiatrust, which acknowledged the full payment of the obligation of the petitioner and the successful mediation between the parties. From the foregoing considerations, we deem it unnecessary to discuss and rule upon the other issues raised in the appeal. WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC Decision dated May 29, 2001 is SET ASIDE. Petitioner ANTHONY L. NG is hereby ACQUITTED of the charge of violation of Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of PD 115. SO ORDERED.
Footnotes
*

Rollo, pp. 58 & 60. Exhibits "1" & "1-A." Check Nos. 5094129 and 5094133 dated January 31, 2000 and May 31, 2000, respectively. Abaca v. Court of Appeals, G.R. No. 127162, June 5, 1998, 290 SCRA 657. Barrameda v. Court of Appeals, G.R. No. 96428, September 2, 1999, 313 SCRA 477. Cosep v. People, G.R. No. 110353, May 21, 1998, 290 SCRA 378. Murao v. People, G.R. No. 141485, June 30, 2005, 462 SCRA 366. Salazar v. People, G.R. No. 149472, August 18, 2004, 437 SCRA 41, 46. People v. Cuevo, 191 Phil. 622 (1981). Nos. L-17603-04, May 31, 1962, 5 SCRA 354. 49 A.L.R. 282. Id. G.R. No. 130365, July 14, 2000, 335 SCRA 703. Luces v. Damole, G.R. No. 150900, March 14, 2008, 548 SCRA 373. Rollo, p. 60. Id. at 58.

10

11

12

13

14

15

16

17

18

19

20

21

Joint Motion for Leave to File and Admit Attached Affidavit of Desistance, March 30, 2009, Annex "A"; Corporate Resolution No. 4155 (s. 2009)"Authorized signatory for the Affidavit of Desistance pertaining to the Settlement Agreement for the account of Anthony Ng/Capitol Blacksmith," March 26, 2009.
22

G.R. No. 134309, November 17, 2000, 345 SCRA 1. G.R. No. 90828, September 5, 2000, 339 SCRA 609.

23

THIRD DIVISION G.R. No. 169617 April 4, 2007 HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners, vs. SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by ZOILO LANDRITO, as their Attorneyin-Fact, Respondents. 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.

Designated as additional member in lieu of Associate Justice Diosdado M. Peralta, per raffle dated March 29, 2010.
**

Designated as additional member in lieu of Associate Justice Antonio Eduardo B. Nachura, per raffle dated April 7, 2010.
1

Penned by Associate Justice Elvi John S. Asuncion and concurred in by Associate Justices Eugenio S. Labitoria and Lucas P. Bersamin (now member of the Court).
2

Penned by then Presiding Judge Diosdado Madarang Peralta (now member of the Court). Rollo, pp. 61-69. Trust Receipt Agreements under Letter of Credit Nos. 1963 and 1964.

20

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 attorneyin-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 Landrito executed 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, Zoilo Espiritu 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 Landrito until 8 January 1992 to redeem the property. 8 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 Makati had 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 Zoilo Landrito, 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

21

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 ruled14: 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-INFACT 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.

22

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 617 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 blanche authority 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 Sheriffs Sale 24 dated 5 October 1990, and in the Certificate of Sale25 dated

23

31 October 1990, the amount designated as mortgage indebtedness amounted to P874,125.00. Likewise, in the demand letter26 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.

24

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 Attorney37 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 aforementioned 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 Landrito filed 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 Landrito conditioned upon the payment of the loan together with herein fixed rate of interest. Costs against the petitioners. SO ORDERED.
Footnotes
1

Penned by Associate Justice Danilo B. Pine with Associate Justices Rodrigo V. Cosico and Arcangelita Romilla-Lontok, concurring. Rollo, pp. 36-53.
2

Id. at 9-10. Id. Id. at 37-38 and 64. Id. at 38 and 67. Id. at 38 and 68-69. TSN, 7 December 1994, pp. 6-7 Rollo, p. 39. Id. at 144-145. Id. at 56. Id. at 91-94. Id. at 36-51. Id. at 52. Id. Id. at 16. Sections 4 and 3 (3) of Republic Act No. 3765 (1963) state that:

10

11

12

13

14

15

16

Sec. 4 Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with the rules and regulations prescribed by the Board, the following information: xxxx (4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) the total amount to be financed; (6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. Section 3. As used in this Act, the term xxxx (3) "Finance charge" includes interest, fees, service charges discounts, and such other charges incident to the extension of credit as the Board may by regulation prescribe.
17

Section 6 (a) and (c) of Republic Act No. 3765 (1963) states that:

25

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year form the date of the occurrence of the violations, in any court of competent jurisdiction. xxxx (c) Any person who willfully violated any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both.
18

359 Phil. 820, 829 (1998). 412 Phil. 816, 822-823 (2001). 449 Phil. 419, 433-435 (2003).

19

20

21

Cuaton v. Salud, G.R. No. 158382, 27 January 2004, 421 SCRA 278, 282; Spouses Almeda v. Court of Appeals, 326 Phil. 309, 319 (1996).
22

Id.

23

First Metro Investment Corporation v. Este Del Sol Mountain Reserve, Inc., 420 Phil. 902, 918 (2001).
24

Rollo, p. 71. Records, Folder I (Defendants Exhibits), p. 22. Id. at 18. Art. 1169, Civil Code. Rollo, p. 72. Id. at 73. Records, Folder II, p. 128. Sections 2 and 3, Rule 68 of the Rules of Court state that:

25

26

27

28

29

30

31

SEC. 2. Judgment on foreclosure for payment or sale. - If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render for the sum so found due and order that the same be paid into court within a period of not less than ninety (90) days from the date of the service of such order, and that in default of such payment the property be sold to realize the mortgage debt and costs. (Emphasis provided.) Section 3. Sale of mortgaged property; effect.When the defendant, after being directed to do so as provided in the last preceding section, fails to pay the principal, interest, and costs at the time directed in the order, the court shall order the property to be sold in the manner and under the regulations that govern sales of real estate under execution. (Emphasis provided.)
32

Heirs of De Guzman Tuazon v. Court of Appeals, G.R. No. 125758, 20 January 2004, 402 SCRA 219, 228; Reyes v. Court of Appeals, 374 Phil. 236, 248 (1999); Spouses Santiago v. Court of Appeals, 343 Phil. 612, 623 (1997).
33

Armamento v. Guerrero, G.R. No. L-34228, 21 February 1980, 96 SCRA 178, 182. Bueno v. Reyes, 137 Phil. 734, 738 (1969). Armamento v. Guerrero, supra note 33 at 184; id. at 739. Rollo, pp. 28-31. Id. at 59. Records, Folder II, pp. 86, 146 and 148.

34

35

36

37

38

26

THIRD DIVISION G.R. No. 148753 July 30, 2004 NEW SAMPAGUITA CONSTRUCTION, INC. (NSBCI), and Spouses EDUARDO R. DEE, and ARCELITA M. DEE, Petitioners, - versus PHILIPPINE NATIONAL BANK, Respondent. DECISION PANGANIBAN, J.: Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to increase interest rates, penalties and other charges at the latters sole discretion and without giving prior notice to and securing the consent of the borrowers. This unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be given effect under the Truth in Lending Act. The Case Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the June 20, 2001 Decision[2] of the Court of Appeals[3] (CA) in CA-GR CV No. 55231. The decretal portion of the assailed Decision reads as follows: WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated December 28, 1995 is REVERSED and SET ASIDE. The foreclosure proceedings of the mortgaged properties of defendants-appellees[4] and the February 26, 1992 auction sale are declared legal and valid and said defendants-appellees are ordered to pay plaintiff-appellant PNB,[5] jointly and severally[,] the amount of deficiency that will be computed by the trial court based on the original penalty of 6% per annum as explicitly stated in the loan documents and to pay attorneys fees in an amount equivalent to x x x 1% of the total amount due and the costs of suit and expenses of litigation.[6]

The Facts The facts are narrated by the CA as follows: On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by [Petitioner] NSBCI [1)] authorizing the company to x x x apply for or secure a commercial loan with the PNB in an aggregate amount of P8.0M, under such terms agreed by the Bank and the NSBCI, using or mortgaging the real estate properties registered in the name of its President and Chairman of the Board [Petitioner] Eduardo R. Dee as collateral; [and] 2) authorizing [petitioner-spouses] to secure the loan and to sign any [and all] documents which may be required by [Respondent] PNB[,] and that [petitioner-spouses] shall act as sureties or co-obligors who shall be jointly and severally liable with [Petitioner] NSBCI for the payment of any [and all] obligations. On August 15, 1989, Resolution No. 77 was approved by granting the request of [Respondent] PNB thru its Board NSBCI for an P8 Million loan broken down into a revolving credit line of P7.7M and an unadvised line of P0.3M for additional operating and working capital[7] to mobilize its various construction projects, namely:
1) 2) 3) 4) 5) 6) 7) MWSS Watermain; NEA-Liberty farm; Olongapo City Pag-Asa Public Market; Renovation of COA-NCR Buildings 1, 2 and 9; Dupels, Inc., Extensive prawn farm development project; Banawe Hotel Phase II; Clark Air Base -- Barracks and Buildings; and

8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles City.

The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a) three (3) parcels of residential land located at Mangaldan, Pangasinan with total land area of 1,214 square meters[,] including improvements thereon and registered under TCT Nos. 128449, 126071, and 126072 of the Registry of Deeds of Pangasinan; b) six (6) parcels of residential land situated at San Fabian, Pangasinan with total area of 1,767 square meters[,] including improvements thereon and covered by TCT Nos. 144006, 144005, 120458, 120890, 144161[,] and 121127 of the Registry of Deeds of

27

Pangasinan; and c) a residential lot and improvements thereon located at Mangaldan, Pangasinan with an area of 4,437 square meters and covered by TCT No. 140378 of the Registry of Deeds of Pangasinan. The loan was further secured by the joint and several signatures of [Petitioners] Eduardo Dee and Arcelita Marquez Dee, who signed as accommodation-mortgagors since all the collaterals were owned by them and registered in their names. Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note dated June 29, 1989 in the amount of P5,000,000.00 with due date on October 27, 1989; [b)] promissory note dated September 1, 1989 in the amount of P2,700,000.00 with due date on December 30, 1989; and c) promissory note dated September 6, 1989 in the amount of P300,000.00 with maturity date on January 4, 1990. In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989 relating to the revolving credit line of P7.7 Million x x x and the Credit Agreement dated September 5, 1989 to support the unadvised line of P300,000.00. On August 31, 1989, [petitioner-spouses] executed a Joint and Solidary Agreement (JSA) in favor of [Respondent] PNB unconditionally and irrevocably binding themselves to be jointly and severally liable with the borrower for the payment of all sums due and payable to the Bank under the Credit Document. Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory notes. On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a letter to the Branch Manager of the PNB Dagupan Branch requesting for a 90-day extension for the payment of interests and restructuring of its loan for another term. Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks aggregating P1,000,000.00, namely 1) check no. 316004 dated August 8, 1991 in the amount of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3) check no. 03499998 dated August 15, 1991 in the amount of P150,000.00.[8]

In a meeting held on August 12, 1991, [Respondent] PNBs representative[,] Mr. Rolly Cruzabra, was informed by [Petitioner] Eduardo Dee of his intention to remit to [Respondent] PNB post-dated checks covering interests, penalties and part of the loan principals of his due account. On August 22, 1991, [Respondent] banks Crispin Carcamo wrote [Petitioner] Eduardo Dee[,] informing him that [Petitioner] NSBCIs proposal [was] acceptable[,] provided the total payment should be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as principal, P3,056,058.03 as interests and penalties[,] and P53,678.93 for insurance[,] with the issuance of post-dated checks to be dated not later than November 29, 1991. On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating his proposals for the settlement of [Petitioner] NSBCIs past due loan account amounting to P7,019,231.33. [Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks aggregating P1,111,306.67 in favor of [Respondent] PNB, viz: Check No. Date Amount 03500087 Sept. 29, 1991 P277,826.70 03500088 03500089 03500090 Oct. 29, 1991 Nov. 29, 1991 Dec. 20, 1991 P277,826.70 P277,826.70 P277,826.57

Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29 and October 29, 1991 were dishonored by the drawee bank and returned due [to] a stop payment order from [petitioners]. On November 12, 1991, PNBs Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him that unless the dishonored checks [were] made good, said PNB branch shall recall its recommendation to the Head Office for the restructuring of the loan account and refer the matter to its legal counsel for legal action.[] [Petitioners] did not heed [respondents] warning and as a result[,] the PNB Dagupan Branch sent demand letters to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E. Rodriguez Sr. Avenue, Quezon City[,] asking it to settle its past due loan account.

28

[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] given them and as a result, [Respondent] PNB filed with the Provincial Sheriff of Pangasinan at Lingayen a Petition for Sale under Act 3135, as amended[,] and Presidential Decree No. 385 dated January 30, 1992. The notice of extra-judicial sale of the mortgaged properties relating to said PNBs [P]etition for [S]ale was published in the February 8, 15 and 22, 1992 issues of the Weekly Guardian, allegedly a newspaper of general circulation in the Province of Pangasinan, including the cities of Dagupan and San Carlos. In addition[,] copies of the notice were posted in three (3) public places[,] and copies thereof furnished [Petitioner] NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City, [and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and [Petitioner] Sps. Eduardo and Arcelita Dee at 213 Wilson St., San Juan, Metro Manila. On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen, Pangasinan foreclosed the real estate mortgage and sold at public auction the mortgaged properties of [petitioner-spouses,] with [Respondent] PNB being declared the highest bidder for the amount of P10,334,000.00. On March 2, 1992, copies of the Sheriffs Certificate of Sale were sent by registered mail to [petitioner] corporations address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City and [petitioner-spouses] address at 213 Wilson St., San Juan, Metro Manila. On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their address at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the properties securing their loan account [had] been sold at public auction, that the Sheriffs Certificate of Sale had been registered with the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a period of one (1) year therefrom [was] granted to them within which to redeem their properties. [Petitioners] failed to redeem their properties within the one-year redemption period[,] and so [Respondent] PNB executed a [D]eed of [A]bsolute [S]ale consolidating title to the properties in its name. TCT Nos. 189935 to 189944

were later issued to [Petitioner] PNB by the Registry of Deeds of Pangasinan. On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the sale conducted on February 26, 1992 were not sufficient to cover its total claim amounting to P12,506,476.43[,] and thus demanded from the latter the deficiency of P2,172,476.43 plus interest and other charges[,] until the amount [was] fully paid. [Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB to institute the instant [C]omplaint for the collection of its deficiency claim. Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the benefits under the program, the court a quo ruled in favor of [petitioners] in its Decision dated December 28, 1995, the fallo of which reads: In view of the foregoing, the Court believes and so holds that the [respondent] has no cause of action against the [petitioners]. WHEREFORE, the case is hereby DISMISSED, without costs.[9] On appeal, respondent assailed the trial courts Decision dismissing its deficiency claim on the mortgage debt. It also challenged the ruling of the lower court that Petitioner NSBCIs loan account was bloated, and that the inadequacy of the bid price was sufficient to set aside the auction sale. Ruling of the Court of Appeals Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of respondents debt relief package (DRP) or take steps to comply with the conditions for qualifying under the program. The appellate court also ruled that entitlement to the program was not a matter of right, because such entitlement was still subject to the approval of higher bank authorities, based on their assessment of the borrowers repayment capability and satisfaction of other requirements. As to the misapplication of loan payments, the CA held that the subsidiary ledgers of NSBCIs loan accounts with respondent reflected all the loan proceeds as well as the partial payments that had been applied either to the principal or to the interests, penalties and other charges. Having been made in the ordinary and usual course of the

29

banking business of respondent, its entries were presumed accurate, regular and fair under Section 5(q) of Rule 131 of the Rules of Court. Petitioners failed to rebut this presumption. The increases in the interest rates on NSBCIs loan were also held to be authorized by law and the Monetary Board and -like the increases in penalty rates -- voluntarily and freely agreed upon by the parties in the Credit Agreements they executed. Thus, these increases were binding upon petitioners. However, after considering that two to three of Petitioner NSBCIs projects covered by the loan were affected by the economic slowdown in the areas near the military bases in the cities of Angeles and Olongapo, the appellate court annulled and deleted the adjustment in penalty from 6 percent to 36 percent per annum. Not only did respondent fail to demonstrate the existence of market forces and economic conditions that would justify such increases; it could also have treated petitioners request for restructuring as a request for availment of the DRP. Consequently, the original penalty rate of 6 percent per annum was used to compute the deficiency claim. The auction sale could not be set aside on the basis of the inadequacy of the auction price, because in sales made at public auction, the owner is given the right to redeem the mortgaged properties; the lower the bid price, the easier it is to effect redemption or to sell such right. The bid price of P10,334,000.00 vis--vis respondents claim of P12,506,476.43 was found to be neither shocking nor unconscionable. The attorneys fees were also reduced by the appellate court from 10 percent to 1 percent of the total indebtedness. First, there was no extreme difficulty in an extrajudicial foreclosure of a real estate mortgage, as this proceeding was merely administrative in nature and did not involve a court litigation contesting the proceedings prior to the auction sale. Second, the attorneys fees were exclusive of all stipulated costs and fees. Third, such fees were in the nature of liquidated damages that did not inure to respondents salaried counsel. Respondent was also declared to have the unquestioned right to foreclose the Real Estate Mortgage. It was allowed to recover any deficiency in the mortgage account not

realized in the foreclosure sale, since petitioner-spouses had agreed to be solidarily liable for all sums due and payable to respondent. Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and auction sale were valid for the following reasons: (1) personal notice to the mortgagors, although unnecessary, was actually made; (2) the notice of extrajudicial sale was duly published and posted; (3) the extrajudicial sale was conducted through the deputy sheriff, under the direction of the clerk of court who was concurrently the ex-oficio provincial sheriff and acting as agent of respondent; (4) the sale was conducted within the province where the mortgaged properties were located; and (5) such sale was not shown to have been attended by fraud. Hence this Petition.[10] Issues Petitioners submit the following issues for our consideration: I Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not avail of PNBs debt relief package and were not entitled thereto as a matter of right. II Whether or not petitioners have adduced sufficient and convincing evidence to overthrow the presumption of regularity and correctness of the PNB entries in the subsidiary ledgers of the loan accounts of petitioners. III Whether or not the Honorable Court of Appeals seriously erred in not holding that the Respondent PNB bloated the loan account of petitioner corporation by imposing interests, penalties and attorneys fees without legal, valid and equitable justification. IV Whether or not the auction price at which the mortgaged properties was sold was disproportionate to their actual fair mortgage value. V

30

Whether or not Respondent PNB is not entitled to recover the deficiency in the mortgage account not realized in the foreclosure sale, considering that: A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which has a separate personality from the [petitioner-spouses]. B. The joint and solidary agreement executed by [petitioner- spouses] are contracts of adhesion not binding on them; C. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because they were compelled to execute the said Resolution[;] otherwise[,] Respondent PNB would not grant petitioner corporation the loan; D. The Respondent PNB had already in its possession the properties of the [petitioner-spouses] which served as a collateral to the loan obligation of petitioner corporation[,] and to still allow Respondent PNB to recover the deficiency claim amounting to a very substantial amount of P2.1 million would constitute unjust enrichment on the part of Respondent PNB. VI Whether or not the extrajudicial foreclosure proceedings and auction sale, including all subsequent proceedings[,] are null and void for non-compliance with jurisdictional and other mandatory requirements; whether or not the petition for extrajudicial foreclosure of mortgage was filed prematurely; and whether or not the finding of fraud by the trial court is amply supported by the evidence on record.[11] The foregoing may be summed up into two main issues: first, whether the loan accounts are bloated; and second, whether the extrajudicial foreclosure and subsequent claim for deficiency are valid and proper. The Courts Ruling The Petition is partly meritorious. First Main Issue: Bloated Loan Accounts

At the outset, it must be stressed that only questions of law[12] may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. As a rule, questions of fact cannot be the subject of this mode of appeal,[13] for [t]he Supreme Court is not a trier of facts.[14] As exceptions to this rule, however, factual findings of the CA may be reviewed on appeal[15] when, inter alia, the factual inferences are manifestly mistaken;[16] the judgment is based on a misapprehension of facts;[17] or the CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would justify a different legal conclusion.[18] In the present case, these exceptions exist in various instances, thus prompting us to take cognizance of factual issues and to decide upon them in the interest of justice and in the exercise of our sound discretion.[19 Indeed, Petitioner NSBCIs loan accounts with respondent appear to be bloated with some iniquitous imposition of interests, penalties, other charges and attorneys fees. To demonstrate this point, the Court shall take up one by one the promissory notes, the credit agreements and the disclosure statements. Increases in Interest Baseless Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be charged: 19.5 percent in the first, and 21.5 percent in the second and again in the third. However, a uniform clause therein permitted respondent to increase the rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future x x x,[20] without even giving prior notice to petitioners. The Court holds that petitioners accessory duty to pay interest[21] did not give respondent unrestrained freedom to charge any rate other than that which was agreed upon. No interest shall be due, unless expressly stipulated in writing.[22] It would be the zenith of farcicality to specify and agree upon rates that could be subsequently upgraded at whim by only one party to the agreement. The unilateral determination and imposition[23] of increased rates is violative of the principle of mutuality of contracts ordained in Article 1308[24] of the Civil Code.[25] One-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties essential equality.

31

Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of money on longterm contracts,[27] giving respondent an unbridled right to adjust the interest independently and upwardly would completely take away from petitioners the right to assent to an important modification in their agreement[28] and would also negate the element of mutuality in their contracts. The clause cited earlier made the fulfillment of the contracts dependent exclusively upon the uncontrolled will[29] of respondent and was therefore void. Besides, the pro forma promissory notes have the character of a contract dadhsion,[30] where the parties do not bargain on equal footing, the weaker partys [the debtors] participation being reduced to the alternative to take it or leave it.[31] While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No. 905,[33] nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.[34] In fact, we have declared nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law, authorized either party to unilaterally raise the interest rate without the others consent.[35] Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing signified a capital transfusion from lending institutions to businesses and industries and was done for the purpose of stimulating their growth; yet respondents continued unilateral and lopsided policy[36] of increasing interest rates without the prior assent[37] of the borrower not only defeats this purpose, but also deviates from this pronouncement. Although such increases are not usurious, since the Usury Law is now legally inexistent[38] -- the interest ranging from 26 percent to 35 percent in the statements of account[39] -must be equitably reduced for being iniquitous, unconscionable and exorbitant.[40] Rates found to be iniquitous or unconscionable are void, as if it there were no express contract thereon.[41] Above all, it is undoubtedly against public policy to charge excessively for the use of money.[42] It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of petitioners for loan restructuring or from their lack of response to the statements of account sent by respondent.

Such request does not indicate any agreement to an interest increase; there can be no implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose.[43] Besides, the statements were not letters of information sent to secure their conformity; and even if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to modify a loan contract, especially interest -- a vital component -- is obliged to answer the proposal.[44] Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the automatic conversion of the portion that remained unpaid after 730 days -- or two years from date of original release -- into a medium-term loan, subject to the applicable interest rate to be applied from the dates of original release.[45] In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid as of October 27, 1989, December 1989 and January 4, 1990 -- their respective due dates -- should have been automatically converted by respondent into medium-term loans on June 30, 1991, September 2, 1991, and September 7, 1991, respectively. And on this unpaid amount should have been imposed the same interest rate charged by respondent on other medium-term loans; and the rate applied from June 29, 1989, September 1, 1989 and September 6, 1989 -their respective original release -- until paid. But these steps were not taken. Aside from sending demand letters, respondent did not at all exercise its option to enforce collection as of these Notes due dates. Neither did it renew or extend the account. In these three Promissory Notes, evidently, no complaint for collection was filed with the courts. It was not until January 30, 1992 that a Petition for Sale of the mortgaged properties was filed -- with the provincial sheriff, instead.[49] Moreover, respondent did not supply the interest rate to be charged on medium-term loans granted by automatic conversion. Because of this deficiency, we shall use the legal rate of 12 percent per annum on loans and forbearance of money, as provided for by CB Circular 416.[50] Credit Agreements. Aside from the promissory notes, another main document involved in the principal obligation is the set of credit agreements executed and their annexes.

32

The first Credit Agreement[51] dated June 19, 1989 -although offered and admitted in evidence, and even referred to in the first Promissory Note -- cannot be given weight. First, it was not signed by respondent through its branch manager.[52] Apparently it was surreptitiously acknowledged before respondents counsel, who unflinchingly declared that it had been signed by the parties on every page, although respondents signature does not appear thereon.[53] Second, it was objected to by petitioners,[54] contrary to the trial courts findings.[55] However, it was not the Agreement, but the revolving credit line[56] of P5,000,000, that expired one year from the Agreements date of implementation.[57] Third, there was no attached annex that contained the General Conditions.[58] Even the Acknowledgment did not allude to its existence.[59] Thus, no terms or conditions could be added to the Agreement other than those already stated therein. Since the first Credit Agreement cannot be given weight, the interest rate on the first availment pegged at 3 percent over and above respondents prime rate[60] on the date of such availment[61] has no bearing at all on the loan. After the first Notes due date, the rate of 19 percent agreed upon should continue to be applied on the availment, until its automatic conversion to a medium-term loan. The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondents prime rate, plus the applicable spread[63] in effect as of the date of each availment,[64] on a revolving credit line of P7,700,000[65] -but did not state any provision on its increase or decrease. [66] Consequently, petitioners could not be made to bear interest more than such prime rate plus spread. The Court gives weight to this second Credit Agreement for the following reasons. First, this document submitted by respondent was admitted by petitioners.[67] Again, contrary to their assertion, it was not the Agreement -- but the credit line -- that expired one year from the Agreements date of implementation.[68] Thus, the terms and conditions continued to apply, even if drawdowns could no longer be made.

Second, there was no 7-page annex[69] offered in evidence that contained the General Conditions,[70] notwithstanding the Acknowledgment of its existence by respondents counsel. Thus, no terms or conditions could be appended to the Agreement other than those specified therein. Third, the 12-page General Conditions[71] offered and admitted in evidence had no probative value. There was no reference to it in the Acknowledgment of the Agreement; neither was respondents signature on any of the pages thereof. Thus, the General Conditions stipulations on interest adjustment,[72] whether on a fixed or a floating scheme, had no effect whatsoever on the Agreement. Contrary to the trial courts findings,[73] the General Condition were correctly objected to by petitioners.[74] The rate of 21.5 percent agreed upon in the second Note thus continued to apply to the second availment, until its automatic conversion into a medium-term loan. The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest as that in the second Agreement. This rate was to be applied to availments of an unadvised line of P300,000. Since there was no mention in the third Agreement, either, of any stipulation on increases or decreases[76] in interest, there would be no basis for imposing amounts higher than the prime rate plus spread. Again, the 21.5 percent rate agreed upon would continue to apply to the third availment indicated in the third Note, until such amount was automatically converted into a medium-term loan. The Court also finds that, first, although this document was admitted by petitioners,[77] it was the credit line that expired one year from the implementation of the Agreement.[78] The terms and conditions therein continued to apply, even if availments could no longer be drawn after expiry. Second, there was again no 7-page annex[79] offered that contained the General Conditions,[80] regardless of the Acknowledgment by the same respondents counsel affirming its existence. Thus, the terms and conditions in this Agreement relating to interest cannot be expanded beyond that which was already laid down by the parties. Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by respondent set forth

33

the same interest rates as those respectively indicated in the Promissory Notes. Although no method of computation was provided showing how such rates were arrived at, we will nevertheless take up the Statements seriatim in order to determine the applicable rates clearly. As to the first Disclosure Statement on Loan/Credit Transaction[82] dated June 13, 1989, we hold that the 19.5 percent effective interest rate per annum[83] would indeed apply to the first availment or drawdown evidenced by the first Promissory Note. Not only was this Statement issued prior to the consummation of such availment or drawdown, but the rate shown therein can also be considered equivalent to 3 percent over and above respondents prime rate in effect. Besides, respondent mentioned no other rate that it considered to be the prime rate chargeable to petitioners. Even if we disregarded the related Credit Agreement, we assume that this private transaction between the parties was fair and regular,[84] and that the ordinary course of business was followed.[85] As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2, 1989, we hold that the 21.5 percent effective interest rate per annum[87] would definitely apply to the second availment or drawdown evidenced by the second Promissory Note. Incidentally, this Statement was issued only after the consummation of its related availment or drawdown, yet such rate can be deemed equivalent to the prime rate plus spread, as stipulated in the corresponding Credit Agreement. Again, we presume that this private transaction was fair and regular, and that the ordinary course of business was followed. That the related Promissory Note was pre-signed would also bolster petitioners claim although, under crossexamination Efren Pozon -- Assistant Department Manager I[88] of PNB, Dagupan Branch -- testified that the Disclosure Statements were the basis for preparing the Notes.[89] As to the third Disclosure Statement on Loan/Credit Transaction[90] dated September 6, 1989, we hold that the same 21.5 percent effective interest rate per annum[91] would apply to the third availment or drawdown evidenced by the third Promissory Note. This Statement was made available to petitioner-spouses, only after the related Credit Agreement had been executed, but simultaneously with the consummation of the Statements related availment or drawdown. Nonetheless, the rate herein should still be

regarded as equivalent to the prime rate plus spread, under the similar presumption that this private transaction was fair and regular and that the ordinary course of business was followed. In sum, the three disclosure statements, as well as the two credit agreements considered by this Court, did not provide for any increase in the specified interest rates. Thus, none would now be permitted. When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB, Dagupan Branch, even testified that the bases for computing such rates were those sent by the head office from time to time, and not those indicated in the notes or disclosure statements.[92] In addition to the preceding discussion, it is then useless to labor the point that the increase in rates violates the impairment[93] clause of the Constitution,[94] because the sole purpose of this provision is to safeguard the integrity of valid contractual agreements against unwarranted interference by the State[95] in the form of laws. Private individuals intrusions on interest rates is governed by statutory enactments like the Civil Code. Penalty, or Increases Thereof, Unjustified No penalty charges or increases thereof appear either in the Disclosure Statements[96] or in any of the clauses in the second and the third Credit Agreements[97] earlier discussed. While a standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all three Promissory Notes still remaining unpaid or unrenewed when they fell due,[98] there is no stipulation therein that would justify any increase in that charges. The effect, therefore, when the borrower is not clearly informed of the Disclosure Statements -- prior to the consummation of the availment or drawdown -- is that the lender will have no right to collect upon such charge[99] or increases thereof, even if stipulated in the Notes. The time is now ripe to give teeth to the often ignored forty-one-year old Truth in Lending Act[100] and thus transform it from a snivelling paper tiger to a growling financial watchdog of hapless borrowers. Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per se, any apparent ambiguity in the loan contracts -- taken as a whole -- shall be strictly construed against respondent who caused it.[101] Worse, in the statements of account, the penalty

34

rate has again been unilaterally increased by respondent to 36 percent without petitioners consent. As a result of its move, such liquidated damages intended as a penalty shall be equitably reduced by the Court to zilch[102] for being iniquitous or unconscionable.[103] Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of the transaction, it is not a contract that can be modified by the related Promissory Note, but a mere statement in writing that reflects the true and effective cost of loans from respondent. Novation can never be presumed,[104] and the animus novandi must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.[105] To allow novation will surely flout the policy of the State to protect its citizens from a lack of awareness of the true cost of credit.[106] With greater reason should such penalty charges be indicated in the second and third Disclosure Statements, yet none can be found therein. While the charges are issued after the respective availment or drawdown, the disclosure statements are given simultaneously therewith. Obviously, novation still does not apply. Other Charges Unwarranted In like manner, the other charges imposed by respondent are not warranted. No particular values or rates of service charge are indicated in the Promissory Notes or Credit Agreements, and no total value or even the breakdown figures of such non-finance charge are specified in the Disclosure Statements. Moreover, the provision in the Mortgage that requires the payment of insurance and other charges is neither made part of nor reflected in such Notes, Agreements, or Statements.[107] Attorneys Fees Equitably Reduced We affirm the equitable reduction in attorneys fees. [108] These are not an integral part of the cost of borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose of these fees is not to give respondent a larger compensation for the loan than the law already allows, but to protect it against any future loss or damage by being compelled to retain counsel in-house or not -- to institute judicial proceedings for the collection of

its credit.[109] Courts have has the power[110] to determine their reasonableness[111] based on quantum meruit[112] and to reduce[113] the amount thereof if excessive.[114] In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no longer holds water, inasmuch as Act 496[115] has repealed the Spanish Notarial Law.[116] In the same vein, their engagement of their counsel in another capacity concurrent with the practice of law is not prohibited, so long as the roles being assumed by such counsel is made clear to the client.[117] The only reason for this clarification requirement is that certain ethical considerations operative in one profession may not be so in the other.[118] Debt Relief Package - Not Availed Of We also affirm the CAs disquisition on the debt relief package (DRP). Respondents Circular is not an outright grant of assistance or extension of payment,[119] but a mere offer subject to specific terms and conditions. Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected by the economic slowdown in the peripheral areas of the then US military bases. Its allegations, devoid of any verification, cannot lead to a supportable conclusion. In fact, for short-term loans, there is still a need to conduct a thorough review of the borrowers repayment possibilities.[120] Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the latest loan value of hard collaterals,[122] to be eligible for the package. Additional accommodations on an unsecured basis may be granted only when regular payment amortizations have been established, or when the merits of the credit application would so justify.[123] The branch managers recommendation to restructure or extend a total outstanding loan not exceeding P8,000,000 is not final, but subject to the approval of respondents Branches Department Credit Committee, chaired by its executive vice-president.[124] Aside from being further conditioned on other pertinent policies of respondent,[125] such approval nevertheless needs to be reported to its Board of Directors for confirmation.[126] In fact, under the General Banking Law of 2000,[127] banks shall grant loans

35

and other credit accommodations only in amounts and for periods of time essential to the effective completion of operations to be financed, consistent with safe and sound banking practices.[128] The Monetary Board -- then and now -- still prescribes, by regulation, the conditions and limitations under which banks may grant extensions or renewals of their loans and other credit accommodations. [129] Entries in Subsidiary Ledgers - Regular and Correct Contrary to petitioners assertions, the subsidiary ledgers of respondent properly reflected all entries pertaining to Petitioner NSBCIs loan accounts. In accordance with the Generally Accepted Accounting Principles (GAAP) for the Banking Industry,[130] all interests accrued or earned on such loans, except those that were restructured and non-accruing,[131] have been periodically taken into income.[132] Without a doubt, the subsidiary ledgers in a manual accounting system are mere private documents[133] that support and are controlled by the general ledger.[134] Such ledgers are neither foolproof nor standard in format, but are periodically subject to audit. Besides, we go by the presumption that the recording of private transactions has been fair and regular, and that the ordinary course of business has been followed. Second Main Issue: Extrajudicial Excessive Foreclosure Valid, But Deficiency Claims

easier[143] for the owner to effect redemption[144] by subsequently reacquiring the property or by selling the right to redeem and thus recover alleged losses. Besides, the public auction sale has been regularly and fairly conducted, [145] there has been ample authority to effect the sale, [146] and the Certificates of Title can be relied upon. No personal notice[147] is even required,[148] because an extrajudicial foreclosure is an action in rem, requiring only notice by publication and posting, in order to bind parties interested in the foreclosed property.[149] As no redemption[150] was exercised within one year after the date of registration of the Certificate of Sale with the Registry of Deeds,[151] respondent -- being the highest bidder -- has the right to a writ of possession, the final process that will consummate the extrajudicial foreclosure. On the other hand, petitioner-spouses, who are mortgagors herein, shall lose all their rights to the property.[152] No Deficiency Claim Receivable After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is extinguished. Although the mortgagors, being third persons, are not liable for any deficiency in the absence of a contrary stipulation, [153] the action for recovery of such amount -- being clearly sureties to the principal obligation -- may still be directed against them.[154] However, respondent may impose only the stipulated interest rates of 19.5 percent and 21.5 percent on the respective availments -- subject to the 12 percent legal rate revision upon automatic conversion into medium-term loans -- plus 1 percent attorneys fees, without additional charges on penalty, insurance or any increases thereof. Accordingly, the excessive interest rates in the Statements of Account sent to petitioners are reduced to 19.5 percent and 21.5 percent, as stipulated in the Promissory Notes; upon loan conversion, these rates are further reduced to the legal rate of 12 percent. Payments made by petitioners are pro-rated, the charges on penalty and insurance eliminated, and the resulting total unpaid principal and interest of P6,582,077.70 as of the date of public auction is then subjected to 1 percent attorneys fees. The total outstanding obligation is compared to the bid price. On the basis of these rates and the comparison made, the deficiency claim receivable amounting to P2,172,476.43 in

Respondent aptly exercised its option to foreclose the mortgage,[135] after petitioners had failed to pay all the Notes in full when they fell due.[136] The extrajudicial sale and subsequent proceedings are therefore valid, but the alleged deficiency claim cannot be recovered. Auction Price Adequate In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights thereto are used as security[139] for the fulfillment of the principal loan obligation,[140] the bid price may be lower than the propertys fair market value.[141] In fact, the loan value itself is only 70 percent of the appraised value.[142] As correctly emphasized by the appellate court, a low bid price will make it

36

fact vanishes. Instead, there is an overpayment by more than P3 million, as shown in the Schedules (***at the end). In the preparation of the above-mentioned schedules, these basic legal principles were followed: First, the payments were applied to debts that were already due.[155] Thus, when the first payment was made and applied on January 5, 1990, all Promissory Notes were already due. Second, payments of the principal were not made until the interests had been covered.[156] For instance, the first payment on January 15, 1990 had initially been applied to all interests due on the notes, before deductions were made from their respective principal amounts. The resulting decrease in interest balances served as the bases for subsequent pro-ratings. Third, payments were proportionately applied to all interests that were due and of the same nature and burden.[157] This legal principle was the rationale for the pro-rated computations shown on Schedule 4. Fourth, since there was no stipulation on capitalization, no interests due and unpaid were added to the principal; hence, such interests did not earn any additional interest. [158] The simple -- not compounded -- method of interest calculation[159] was used on all Notes until the date of public auction. In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency receivable in favor of PNB, but rather an excess claim or surplus[162] payable by respondent; this excess should immediately be returned to petitioner-spouses or their assigns -- not to mention the buildings and improvements[163] on and the fruits of the property -- to the end that no one may be unjustly enriched or benefited at the expense of another.[164] Such surplus is in the amount of P3,686,101.52, computed as follows:
Total unpaid principal and interest on the promissory notes as of February 26, 1992: Drawdown on June 29, 1989 (Schedule 1) P 4,037,204.10

(Schedule 3)

255,833.22 6,582,077.70

Add: 1% attorneys fees Total outstanding obligation Less: Bid price Excess P

65,820.78 6,647,898.48 10,334,000.00 3,686,101.52

Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint and Solidary Agreement (JSA)[165] was indubitably a surety, not a guaranty.[166] They consented to be jointly and severally liable with Petitioner NSBCI -- the borrower -- not only for the payment of all sums due and payable in favor of respondent, but also for the faithful and prompt performance of all the terms and conditions thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI certified as early as February 23, 1989, that the spouses should act as such surety.[168] But, their solidary liability should be carefully studied, not sweepingly assumed to cover all availments instantly. First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners,[169] it covered only the Promissory Notes of P2,700,000 and P300,000 made after that date. The terms of a contract of suretyship undeniably determine the suretys liability[170] and cannot extend beyond what is stipulated therein.[171] Yet, the total amount petitioner-spouses agreed to be held liable for was P7,700,000; by the time the JSA was executed, the first Promissory Note was still unpaid and was thus brought within the JSAs ambit.[172] Second, while the JSA included all costs, charges and expenses that respondent might incur or sustain in connection with the credit documents,[173] only the interest was imposed under the pertinent Credit Agreements. Moreover, the relevant Promissory Notes had to be resorted to for proper valuation of the interests charged. Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against the party who may have caused any ambiguity therein, no such ambiguity was found. Petitioner-spouses, who agreed to be

Drawdown on September 1, 1989 (Schedule 2) Drawdown on September 6, 1989 2,289,040.38

37

accommodation mortgagors,[174] can no longer be held individually liable for the entire onerous obligation[175] because, as it turned out, it was respondent that still owed them. To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and 21.5 percent stipulated in the Promissory Notes may be imposed by respondent on the respective availments. After 730 days, the portions remaining unpaid are automatically converted into medium-term loans at the legal rate of 12 percent. In all instances, the simple method of interest computation is followed. Payments made by petitioners are applied and pro-rated according to basic legal principles. Charges on penalty and insurance are eliminated, and 1 percent attorneys fees imposed upon the total unpaid balance of the principal and interest as of the date of public auction. The P2 million deficiency claim therefore vanishes, and a refund of P3,686,101.52 arises. WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court of Appeals is AFFIRMED, with the MODIFICATION that PNB is ORDERED to refund the sum of P3,686,101.52 representing the overcollection computed above, plus interest thereon at the legal rate of six percent (6%) per annum from the filing of the Complaint until the finality of this Decision. After this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction. No costs. SO ORDERED.
-------------------------------------------------------------------------------[1] [2] Rollo, pp. 118-158. Id., pp. 159-183.

Comments/Objections (to defendants formal offer of evidence) filed on December 28, 1994 (per records, p. 146) and admitted by the RTC in its December 28, 1994 Order (per records, p. 151). [9] CA Decision, pp. 2-8; rollo, pp. 160-166. Citations omitted.

[10] The Petition was deemed submitted for decision on August 19, 2002, upon receipt by the Court of petitioners Memorandum signed by Atty. Cesar M. Carino. Respondents Memorandum, signed by Attys. Flerida P. Zaballa-Banzuela and Dinah B. Tabada, was filed on June 28, 2002. [11] [12] [13] [14] [15] [16] [17] Petitioners Memorandum, pp. 14-16; rollo, pp. 385-387. Original in upper case. Metropolitan Bank and Trust Co. v. Wong, 412 Phil. 207, 216, June 26, 2001. Perez v. CA, 374 Phil. 388, 409-410, October 1, 1999. Far East Bank & Trust Co. v. CA, 326 Phil. 15, 18, April 1, 1996, per Hermosisima Jr., J. Alsua-Betts v. CA, 92 SCRA 332, 366, July 30, 1979. Luna v. Linatoc, 74 Phil. 15, October 28, 1942. De La Cruz v. Sosing, 94 Phil. 26, 28, November 27, 1953.

[18] Larena v. Mapili, 408 SCRA 484, 489, August 7, 2003, per Panganiban, J.; and The Heirs of Felicidad Canque v. CA, 341 Phil. 738, 750, July 21, 1997. [19] [20] [21] [22] [23] Feria and Noche, Civil Procedure Annotated, Vol. 2 (2001), p. 203. Exhibits C, C-1, and C-2; Exhibits 13, 13-B, and 13-C; folder of exhibits, Vol. I, pp. 5-7. De Leon, Comments and Cases on Credit Transactions (1995), p. 32. Article 1956 of the Civil Code. Spouses Florendo v. CA, 333 Phil. 535, 546, December 17, 1996, per Panganiban, J.

[24] Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. [25] Spouses Florendo v. CA, supra (citing Philippine National Bank v. CA, 196 SCRA 536, 544-545, April 30, 1991. See Philippine National Bank v. CA, 328 Phil. 54, 61-62, July 9, 1996). [26] Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. I (1989), p. 131. See Banco Filipino Savings and Mortgage Bank v. Hon. Navarro, 152 SCRA 346, 353, July 28, 1987. Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds. Polotan Sr. v. CA, 357 Phil. 250, 260, September 25, 1998, per Romero, J. [27] De Leon, supra, p. 87.

[28] Philippine National Bank v. CA, supra at note 25, pp. 62-63, per Mendoza, J. (citing Philippine National Bank v. CA, 238 SCRA 20, 26, November 8, 1994, per Puno, J). [29] Garcia v. Rita Legarda, Inc., 128 Phil. 590, 594-595, October 30, 1967, per Dizon, J.

[30] Labeled since Raymond Baloilles contracts by adherence. Qua Chee Gan v. Law Union & Rock Insurance Co. Ltd., 98 Phil. 85, 95, December 17, 1955, per Reyes, J.B.L., J. [31] Philippine National Bank v. CA, supra at note 25, per Grio-Aquino, J. See Qua Chee Gan v. Law Union & Rock Insurance Co. Ltd., supra. [32] Act No. 2655.

[3] Special Eleventh Division. Penned by Justice Presbitero J. Velasco Jr., with the concurrence of Justices Bienvenido L. Reyes and Juan Q. Enriquez Jr. [4] [5] [6] [7] [8] Petitioners herein. Respondent herein. CA Decision, pp. 24-25; rollo, pp. 182-183. Working capital refers to current assets minus current liabilities. Prior to 1991, the following payments were also made by NSBCI to PNB: P 572,073.65 278,711.83 341,263.89 1,432,999.84

[33] Approved by the Monetary Board in its Resolution No. 2224 on December 3, 1982, it took effect on January 1, 1983. [34] Imperial v. Jaucian, GR No. 149004, April 14, 2004, p. 10, per Panganiban; citing Spouses Solangon v. Salazar, 412 Phil. 816, 822, June 29, 2001, per Sandoval-Gutierrez, J.; and Spouses Almeda v. CA, 326 Phil. 309, 319, April 17, 1996. [35] [36] [37] Philippine National Bank v. CA, supra at note 28, p. 25. Spouses Almeda v. CA, supra, p. 319, per Kapunan, J. Id., p. 316.

January 5, 1990 March 30, 1990 May June 31, 1990 29, 1990

[38] Medel v. CA, 359 Phil. 820, 829, November 27, 1998, per Pardo, J. See also People v. Dizon, 329 Phil. 685, 696, August 22, 1996; Liam Law v. Olympic Sawmill Co., 214 Phil. 385, 388, May 28, 1984; Peoples Financing Corp. v. CA, 192 SCRA 34, 40, December 4, 1990; and Javier v. De Guzman Jr., 192 SCRA 434, 439, December 19, 1990. [39] These are billings sent by respondent to petitioner showing the details of its outstanding claim against the latter as of a given date.

These were indicated in the Summary of Payments, (Exhibit 20, folder of exhibits, Vol. I, p. 27) prepared and testified to by PNBs Loan Analyst II, Julia Ang-Lopez; and offered in evidence by petitioners on December 1, 1994, per records, p. 141. No objection thereto was raised in respondents

38

[40] [41] [42] [43]

Spouses Solangon v. Salazar, supra, p. 822. Imperial v. Jaucian, supra, p. 10. De Leon, supra, p. 50. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. I (1990), p. 29.

[70] [71] [72] [73]

4 of Exhibit F, p. 4; id., p. 18. Exhibit F-2-A, pp. 1-12; id., pp. 28-39. 7.02 of Exhibit F-2-C, p. 9; id., p. 36. Order dated September 15, 1994; records, p. 118.

[44] Philippine National Bank v. CA, supra at note 25, p. 63, per Mendoza, J. (citing Philippine National Bank v. CA, supra at note 28, pp. 26-27). [45] [46] [47] [48] [49] Exhibits C, C-1, and C-2; Exhibits 13, 13-B, and 13-C; folder of exhibits, Vol. I, pp. 5-7. Exhibit C; Exhibit 13; folder of exhibits, Vol. I, p. 5. Exhibit C-1; Exhibit 13-B; folder of exhibits, Vol. I, p. 6. Exhibit C-2; Exhibit 13-C; folder of exhibits, Vol. I, p. 7. Exhibit N; folder of exhibits, Vol. I, pp. 54-57.

[74] Comments/Objections to Respondents Formal Offer of Evidence dated September 5, 1994, p.3; records, p. 112. [75] [76] Exhibit F-1, pp. 1-4; folder of exhibits, Vol. I, pp. 20-23. 1 of Exhibit F, pp. 1-2; id., pp. 15-16.

[77] Comments/Objections to Respondents Formal Offer of Evidence dated September 5, 1994, p. 2; records, p. 111. [78] [79] [80] [81] [82] [83] [84] [85] [86] [87] 1.01 of Exhibit F-1, p. 1; folder of exhibits, Vol. I, p. 20. Acknowledgment (dated September 5, 1989) of Exhibit F-1, p. 4; id., p. 23. 4 of Exhibit F-1, p. 3; id., p. 22. Exhibits 12, 12-A, and 12-B; folder of exhibits, Vol. II, pp. 19-21. Exhibit 12; id., p. 19. Item 7, ibid. 3(p) of Rule 131 of the Rules of Court. 3(q) of Rule 131 of the Rules of Court. Exhibit 12-A; folder of exhibits, Vol. II, p. 20. Item 7, ibid; ibid.

[50] De Leon, supra, p. 40. See Tropical Homes, Inc. v. CA, 338 Phil. 930, 943-944, May 14, 1997 (citing Eastern Shipping Lines, Inc. v. CA, 234 SCRA 78, 95-96, July 12, 1994). [51] [52] [53] Exhibit F-2, pp. 1-4; folder of exhibits, Vol. I, pp. 24-27. Exhibit F-2, p. 3; id., p. 26. Id., pp. 4 and 27.

[54] Comments/Objections to Respondents Formal Offer of Evidence, dated September 5, 1994, p. 2; records, p. 111. [55] Order dated September 15, 1994; records, p. 118.

[56] Banks give credit lines to businessmen in order to assist them in the operation of their business. A fixed limit or ceiling may be placed on the account, provided its balance does not exceed such stipulated limit or ceiling. The balance may perhaps never be cleared, since the credit revolves round and round; hence, the title revolving credit. Miranda, Essentials of Money, Credit and Banking (5th rev. ed., 1981), pp. 96-99. Moreover, a revolving credit line is a formal commitment by a bank to lend a borrower up to a specified amount of money over a given period of time. The actual notes evidencing the debt are shortterm; but the borrower may renew them up to a specified maximum throughout the duration of such commitment. The bank, in turn, is legally bound under the loan agreement to have funds available whenever money is borrowed. At the maturity of the commitment, borrowings then owing can be converted into a term loan. Van Horne, Financial Management and Policy (5th ed., 1980), pp. 520-521. Thus, when a borrower needs money, it makes a drawdown or availment on the credit line in the form of a note or promise to pay a certain principal amount. The balance of all unpaid principals, otherwise known as outstanding drawdowns or availments, at any given time, should not exceed the ceiling or limit. After due payment of any drawdown or availment, the borrower can make succeeding drawdowns or availments within the maximum amount committed, provided the line has not yet expired. [57] [58] [59] 1.01 of Exhibit F-2, p. 1; folder of exhibits, Vol. I, p. 24. 4.01 of Exhibit F-2, p. 3; id., p. 26. Acknowledgment dated June 19, 1989 of Exhibit F-2, pp. 3-4; id., pp. 26-27.

[88] On direct examination, he said that he was also a member of the branch committee in charge of loan approval and sale of foreclosed properties. TSN, May 11, 1994, pp. 3-4. [89] [90] [91] [92] TSN, May 26, 1994, p. 7. Exhibit 12-B; folder of exhibits, Vol. II, p. 21. Item 7 of Exhibit 12-B; id., p. 21. TSN, July 6, 1994, pp. 13 & 17.

[93] This is anything substantial that diminishes the efficacy of a contract. Clemons v. Nolting, 42 Phil. 702, 717, January 24, 1922 (cited in Bernas, The Constitution of the Republic of the Philippines: A Commentary, Vol. I [1st ed., 1987], p. 321). [94] [95] [96] [97] [98] [99] [100] 10 of Article III of the 1987 Constitution. Cruz, Constitutional Law (1989), p. 232. Exhibits 12, 12-A, and 12-B; folder of exhibits, Vol. II, pp. 19-21. Exhibit F, pp. 1-5; and Exhibit F-1, pp. 1-4; folder of exhibits, Vol. I, pp. 15-23. Exhibits C, C-1, and C-2; exhibits 13, 13-B, and 13-C; folder of exhibits, Vol. I, pp. 22-24. Consolidated Bank and Trust Corp. (Solidbank) v. CA, 316 Phil 247, 258, July 14, 1995. RA 3765, effective upon approval on June 22, 1963.

[60] In 1983, the interest rate structuring was completely deregulated. To complement the lifting of short-term interest ceilings, the Central Bank (now Bangko Sentral) implemented a prime rate system. Under this system, the prime rate referred to the rate charged on loans to borrowers with the highest credit ratings on 90-day loans of P500,000 and above, that were not rediscountable at preferred rates with the Central Bank. Saldaa, Financial Management in the Philippine Setting: Text and Cases (1985), p. 82. [61] [62] 1.04(a) of Exhibit F-2, p. 1; folder of exhibits, Vol. I, p. 24. Exhibit F, pp. 1-5; id., pp. 15-19.

[101] Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. See Palmares v. CA, 351 Phil. 664, 677, March 31, 1998; and Garcia v. CA, 327 Phil. 1097, 1111, July 5, 1996. [102] A penalty that causes the economic ruin of the borrower, or is grossly disproportionate to the damage suffered by the lender, may be entirely voided. Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV (1991), p. 268. [103] Article 2227 of the Civil Code provides:

[63] The difference between the interest and other service fees charged by a bank to its borrowers and clients and the interest it pays to its depositors and other suppliers of funds is the gross or intermediation spread. IBON Databank Phil., Inc., The Philippine Financial System -- A Primer (1983), p. 36. [64] [65] [66] 1.04(a) of Exhibit F, p. 2; folder of exhibits, Vol. I, p. 16. Exhibit F, p. 1; id., p. 15. 1 of Exhibit F, pp. 1-2; id., pp. 15-16.

[67] Comments/Objections (to [Respondents] Formal Offer of Evidence) dated September 5, 1994, p.2; records, p. 111. [68] [69] Ibid. Acknowledgment dated August 31, 1989 of Exhibit F, p. 5; folder of exhibits, Vol. I, p. 19.

Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. See also Palmares v. CA, supra, pp. 690-691; Social Security Commission v. Almeda, 168 SCRA 474, 480, December 14, 1988; Garcia v. CA, 167 SCRA 815, 831, November 24, 1988; and Joes Radio and Electrical Supply v. Alto Electronics Corp., 104 Phil. 333, 344, August 22, 1958.

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[104]

Tolentino, supra at note 102, p. 383.

[105] Ocampo-Paule v. CA, 426 Phil. 463, 470, February 4, 2002, per Kapunan, J. (citing Quinto v. People, 365 Phil. 259, 267, April 14, 1999, per Vitug, J). [106] [107] 2 of RA 3765. Agbayani, supra, p. 142.

A general ledger, on the one hand, is a summary or repository of accounts to which debits and credits resulting from financial transactions are posted from journals or books of original entry; a subsidiary ledger, on the other, is a special type of ledger confined chiefly to a particular account. [135] China Banking Corp. v. CA, 333 Phil. 158, 174, December 5, 1996, per Francisco, J.

[136] Bicol Savings and Loan Association v. CA, 171 SCRA 630, 634-635, March 31, 1989; and Commodity Financing Co., Inc. v. Jimenez, 91 SCRA 57, 69, June 29, 1979. [137] Rodriguez, Credit Transactions (2nd ed., 1992), pp. 143-144.

[108] The legality of stipulations on attorneys fees is recognized in the Negotiable Instruments Law and in the Civil Code. Agbayani, supra, p. 135. [109] De Leon, supra, p. 64. See Andreas v. Green, 48 Phil. 463, 465, December 16, 1925.

[138] Also known as a mortuum vadium. Noblejas and Noblejas, Registration of Land Titles and Deeds (1992 rev. ed.), p. 510. [139] It is a mere lien on and does not create title to the property. Pea, Pea Jr., and Pea, Registration of Land Titles and Deeds (1994 rev. ed.), p.253. [140] Contracts of loan, being consensual, are deemed perfected at the time the Mortgage is executed. Bonnevie v. CA, 210 Phil. 100, 108, October 24, 1983. It appears that the Mortgage was executed even before the first Promissory Note was made, both covering the same amount of availment. Exhibit D; folder of exhibits, Vol. I, p. 26. The Amendment to this Mortgage was also executed prior to the second Note, which was for an increased amount. Exhibit E; id., p. 14-16. Only the third Note was not secured by the Mortgage, but the fair market value of the mortgaged properties was even higher than the value of the Note itself. Furthermore, the mortgagors were the absolute owners of said properties; no additional security was necessary. [141] De Leon, supra, pp. 398-399.

[110] The Bachrach Garage and Taxicab Co., Inc. v. Golingco, 39 Phil. 912, 920-921, July 12, 1919; and Bachrach v. Golingco, 39 Phil. 138, 143-144, November 13, 1918. [111] [112] [113] [114] [115] Article 2208 of the Civil Code. Agpalo, Legal Ethics (4th ed., 1989), p. 323. Sangrador v. Spouses Valderrama, 168 SCRA 215, 229, November 29, 1988. Manila Trading & Supply Co. v. Tamaraw Plantation Co., 47 Phil. 513, 524, February 28, 1925. Aznar Brothers Realty Co. v. CA, 384 Phil. 95, 112-113, March 7, 2000.

[116] Kapunan v. Casilan, 109 Phil. 889, 892-893, October 31, 1960 (cited in Pea, Legal Forms for Conveyancing and Other Deeds [4th ed., 1994], pp. 9-10). [117] [118] [119] [120] Rule 15.08 of the Code of Professional Responsibility (cited in Agpalo, supra, p. 85). Agpalo, The Code of Professional Responsibility for Lawyers (1st ed., 1991), p. 186. Exhibit 2, pp. 1-6; folder of exhibits, Vol. I, pp. 4-9. Exhibit 2-B, p. 2; id., p. 5.

[142] Pozon also testified that the appraised value was only 90% of the fair market value. TSN, May 26, 1994, p. 13. Under 37 of RA 8791, except as otherwise prescribed by the Monetary Board, such rate has been increased to 75%, plus 60% of the appraised value of the insured improvements. This is a less strict benchmark set out in BSP Circular-Letter dated May 6, 1997. Morales, supra, p. 103. [143] The Abaca Corp. of the Philippines, represented by the Board of Liquidators v. Garcia, 338 Phil. 988, 993, May 14, 1997; citing Tiongco v. Philippine Veterans Bank, 212 SCRA 176, August 5, 1992. [144] [145] Aquino, Land Registration and Related Proceedings (2002 rev. ed.), p. 201. See AM No. 99-10-05-0, Procedure in Extra-Judicial Foreclosure of Mortgage, August 7, 2001.

[121] Either party has not defined the term margin of equity; hence, there is no basis for its being shown by petitioners or approved by respondent. [122] [123] [124] [125] [126] [127] [128] Exhibit 2, p. 4; id., p. 7. Ibid. Exhibit 2, p. 5, id., p. 8. Ibid. Exhibit 2, p. 6, id., p. 9. Rep. Act (RA) No. 8791. 1st par. of 39 of RA 8791 (then 75 of RA 337 or The General Banking Act, as amended).

[146] This is in conformity with the procedure laid out in Act No. 3135, as amended by Act No. 4118. See Fiestan v. CA, 185 SCRA 751, 755-757, May 28, 1990; citing Valenzuela v. Aguilar, 118 Phil. 213, 217, May 31, 1963. [147] [148] Philippine National Bank v. Spouses Rabat, 344 SCRA 706, 716, November 15, 2000. Pea, Pea Jr., and Pea, supra, p. 295.

The amount, tenor or maturity of the loan must comport with the actual requirements of the borrower. The purpose of the loan or credit accommodation must be stated in the application and documentation. Any deviation may cause acceleration, immediate repayment, foreign currency blacklisting, or conversion from a term loan to a demand loan. Morales, The Philippine General Banking Law Annotated (2002), pp. 105-106. [129] 48 of RA 8791 (then 81 of RA 337, as amended).

[149] Langkaan Realty Development, Inc. v. United Coconut Planters Bank, 347 SCRA 542, 559, December 8, 2000. [150] It is an absolute and personal privilege, the exercise of which is entirely dependent upon the will and discretion of the redemptioner. De Leon, supra, p. 408. [151] 6 of Art No. 3135 and 47 of RA 8791.

[130] This is the first of a series of Statements of Financial Accounting Standards (SFAS) for specialized industries -- issued by the Accounting Standards Council -- effective for the fiscal years ending on or after December 31, 1988, although its earlier application has been encouraged. The Board of Accountancy, in its Board Resolution No. 509, series of 1987, has also approved this Statement. [131] These two types of accounts are valued and reported differently in the books and financial statements of a bank, as part of the heading Resources, in accordance with the GAAP for the Banking Industry. In fact, there is every reason to use also the account title Real and Other Properties Owned or Acquired or ROPOA for real and other properties acquired by the bank in the settlement of loans. Item 1 of ROPOA, GAAP for the Banking Industry, pp. 23-25. In addition to 48 of RA 8791, there are existing rules on restructured loans in X322 of the Manual of Regulations for Banks. Matters of extension or renewal, short of restructuring, are addressed to the sound discretion of the lending bank, subject to the guidelines of the Monetary Board and the Basle Core Principle 7 for effective banking supervision. Morales, supra, p. 118. [132] [133] [134] Item 7 of Loans, GAAP for the Banking Industry, p. 16. 19 of Rule 132 of the Rules of Court. Meigs and Meigs, Accounting: The Basis for Business Decisions, Part 1 (5th ed., 1982), pp. 251-255.

The right becomes functus officio on the date of its expiry. Noblejas and Noblejas, supra, p. 572. [152] [153] State Investment House, Inc. v. CA, 215 SCRA 734, 744-747, November 13, 1992. De Leon, supra, p. 391.

[154] x x x [T]he mortgagee is entitled to claim the deficiency from the debtor. Philippine National Bank v. CA, 367 Phil. 508, 515, June 14, 1999, per Mendoza, J. [155] [156] [157] [158] [159] [160] [161] 1st par. of Article 1252 of the Civil Code. Article 1253 of the Civil Code. 2nd par. of Article 1254 of the Civil Code. Article 1959 of the Civil Code. Mambulao Lumber Co. v. Philippine National Bank, 130 Phil. 366, 377, January 30, 1968. Article 1960 of the Civil Code. Tolentino, supra at note 102, p. 650.

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[162] To recover the surplus, the mortgagee cannot raise the defense that no actual cash was received. Sulit v. CA, 335 Phil. 914, 928-929, February 17, 1997, per Regalado, J. [163] Felipe Cuison Jr., security inspector of PNB on mortgaged properties, testified on cross-examination that no value had been given to such improvements, because it was the banks policy to consider them fully depreciated. TSN, July 13, 1994, pp. 28-30. [164] [165] Tolentino, supra at note 102, p. 68. Exhibit G, pp. 1-6; folder of exhibits, Vol. I, pp. 40-45.

[166] Applying Article 2047 of the Civil Code, the surety is charged not as a collateral undertaking, but as an original promissor to the loan. See Rodriguez, supra, p. 71; Goldenrod, Inc. v. CA, 418 Phil. 492, 502, September 28, 2001; and Philippine National Bank v. Luzon Surety Co., Inc., 68 SCRA 207, 214, November 29, 1975. [167] Exhibit G, pp. 1-2; folder of Exhibits, Vol. I, pp. 40-41.

It is common business and banking practice to require sureties to guarantee corporate obligations. Taedo v. Allied Banking Corp., 424 Phil. 844, 850, January 18, 2002, per Pardo, J. [168] Secretarys Certificate issued by Macario G. Ydia, referring to the P8 million commercial loan application of Petitioner NSBCI, Exhibit A; folder of exhibits, Vol. I, p. 1. [169] Comments/Objections to Respondents Formal Offer of Evidence dated September 5, 1994, p. 3; records, p. 112. [170] Government v. Herrero, 38 Phil. 410, 413, August 5, 1918.

[171] Visayan Surety & Insurance Corp. v. CA, 417 Phil. 110, 116-117, September 7, 2001; and Solon v. Solon, 64 Phil. 729, 734, September 9, 1937. [172] A bank or financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. South City Homes, Inc. v. BA Finance Corp., 423 Phil. 84, 95, December 7, 2001, per Pardo, J. (citing Fortune Motors (Phils.) Corp. v. CA, 335 Phil. 315, 326, February 7, 1997). [173] Item 4 of Exhibit G, pp. 2-3, folder of exhibits, Vol. I, pp. 41-42.

[174] An accommodation mortgagor is a third person who is not a debtor to a principal obligation, but secures it by mortgaging his or her own property. Pea, Pea Jr., and Pea, supra, p. 255. See Spouses Belo v. Philippine National Bank, 353 SCRA 359, 371, March 1, 2001. Like an accommodation party to a negotiable instrument under 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, the accommodation mortgagor uses his or her own property, in effect becoming a surety, to enable the accommodated debtor to obtain credit. See Spouses Gardose v. Tarroza, 352 Phil. 797, 807, May 19, 1998. [175] Tolentino, supra at note 102, p. 217.

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EN BANC G.R. No. L-34964 January 31, 1973 CHINA BANKING CORPORATION and TAN KIM LIONG, petitioners-appellants, vs. HON. WENCESLAO ORTEGA, as Presiding Judge of the Court of First Instance of Manila, Branch VIII, and VICENTE G. ACABAN, respondents-appellees.
Sy Santos, Del Rosario and Associates for petitioners-appellants. Tagalo, Gozar and Associates for respondents-appellees.

Corporation of defendant B & B Forest Development Corporation, and if there is any deposit, to hold the same intact and not allow any withdrawal until further order from this Court." Tan Kim Liong moved to reconsider but was turned down by order of March 27, 1972. In the same order he was directed "to comply with the order of this Court dated March 4, 1972 within ten (10) days from the receipt of copy of this order, otherwise his arrest and confinement will be ordered by the Court." Resisting the two orders, the China Banking Corporation and Tan Kim Liong instituted the instant petition. The pertinent provisions of Republic Act No. 1405 relied upon by the petitioners reads: Sec. 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation. Sec 3. It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits. Sec. 5. Any violation of this law will subject offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court. The petitioners argue that the disclosure of the information required by the court does not fall within any of the four (4) exceptions enumerated in Section 2, and that if the questioned orders are complied with Tan Kim Liong may be

MAKALINTAL, J.: The only issue in this petition for certiorari to review the orders dated March 4, 1972 and March 27, 1972, respectively, of the Court of First Instance of Manila in its Civil Case No. 75138, is whether or not a banking institution may validly refuse to comply with a court process garnishing the bank deposit of a judgment debtor, by invoking the provisions of Republic Act No. 1405. * On December 17, 1968 Vicente Acaban filed a complaint in the court a quo against Bautista Logging Co., Inc., B & B Forest Development Corporation and Marino Bautista for the collection of a sum of money. Upon motion of the plaintiff the trial court declared the defendants in default for failure to answer within the reglementary period, and authorized the Branch Clerk of Court and/or Deputy Clerk to receive the plaintiff's evidence. On January 20, 1970 judgment by default was rendered against the defendants. To satisfy the judgment, the plaintiff sought the garnishment of the bank deposit of the defendant B & B Forest Development Corporation with the China Banking Corporation. Accordingly, a notice of garnishment was issued by the Deputy Sheriff of the trial court and served on said bank through its cashier, Tan Kim Liong. In reply, the bank' cashier invited the attention of the Deputy Sheriff to the provisions of Republic Act No. 1405 which, it was alleged, prohibit the disclosure of any information relative to bank deposits. Thereupon the plaintiff filed a motion to cite Tan Kim Liong for contempt of court. In an order dated March 4, 1972 the trial court denied the plaintiff's motion. However, Tan Kim Liong was ordered "to inform the Court within five days from receipt of this order whether or not there is a deposit in the China Banking

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criminally liable under Section 5 and the bank exposed to a possible damage suit by B & B Forest Development Corporation. Specifically referring to this case, the position of the petitioners is that the bank deposit of judgment debtor B & B Forest Development Corporation cannot be subject to garnishment to satisfy a final judgment against it in view of the aforequoted provisions of law. We do not view the situation in that light. The lower court did not order an examination of or inquiry into the deposit of B & B Forest Development Corporation, as contemplated in the law. It merely required Tan Kim Liong to inform the court whether or not the defendant B & B Forest Development Corporation had a deposit in the China Banking Corporation only for purposes of the garnishment issued by it, so that the bank would hold the same intact and not allow any withdrawal until further order. It will be noted from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became Republic Act 1405, that it was not the intention of the lawmakers to place bank deposits beyond the reach of execution to satisfy a final judgment. Thus: Mr. MARCOS. Now, for purposes of the record, I should like the Chairman of the Committee on Ways and Means to clarify this further. Suppose an individual has a tax case. He is being held liable by the Bureau of Internal Revenue for, say, P1,000.00 worth of tax liability, and because of this the deposit of this individual is attached by the Bureau of Internal Revenue. Mr. RAMOS. The attachment will only apply after the court has pronounced sentence declaring the liability of such person. But where the primary aim is to determine whether he has a bank deposit in order to bring about a proper assessment by the Bureau of Internal Revenue, such inquiry is not authorized by this proposed law. Mr. MARCOS. But under our rules of procedure and under the Civil Code, the attachment or garnishment of money deposited is allowed. Let us assume, for instance, that there is a preliminary attachment which is for garnishment or for holding liable all moneys

deposited belonging to a certain individual, but such attachment or garnishment will bring out into the open the value of such deposit. Is that prohibited by this amendment or by this law? Mr. RAMOS. It is only prohibited to the extent that the inquiry is limited, or rather, the inquiry is made only for the purpose of satisfying a tax liability already declared for the protection of the right in favor of the government; but when the object is merely to inquire whether he has a deposit or not for purposes of taxation, then this is fully covered by the law. Mr. MARCOS. And it protects the depositor, does it not? Mr. RAMOS. Yes, it protects the depositor. Mr. MARCOS. The law prohibits a mere investigation into the existence and the amount of the deposit. Mr. RAMOS. Into the very nature of such deposit. Mr. MARCOS. So I come to my original question. Therefore, preliminary garnishment or attachment of the deposit is not allowed? Mr. RAMOS. No, without judicial authorization. Mr. MARCOS. I am glad that is clarified. So that the established rule of procedure as well as the substantive law on the matter is amended? Mr. RAMOS. Yes. That is the effect. Mr. MARCOS. I see. Suppose there has been a decision, definitely establishing the liability of an individual for taxation purposes and this judgment is sought to be executed ... in the execution of that judgment, does this bill, or this proposed law, if approved, allow the investigation or scrutiny of the bank deposit in order to execute the judgment?

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Mr. RAMOS. To satisfy a judgment which has become executory. Mr. MARCOS. Yes, but, as I said before, suppose the tax liability is P1,000,000 and the deposit is half a million, will this bill allow scrutiny into the deposit in order that the judgment may be executed? Mr. RAMOS. Merely to determine the amount of such money to satisfy that obligation to the Government, but not to determine whether a deposit has been made in evasion of taxes. xxx xxx xxx Mr. MACAPAGAL. But let us suppose that in an ordinary civil action for the recovery of a sum of money the plaintiff wishes to attach the properties of the defendant to insure the satisfaction of the judgment. Once the judgment is rendered, does the gentleman mean that the plaintiff cannot attach the bank deposit of the defendant? Mr. RAMOS. That was the question raised by the gentleman from Pangasinan to which I replied that outside the very purpose of this law it could be reached by attachment. Mr. MACAPAGAL. Therefore, in such ordinary civil cases it can be attached? Mr. RAMOS. That is so. (Vol. II, Congressional Record, House of Representatives, No. 12, pp. 3839-3840, July 27, 1955). It is sufficiently clear from the foregoing discussion of the conference committee report of the two houses of Congress that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the

Court, through the expedient of converting their assets into cash and depositing the same in a bank. WHEREFORE, the orders of the lower court dated March 4 and 27, 1972, respectively, are hereby affirmed, with costs against the petitioners-appellants. Zaldivar, Castro, Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur. Concepcion, C.J. and Teehankee, J., took no part.
Footnotes * An Act Probihiting Disclosure of or Inquiry into, Deposits with any Banking Institution and Providing Penalty Therefor.

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SPECIAL FORMER FIRST DIVISION G.R. No. 73882 October 22, 1987 ROSA CANCIO, petitioner, vs. HON. COURT OF TAX APPEALS and HON. COMMISSIONER OF CUSTOMS, respondents. MELENCIO-HERRERA, J.: Before us is petitioner's Motion for Reconsideration of this Court's Resolution of August 11, 1986, which denied for lack of merit her Petition for Review on certiorari of respondent Court of Tax Appeals' (CTA) Decision in C.T.A. Case No. 3398. During the pendency of this case, or on April 23, 1986, petitioner had passed away and her legal heirs were ordered substituted in her stead and Jose Cancio, Jr., was appointed guardian ad-litem for the minors Ma. Irene and Roberto, both surnamed Cancio, in this Court's Resolution of August 11, 1986. There is no substantial dispute on the background facts and the evidentiary aspects Vol the controversy, summarized in said Decision as follows: The records show that claimant Mrs. Rosa Cancio bearing Philippine Passport No. 11797799 while clearing through the Pre-Boarding (AVSECOM) Area of MIA with her husband and three (3) children to board PR 306 for Hongkong in the morning of June 12, 1981, was apprehended with One Hundred Two Thousand Nine Hundred Dollars (US$102,900.00) in cash, six hundred dollars (US$600.00) in two travelers checks, and one thousand five hundred (Pl,500.00) Pesos; that such apprehension was effected only thru an alarm sounded by the scanner (metal detecting device) of the AVSECOM men, when Mrs. Cancio who did not declare her currency had already passed the Customs inspection area; that subject currencies were placed and concealed inside the two fairly-sized carton boxes for local chocolates, securely wrapped and taped with tin foil-back paper; and, that in view of claimant's failure, upon being required, to present the Central Bank Authority, the said currencies were accordingly confiscated and a

seizure Receipt No. 013 was issued to her; hence, this seizure proceedings. At the hearing of this case, claimant, thru counsel, presented certified xerox copy of her Bank Book (Exhibit "I") for foreign currency deposit with the Philippine Commercial and Industrial Bank under Account FCDU No. 0265, dollar remittances in telegraphic transfers from abroad for deposits in her account from May 13, 1981 to May 21, 1981, and withdrawal cards (Exhibit "l-A" to "1-E", inclusive), attesting to the fact that claimant Rosa Cancio had withdrawn from her FCDU Account a certain amount of United States currency which tended to show that claimant herein was a foreign currency depositor pursuant to the provisions of Republic Act No. 6426, as implemented by Central Bank Circular No. 343. And herein claimant testified that because her foreign currency deposit could not be withdrawn at one time, she made her withdrawal on several occasions starting from May 14, 1981 up to May 27, 1981 when she closed her account preparatory to her departure which was scheduled in the morning of June 12, 1981 for Hongkong; that from Hongkong, she and her family intended to proceed to the United States for medical treatment of her heart ailment as advised by her two attending physicians from the UST Hospital; that the US currency that they were carrying and confiscated from them on June 12, 1981 was intended principally for such medical purpose and for other miscellaneous and necessary expenses, and, that the subject currencies were concealed and hidden by them inside the two chocolate boxes solely for security reasons. 1 By reason of the forfeiture decreed by respondent Commissioner of Customs of both the foreign and local currencies due to petitioner's failure to present a Central Bank (CB) authority to bring said currencies out of the country, petitioner appealed to respondent Court of Tax Appeals. The latter Court affirmed the forfeiture of the US$102,900.00 in cash, and US$600.00 in travellers' checks for having been in violation of Central Bank Circulars Nos. 265 and 534, in relation to Section 2530(f) of the Tariff and Customs Code, as amended. It reversed, however, the forfeiture of P1,500.00 on the ground that since petitioner was travelling with her husband and three (3) children, the

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said amount did not exceed the P500.00 at that each traveller is allowed to bring out of the country without a CB permit pursuant to paragraph 4 of CB Circular No. 383. Petitioner's unimpugned evidence shows that she was a foreign currency depositor at the Philippine Commercial and Industrial Bank at Makati, Metro Manila, and that the subject foreign currency was part of the total amount of US$116,000.00 she had withdrawn from said bank from May 14 to 27, 1981 for her travel and medical expenses in the United States via Hongkong. 2 Admitted, too, is the fact that petitioner failed to present to the apprehending customs authorities a Central Bank authority to bring out of the country the said currencies while at the pre-boarding area of the Manila International Airport on June 12, 1981 on her scheduled flight to Hongkong together with her husband and three children. The primordial issue for resolution is whether or not respondent Court had committed reversible error in upholding the forfeiture of the foreign currencies in question. A second look at the facts and the equity of the case, the pertinent laws, and the CB Circulars involved constrains us to rule in the affirmative and, accordingly, to grant reconsideration of our Resolution of August 11, 1986 denying review. It is true that in so far as the exportation or taking out of foreign currency from the country is concerned, Central Bank Circular No. 265, issued on November 20, 1968, particularly paragraph 3 thereof, mandates: 3. No person shall take out or export from the Philippines foreign currency or any other foreign exchange except as otherwise authorized by the Central Bank. Similarly, Central bank Circular No. 534, issued on July 19, 1976, reiterates and provides in Sec. 3 thereof as follows: Sec. 3. Unless specifically authorized by the Central Bank or allowed under existing international agreements or Central Bank regulations, no person shall take or transmit or attempt to take or transmit foreign exchange, in any form out of the Philippines

only, through other persons, through the mails, or through international carriers. The provisions of this Section shall not apply to tourists and non-resident temporary visitors who are taking or sending out of the Philippines their own foreign exchange brought in by them. However, peculiar to the present controversy is the fact that, as stated previously, petitioner is a foreign currency depositor. Relevant and applicable to her is the following provision of the "Foreign Currency Deposit Act of the Philip pines" (Republic Act No. 6426, as amended), which took effect upon its approval on April 4,1972: SEC. 5. Withdrawability and transferability of deposits. There shall be no restriction on the withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank.11 (Emphasis Ours). Under the foregoing provision, the transferability abroad of foreign currency deposits is unrestricted. Only one exception is provided for therein, which is, any restriction " from the contract between the depositor and the bank." Neither is a Central Bank authority required for the transferability abroad of foreign currency deposits. Attention is called, however, to the implementing rules and regulations to said Republic Act 6426, as embodied in CB Circular No. 343 issued on April 24, 1972, which provides: SEC. 11. Withdrawability and Liquidity of Deposits. a. x x x x x x x x x b. Subject only to the terms of the contract between the bank and the depositor, the latter shall have a general license to withdraw his deposit, notwithstanding any change in policy or regulations. xxx xxx xxx (Emphaisis supplied)

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Respondent Court has taken the position that the foregoing provision its the right of the depositor to that of withdrawal and withholds from him the right of transferability abroad. That is not so. Circular-Letter, dated August 3, 1978, issued by the Central Bank reads in explicit terms:
TO: ALL BANKS AUTHORIZED TO ACCEPT FOREIGN CURRENCY DEPOSITS UNDER THE PROVISIONS OF RA 6426, AS AMENDED AND PRESIDENTIAL DECREE NO. 1035. Effective immediately, the banks authorized to accept foreign currency deposits under the provisions of RA 6426, as amended, and PD 1035 and as implemented by Central Bank Circular 343 and 547, are hereby instructed to advise their foreign currency depositors who are withdrawing funds for travel purposes to carry with them the certificate of withdrawal that the banks shall issue. The travellers shall present the certifications to the Customs and Central Bank personnel at the MIA, if requested. The banks shall issue a uniform certification, as follows:
TO WHOM IT MAY CONCERN: This certifies that ________________________whose signature appears below has withdrawn today, the amount of ____________in cash (US$ _______________) and Travellers Check (US$___________________________) against his/her foreign currency account maintained with us. The funds herein withdrawn are represented to be used in connection with the depositor's foreign travel scheduled on or about ____________________197_________.e) ___________________________ (Signature of Authorized Official OverPrinted Name) _______________________ (Signature of Depositor)

be considered as substantial compliance for purposes of this case. Indeed, given the underlying objective of the Foreign Currency Deposit Act, as amended, which is to attract and invite the deposit of foreign currencies which are acceptable as part of the international reserve in duly authorized banks in order that they may be put into the stream of the banking system, it would be to defeat the very purpose of the law to place undue restrictions on the transferability of such funds. The countervailing effect would be to discourage prospective foreign currency depositors to the detriment of the banking system. In fine, Central Bank Circulars Nos. 265 and 534 requiring prior Central Bank authority for the taking out of the country of foreign currency should not be made to encompass foreign currency depositors whose rights are expressly defined and guaranteed in a special law, the Foreign Currency Deposit Act (RA 6426, as amended). As a foreign currency depositor, therefore, petitioner cannot be adjudged to have violated the aforestated Central Bank Circulars. It follows that neither is there room for the application of Section 2530(f) of the Tariff and Customs Code, as amended, which provides for the forfeiture of any article and other objects, the exportation of which is effected or attempted contrary to law. This is not to condone petitioner's failure to declare the foreign currency she was carrying out of the country but just to stress that the Foreign Currency Deposit Act grants petitioner the right of transferability of her funds abroad except that she was not advised by her bank to secure, and consequently was unable to present, the necessary certificate of withdrawal from said bank. ACCORDINGLY, the Decision of respondent Court of Tax Appeals is hereby SET ASIDE in so far as it upheld the forfeiture by respondent Commissioner of Customs of the sums of US$102,900.00 in cash, and US$600.00 in traveller's checks, which amounts should now be returned to petitioner's heirs, but AFFIRMED in so far as it reversed the forfeiture by the same official of the sum of P1,500.00. No costs. SO ORDERED. Yap, Actg. C.J., Narvasa, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.

Please be guided accordingly. (SGD.) R.D.RUIZ Director

It is a fact that petitioner could not present a certificate of withdrawal at the Manila International Airport when she was about to depart. As she had explained, however, she was unaware of this requirement. And if she had wrapped her dollar currency inside a chocolate box it was for "security reasons." Besides, as instructed in the Circular-Letter abovequoted, it is the authorized depository bank which should advise its depositors to carry with them the certificate of withdrawal. At any rate, respondent Court has found that petitioner has presented in evidence her foreign currency bank book 3 and her withdrawal cards. 4 These may

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Footnotes 1 CTA Decision, pp. 2-3; Rollo, pp. 33-34. 2 Ibid., pp. 7-8. 3 Exhibit " I ". 4 Exhibits"I-A"to"I-E".

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