Philippine National Bank vs. Antonio Bacani, et al.

Respondent Rodolfo Bacani was the registered owner of a parcel of land in Santiago, Isabela.
The other respondents were the occupants of the subject property. On July 16, 1980, Rodolfo and
his wife used the subject property to secure a loan of Php80,000.00 from PNB. The PNB
extrajudicially foreclosed the subject property on September 9, 1986 when the Spouses Bacani
failed to pay their loan. The Spouses Bacani failed to redeem the property and Rodolfo’s title
was cancelled. A new TCT was issued in the name of PNB.
On November 29, 1989, PNB issued a Circular where former owners or their heirs were given
priority in the re-acquisition of their foreclosed assets on negotiated basis without bidding. The
Spouses Bacani initiated negotiations with PNB regarding the re-acquisition of their property.
Despite the Spouses Bacani’s increasing offers to repurchase their property, the PNB refused it
stating that their offer was low as compared to the market value of the property at that time. The
PNB then sold subject property through a negotiated sale to Renato de Leon who later on filed an
ejectment case against the respondents.
The respondents filed with the Regional Trial Court of Santiago City a complaint for the
annulment of the sale and Renato’s title over the subject property. They alleged that the PNB
schemed to prevent the Spouses Bacani from buying back the subject property. The PNB refuted
the respondent’s allegations. The RTC ruled in favor of the respondents. The RTC ruled that the
PNB failed to observe its own policy granting priority right to the former owners of its acquired
assets.
The PNB appealed to the CA. PNB argued that as the registered owner of the subject property, it
has the prerogative to dispose or sell the property in the manner it sees fit. PNB asserted that the
sale to Renato was not fraudulent. The CA denied the appeal of the PNB and affirmed the trial
court’s findings that the sale of the subject property to Renato was fraudulent because the
Spouses Bacani were unable to exercise their right to buy back their foreclosed property at the
scheduled public bidding. The PNB moved for the reconsideration of the CA’s Decision but was
denied, hence this petition.
Issue:
Whether the RTC and the CA erred in ruling that the sale of the subject property to Renato de
Leon is fraudulent
Ruling:
Yes, both the RTC and the CA gravely erred in relying on the PNB Circular to nullify the sale of
the subject property.
Upon the expiration of the period to redeem, the Spouses Bacani do not have an enforceable
right to repurchase the subject property. In extrajudicial foreclosures of real estate mortgage, the
debtor, his or her successors-in-interest, or any judicial creditor or judgment creditor of said
debtor, is granted a period of one year within which to redeem the property. The redemption
period is reckoned from the registration of the certificate of sale with the Register of Deeds.
When the debtor, or the successors-in-interest as the case may be, fails to redeem the property
within the prescribed statutory period, the consolidation of ownership in favor of the purchaser
becomes a matter of right. At that point, the purchaser becomes the absolute owner of the
property, and may, as a necessary consequence, exercise all the essential attributes of ownership.
The Spouses Bacani did not exercise their right to redeem the subject property within the one
year period from the registration of PNB’s certificate of sale. Because of their failure to exercise
their redemption right, the title of Rodolfo over the subject property was cancelled and a new
TCT was issued in the name of the PNB. At this point, the PNB became the absolute owner of
the property. PNB not only had the right to its possession but also other rights considered as
essential attributes of ownership, including the right to dispose or alienate the subject property.
Clearly, PNB had full discretion as to the terms and conditions relating to the disposition of the
subject property. PNB cannot be compelled to sell the subject property to specific persons
without its consent. Neither may the courts enjoin nor nullify the alienation of the property on
the grounds other than those established by law.
When the circular was issued, the redemption period has expired and the title over the subject
property was already consolidated in favor of PNB as its purchaser during the foreclosure sale.
For this case, any offer on the part of the Spouses Bacani is merely an offer to repurchase, and
PNB was not statutorily or contractually bound to accept such offer. Since it is undisputed that
the Spouses Bacani failed to exercise their right of redemption within the prescribed period, the
Court cannot uphold their assertion that PNB’s policy of preference should allow them to
repurchase the property unconditionally. At most, the PNB circular grants a privilege to the
Spouses Bacani as the former owners, to be given priority in the disposition of the subject
property. It does not confer an enforceable and absolute right to reacquire the property, to the
prejudice of PNB as the absolute owner.

With respect to the allegation of fraud, it is settled that fraud is never presumed—it must be
proven by clear and convincing evidence. In this case, the Spouses Bacani were unable to
establish that PNB and Renato committed fraud in the disposition of the subject property. There
was no showing that PNB assured the sale of the subject property to the Spouses Bacani during
the auction. As a matter of fact, the Spouses Bacani did not even attend the scheduled auction
sale to make an offer on the subject property. The publication of the Invitation to Bid, which
included the subject property, was not a binding obligation on the part of PNB. Article 1326 of
the Civil Code clearly provides that advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the
contrary appears. The Spouses Bacani do not have a cause of action, especially following the
consolidation of the subject propet1y's title in favor of PNB. At the time of the sale to Renato,
PNB was the absolute owner of the subject property. It had the right to dispose or alienate the
property, notwithstanding the intention of the Spouses Bacani to repurchase it. Accordingly, the
sale to Renato was valid. The complaint for the annulment of said sale, as well as the annulment
of Renato's title over the subject property, must be dismissed.

The present petition is granted. The Decision and Resolution of the CA are reversed and set
aside.
Severino Tolentino, et al. vs. Benito Gonzales Sy Chiam
FACTS:
The appellants purchased a from the Luzon Rice Mills, Inc. a parcel of land in Tarlac for
P25,000.00 which was to be paid in three installments. One of the conditions of the contract of
purchase was that on failure of the purchasers to pay the balance or any installment on the date
agreed upon, the property bought would revert to the original owner. When the appellants
realized that they would not be able to pay the balance due, they applied for a loan with the
defendant for the purpose of satisfying their indebtedness to the vendor of the said property. The
defendant agreed to the loan on the condition that the plaintiffs execute and deliver to him a
pacto de retro of the property. The defendant paid the loan of the plaintiffs, and the attorney’s fee
for drafting the contract of retro pacto. The contract of retro pacto contained a stipulation that the
plaintiffs can lease the property and failure to pay rent for two consecutive moths will lead to the
termination of the lease and the loss of the right of withdrawal.
Issues:
Whether the contract between the parties is a pacto de retro sale with the right to repurchase or a
mortgage
Whether the payment of rent is usurious
Whether the contract may be modified by parol evidence
Ruling:
The contract is a pacto de retro and not a mortgage. Language cannot be clearer. The purpose of
the contract is clearly expressed that there can certainly be no doubt as to the purpose of the
plaintiff to sell the property in question, reserving the right only to repurchase the same. The
intention to sell with the right to repurchase cannot be more clearly expressed. There is not a
word, a phrase, a sentence or a paragraph in the entire record, which justifies this court in
holding that the said contract of retro pacto is a mortgage and not a sale with the right to
repurchase. Article 1281 of the Civil Code provides that if the terms of a contract are clear and
leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations
shall be followed. Article 1282 provides that in order to judge as to the intention of the
contracting parties, attention must be paid principally to their conduct at the time of making the
contract and subsequently thereto.
When the vendor of property under a pacto de retro rents the property and agrees to pay a rental
value for the property during the period of his right to repurchase, he thereby becomes a "tenant"
and in all respects stands in the same relation with the purchaser as a tenant under any other
contract of lease. The appellant contends that the rental price paid during the period of the
existence of the right to repurchase, based upon the value of the property, amounted to
usury. Usury, generally speaking, may be defined as contracting for or receiving something in
excess of the amount allowed by law for the loan or forbearance of money the taking of more
interest for the use of money than the law allows.
The language of the contract is explicit, clear, unambiguous and beyond question. It expresses
the exact intention of the parties at the time it was made.  There is not a word a phrase, a
sentence or paragraph found in said contract which needs explanation. The parties thereto
entered into contract with the full understanding of its terms and should not now be permitted to
change or modify it by parol evidence.

Republic vs. Grijaldo

Facts:
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank
of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per
annum, compounded quarterly. These loans are evidenced by five promissory notes executed by
the appellant in favor of the Bank of Taiwan, Ltd. To secure the payment of the loans the
appellant executed a chattel mortgage on the standing crops on his land. By virtue of Vesting
Order No. P-4, dated January 21, 1946, and under the authority provided for in the Trading with
the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were
vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946
of the United States, these assets, including the loans in question, were subsequently transferred
to the Republic of the Philippines by the Government of the United States under Transfer
Agreement dated July 20, 1954. These assets were among the properties that were placed under
the administration of the Board of Liquidators created under Executive Order No. 372, dated
November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477 and other pertinent
laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman
of the Board of Liquidators, made a written extrajudicial demand upon the appellant for the
payment of the account in question. The record shows that the appellant had actually received the
written demand for payment, but he failed to pay. On January 17, 1961 the appellee filed a
complaint in the Justice of the Peace Court of Hinigaran, Negros Occidental, to collect from the
appellant the unpaid account in question. The Justice of the Peace Of Hinigaran dismissed the
case on the ground that the action had prescribed. The appellee appealed to the Court of First
Instance of Negros Occidental and the court a quo rendered a decision ordering the appellant to
pay the appellee the sum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6%
per annum compounded quarterly from the date of the filing of the complaint until full payment
was made. The appellant was also ordered to pay the sum equivalent to 10% of the amount due
as attorney's fees and costs.
The appellant appealed directly to the Supreme Court. During the pendency of the appeal the
appellant Jose Grijaldo died. Upon motion by the Solicitor General the Court required Manuel
Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of
Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of Rule 3
of the Rules of Court.
Issues:
1. Whether the appellee has cause of action against the appellant
 2. Whether the cause of action, if any, has prescribed
3. Whether the lower court erred in ordering the appellant to pay the amount of P2,377.23
Ruling:

The contention of the appellant that the appellee has no privity of contract with the appellant has
no merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction
between the appellant and the Bank of Taiwan was a private contract of loan. However, pursuant
to the Trading with the Enemy Act, as amended, and Executive Order No. 9095 of the United
States, and under Vesting Order No. P-4, dated January 21, 1946, the properties of the Bank of
Taiwan, Ltd. were vested in the United States Government and the Republic of the Philippines.
The assets of the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the
Philippines. The successive transfer of the rights over the loans in question from the Bank of
Taiwan, Ltd. to the United States Government, and from the United States Government to the
government of the Republic of the Philippines, made the Republic of the Philippines the
successor of the rights, title and interest in said loans, thereby creating a privity of contract
between the appellee and the appellant. The word "privy" denotes the idea of succession, hence
an assignee of a credit, and one subrogated to it, etc. will be privies; in short, he who by
succession is placed in the position of one of those who contracted the judicial relation and
executed the private document and appears to be substituting him in the personal rights and
obligation is a privy.

The United States of America acting as a belligerent sovereign power seized the assets of the
Bank of Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets of the
Bank of Taiwan, Ltd. being an involuntary act of war, and sanctioned by international law, the
United States succeeded to the rights and interests of said Bank of Taiwan, Ltd. over the assets of
said bank. As successor in interest in, and transferee of, the property rights of the United States
of America over the loans in question, the Republic of the Philippines had thereby become a
privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the appellant. It
follows, therefore, that the Republic of the Philippines has a legal right to bring the present
action against the appellant Jose Grijaldo.
The argument of the appellant that the appellee has no cause of action because the loans were
secured by a chattel mortgage on the standing crops on a land owned by him and these crops
were lost or destroyed through enemy action his obligation to pay the loans was thereby
extinguished is untenable. The terms of the promissory notes and the chattel mortgage that the
appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant.
The obligation of the appellant under the five promissory notes was not to deliver a determinate
thing namely, the crops to be harvested from his land, or the value of the crops that would be
harvested from his land. Rather, his obligation was to pay a generic thing — the amount of
money representing the total sum of the five loans, with interest. The transaction between the
appellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of
money. The obligation of the appellant under the five promissory notes evidencing the loans in
questions is to pay the value thereof; that is, to deliver a sum of money — a clear case of an
obligation to deliver, a generic thing. Article 1263 of the Civil Code provides that in an
obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation. The chattel mortgage on the crops growing on appellant's land simply
stood as a security for the fulfillment of appellant's obligation covered by the five promissory
notes, and the loss of the crops did not extinguish his obligation to pay, because the account
could still be paid from other sources aside from the mortgaged crops.
The contention of the appellant that the action of the appellee had prescribed has no merit.
Firstly, it should be considered that the complaint in the present case was brought by the
Republic of the Philippines not as a nominal party but in the exercise of its sovereign functions,
to protect the interests of the State over a public property. Under paragraph 4 of Article 1108 of
the Civil Code prescription, both acquisitive and extinctive, does not run against the State. This
Court has held that the statute of limitations does not run against the right of action of the
Government of the Philippines. Secondly, the running of the period of prescription of the action
to collect the loan from the appellant was interrupted by the moratorium laws. The loan in
question, as evidenced by the five promissory notes, were incurred in the year 1943, or during
the period of Japanese occupation of the Philippines. This case is squarely covered by Executive
Order No. 25, which became effective on November 18, 1944, providing for the suspension of
payments of debts incurred after December 31, 1941. The period of prescription was, therefore,
suspended beginning November 18, 1944. The complaint in the present case was filed on
January 17, 1961, or after a period of 16 years, 6 months and 16 days when the cause of action
arose. If the prescriptive period was not interrupted by the moratorium laws, the action would
have prescribed already; but, as We have stated, the prescriptive period was suspended by the
moratorium laws for a period of 8 years and 6 months. If we deduct the period of suspension (8
years and 6 months) from the period that elapsed from the time the cause of action arose to the
time when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8
years and 16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There
still remained a period of one year, 11 months and 14 days of the prescriptive period when the
complaint was filed.
The contention of the appellant that the lower court erred in ordering him to pay the amount of
P2,377.23 is also without merit. The sum total of the five loans obtained by the appellant from
the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes. Computed under the Ballantyne
Scale of values as of June 1943, this sum of P1,281.97 in Japanese war notes in June 1943 is
equivalent to P889.64 in genuine Philippine currency which was considered the aggregate
amount due as principal of the five loans, and the amount of P2,377.23 as of December 31, 1959
was arrived at after computing the interest on the principal sum of P889.64 compounded
quarterly from the time the obligations were incurred in 1943.
The lower court’s decision is affirmed.

Philippine National Bank vs. Court of Appeals

Facts:
In July 1982, the private respondent applied for, and was granted by petitioner PNB, a credit line
of P1.8 million, secured by a real estate mortgage, for a term of two years, with 18% interest per
annum. Private respondent executed in favor of the PNB a Credit Agreement, two promissory
notes and a Real Estate Mortgage. The Credit Agreement provided that the PNB is authorized to
increase the 18% interest per annum within the limits allowed by law at any time depending on
whatever policy it may adopt in the future. Also, the Real Estate Mortgage provided that the rate
of interest charged on the obligation secured by the mortgage as well as the interest on the
amount which may have been advanced by the mortgagee shall be subject during the life of the
contract to an increase within the rate allowed by law. On several occasions, the PNB imposed
subsequent raises to the applicable rate.
On December 18, 1984, private respondent filed in the Regional Trial Court of Manila a
complaint against PNB, alleging that the bank is imposing illegal and excessive increases of
interest rates. The PNB denied that the increase in interst were illegal, unilateral excessive and
arbitrary. The trial court dismissed the complaint because the increase in interest were properly
made.
The private respondent appealed to the Court of Appeals. The Court of Appeals reversed the trial
court, hence, this petition for review.
Issue:
Whether PNB, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the rate stipulated therein at will and as often as it pleased.
Ruling:
No. Although Section 2, P.D. No. 116 of January 29, 1973 authorizes the Monetary Board to
prescribe the maximum rate or rates of interest for loans or renewal thereof and to change such
rate or rates whenever warranted by prevailing economic and social conditions, it expressly
provides that such changes shall not be made oftener than once every twelve months. In this
case, PNB, over the objection of the private respondent, and without authority from the
Monetary Board, within a period of only four months, increased the 18% interest rate on the
private respondent’s loan obligation three times. Those increases were null and void, for if the
Monetary Board itself was not authorized to make such changes oftener than once a year, even
less so may a bank which is subordinate to the Board. While the private respondent-debtor
agreed in the Deed of Real Estate Mortgage that the interest rate may be increased during the life
of the contract to such increase within the rate allowed by law, as the Board of Directors of the
mortgagee may prescribe or within the limits allowed by law, no law was ever passed in July to
November 1984 increasing the interest rates on loans or renewals thereof to 32%, 41% and 48%
(per annum), and no documents were executed and delivered by the debtor to effectuate the
increases.
CB Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest rates-- “x x x
increases in interest rates are not subject to any ceiling prescribed by the Usury Law.” -- but it
did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase
the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D.
116 which limits such changes to once every twelve months. Besides violating P.D. 116, the
unilateral action of the PNB in increasing the interest rate on the private respondent’s loan,
violated the mutuality of contracts ordained in Article 1308 of the Civil Code which states that
the contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.
In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void. Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private respondent gave the PNB a license to increase the
interest rate at will during the term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts. It would have invested the
loan agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party’s participation being reduced to the alternative to take it or leave
it. Such a contract is a veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition. PNB’s successive increases of the interest rate on the private
respondent’s loan, over the latter’s protest, were arbitrary as they violated an express provision
of the Credit Agreement that its terms may be amended only by an instrument in writing signed
by the party to be bound as burdened by such amendment.”The increases imposed by PNB also
contravene Art. 1956 of the Civil Code which provides that no interest shall be due unless it has
been expressly stipulated in writing.

Medel et. al. vs Court of Appeals 299 SCRA 481 (1998)

FACTS:

Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and
executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and
retained P3, 000.00 as advance interest for 1 month at 6% per month.

Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2
months, at 6% interest per month. They executed a promissory note to evidence the loan and
received only P84, 000.00 out of the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00,
maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in
favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the
proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.

Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from
Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of
P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500,
000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional
amount of 1% per month as penalty charges.
On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the
Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including
interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has been duly
proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on
the loans was unconscionable and “revolting to the conscience” and ordered the payment of the
amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty.

On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the
unpaid loans of the defendants, is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law
has become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No.
905, the lender and the borrower could agree on any interest that may be charged on the loan,
and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month
interest and 2& service charge per annum , and 1% per month as penalty charges.

Defendants filed the present case via petition for review on certiorari.

Issue:

WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is
usurious.

Ruling:

No. A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive,
iniquitous, unconscionable and exorbitant, but it cannot be considered “usurious” because
Central Bank Circular No. 905 has expressly removed the interest ceilings prescribed by the
Usury Law and that the Usury Law is now “legally inexistent.”

Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but
simply suspended the latter’s effectivity (Security Bank and Trust Co vs RTC).  Usury has been
legally non-existent in our country’s jurisdiction. Interest can now be charged as lender and
borrower may agree upon.

Hence, the decision of the Court of Appeals was reversed. The decision dated December 9, 1991,
of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-
90, was revived and affirmed.
CUATON v.  SALUD

Facts:

On January 5, 1993, respondent Rebecca Salud, joined by her husband Rolando Salud, instituted
a suit for foreclosure of real estate mortgage with damages against petitioner Mansueto Cuaton
and his mother, Conchita Cuaton, with the Regional Trial Court of General Santos City. The trial
court declared the mortgage constituted on October 31, 1991 as void. The court ordered
petitioner to pay Rebecca Salud, inter alia, the loan secured by the mortgage in the amount of
One Million Pesos plus a total P610,000.00 representing interests of 10% and 8% per month for
the period February 1992 to August 1992.

Both parties filed their respective notices of appeal. The Court of Appeals affirmed the judgment
of the trial court. Petitioner filed a motion for partial reconsideration of the trial court’s decision
with respect to the award of interest in the amount of P610,000.00, arguing that the same was
iniquitous and exorbitant. This was denied by the Court of Appeals, hence, this petition.

Issue:

Whether the 8% and 10% monthly interest rates imposed on the load obligation are valid.

Ruling:

No. The Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on
January 1, 1983, and that parties to a loan agreement have been given wide latitude to agree on
any interest rate. However, 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. The stipulated interest rates are illegal if they are unconscionable.

Stipulations authorizing iniquitous or unconscionable interests are contrary to morals (contra

bonos mores), 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.

Moreover, the contention regarding the excessive interest rates cannot be considered as an issue
presented for the first time on appeal. The records show that petitioner raised the validity of the
10% monthly interest in his answer filed with the trial court. To deprive him of his right to assail
the imposition of excessive interests would be to sacrifice justice to technicality. Furthermore, an
appellate court is clothed with ample authority to review rulings even if they are not assigned as
errors. This is especially so if the court finds that their consideration is necessary in arriving at a
just decision of the case before it. We have consistently held that an unassigned error closely
related to an error properly assigned, or upon which a determination of the question raised by the
error properly assigned is dependent, will be considered by the appellate court notwithstanding
the failure to assign it as an error..
In Eastern Shipping Lines, Inc. v. Court of Appeals, the Court stated that when the obligation is
breached, and it consists in the payment of a sum of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default. The interest of 12% per annum imposed by the
Court (in lieu of the invalidated 10% and 8% per month interest rates) on the one-million-peso
loan should be computed from the date of the execution of the loan on October 31, 1991 until
finality of this decision. After the judgment becomes final and executory until the obligation

ANTONIO TAN v. COURT OF APPEALS

Facts:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two (2) loans each in the
principal amount of Two Million Pesos (P2,000,000.00), or in the total principal amount of Four
Million Pesos (P4,000,000.00) from respondent Cultural Center of the Philippines evidenced by
two (2) promissory notes. Petitioner defaulted but after a few partial payments he had the loans
restructured by respondent CCP, and petitioner accordingly executed a promissory note in the
amount of Three Million Four Hundred Eleven Thousand Four Hundred Twenty-One Pesos and
Thirty-Two Centavos (P3,411,421.32) payable in five (5) installments. Petitioner Tan failed to
pay any installment on the said restructured loan. Petitioner requested and proposed to
respondent CCP a mode of paying the restructured loan. On October 20, 1983, petitioner again
sent a letter to respondent CCP requesting for a moratorium on his loan obligation until the
following year allegedly due to a substantial deduction in the volume of his business and on
account of the peso devaluation. No favorable response was made to said letters. Instead,
respondent CCP, through counsel, wrote a letter to the petitioner demanding full payment, within
ten (10) days from receipt of said letter, of the petitioners restructured loan.

On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a
sum of money against the petitioner after the latter failed to settle his said restructured loan
obligation. The petitioner interposed the defense that he merely accommodated a friend, Wilson
Lucmen, who allegedly asked for his help to obtain a loan from respondent CCP. Petitioner
claimed that he has not been able to locate Wilson Lucmen. While the case was pending in the
trial court, the petitioner filed a Manifestation to settle his indebtedness to respondent CCP by
proposing to make a down payment of One Hundred Forty Thousand Pesos (P140,000.00) and to
issue twelve (12) checks every beginning of the year to cover installment payments for one year,
and every year thereafter until the balance is fully paid. Respondent CCP did not agree to the
petitioner’s proposals and so the trial of the case ensued. The trial court rendered a decision in
favor of plaintiff and against defendant, ordering defendant to pay plaintiff, the amount of
P7,996,314.67, representing defendants outstanding account as of August 28, 1986, with the
corresponding stipulated interest and charges thereof, until fully paid, plus attorney’s fees in an
amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary damages,
plus costs. Defendants counterclaims are ordered dismissed, for lack of merit.
The petitioner appealed the decision of the trial court to the Court of Appeals insofar as it
charged interest, surcharges, attorney’s fees and exemplary damages against the petitioner. In his
appeal, the petitioner asked for the reduction of the penalties and charges on his loan obligation.
He abandoned his alleged defense in the trial court that he merely accommodated his friend,
Wilson Lucmen, in obtaining the loan, and instead admitted the validity of the same. The
appellate affirmed the decision of the trial court. However, it modified the decision of the trial
court by deleting the award for exemplary damages and reducing the amount of awarded
attorney’s fees to five percent (5%). The appellate court denied the petitioners motion for
reconsideration of the said decision, hence, this petition.

Issues:

1. Whether there are contractual and legal bases for the imposition of the penalty, interest
on the penalty and attorney’s fees.
2. Whether interest may accrue on the penalty or compensatory interest without violating
the provisions of Article 1959 of the New Civil Code

Article 1226 of the New Civil Code provides that in obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The
penalty may be enforced only when it is demandable in accordance with the provisions of this
Code.

In the case at bar, the promissory note expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subject restructured
loan. The stipulated fourteen percent (14%) per annum interest charge until full payment of the
loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New
Civil Code. On the other hand, the stipulated two percent (2%) per month penalty is in the form
of penalty charge which is separate and distinct from the monetary interest on the principal of the
loan.

Penalty on delinquent loans may take different forms. In Government Service Insurance System
v. Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a
penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the
penalty does not include the monetary interest, and as such the two are different and distinct
from each other and may be demanded separately.

The penalty charge of two percent (2%) per month in the case at bar began to accrue from the
time of default by the petitioner. There is no doubt that the petitioner is liable for both the
stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest.

Article 1959 of the New Civil Code provides that without prejudice to the provisions of Article
2212, interest due and unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added principal, shall earn new
interest.

According to the petitioner, there is no legal basis for the imposition of interest on the penalty
charge for the reason that the law only allows imposition of interest on monetary interest but not
the charging of interest on penalty. He claims that since there is no law that allows imposition of
interest on penalties, the penalties should not earn interest. But as we have already explained,
penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding
of the penalty or compensatory interest is sanctioned by and allowed pursuant to the provision of
Article 1959 of the New Civil Code.

In the case at bar, equity cannot be considered inasmuch as there is a contractual stipulation in
the promissory note whereby the petitioner expressly agreed to the compounding of interest in
case of failure on his part to pay the loan at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law between the parties and does not appear to be
inequitable or unjust, the said written stipulation should be respected.

The continued monthly accrual of the two percent (2%) penalty charge on the total amount due
to be unconscionable inasmuch as the same appeared to have been compounded monthly.
Considering petitioners several partial payments and the fact he is liable under the note for the
two percent (2%) penalty charge per month on the total amount due, compounded monthly, for
twenty-one (21) years since his default in 1980, we find it fair and equitable to reduce the penalty
charge to a straight twelve percent (12%) per annum on the total amount due starting August 28,
1986, the date of the last Statement of Account. The offers of the petitioner to enter into a
compromise for the settlement of his debt by presenting proposed payment schemes to
respondent CCP showed his good faith despite difficulty in complying with his loan obligation
due to his financial problems. However, we are not unmindful of the respondents long overdue
deprivation of the use of its money collectible from the petitioner.

On the issue of attorneys fees, the appellate court ruled correctly and justly in reducing the trial
courts award of twenty-five percent (25%) attorneys fees to five percent (5%) of the total amount
due.

The Decision of the Court of Appeals is AFFIRMED with MODIFICATION in that the penalty
charge of two percent (2%) per month on the total amount due, compounded monthly, is reduced
to a straight twelve percent (12%) per annum starting from August 28, 1986.

LIGUTAN vs. HON. COURT OF APPEALS

Facts:

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a
promissory note binding themselves, jointly and severally, to pay the sum borrowed with an
interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month on the
outstanding principal and interest in case of default. In addition, petitioners agreed to pay 10% of
the total amount due by way of attorney’s fees if the matter were indorsed to a lawyer for
collection or if a suit were instituted to enforce payment. The obligation matured on 8 September
1981; the bank, however, granted an extension but only up until 29 December 1981.

Despite several demands from the bank, petitioners failed to settle the debt On 30 September
1982, the bank sent a final demand letter to petitioners informing them that they had five days
within which to make full payment. Since petitioners still defaulted on their obligation, the bank
filed with the Regional Trial Court of Makati a complaint for recovery of the due amount.

In view of the absence of petitioners and their counsel on the third hearing date, the bank moved,
and the trial court resolved, to consider the case submitted for decision.

Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the
order of the trial court declaring them as having waived their right to present evidence and
prayed that they be allowed to prove their case. The court a quo denied the motion and rendered
judgment in favor of the plaintiff and against the defendants.

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial
court of their motion to present evidence and assailing the imposition of the 2% service charge,
the 5% per month penalty charge and 10% attorney's fees. The appellate court affirmed the
judgment of the trial court except on the matter of the 2% service charge which was deleted
pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate
court, both parties filed their respective motions for reconsideration. The Court of Appeals
modified its decision and ordereddefendants-appellants Tolomeo Ligutan and Leonidas dela
Llana to pay the plaintiff-appellee Security Bank and Trust Company the sum of P114,416.00
with interest thereon at the rate of 15.189% per annum and 3% per month penalty charge
commencing May 20, 1982 until fully paid; and the sum equivalent to 10% of the total amount of
the indebtedness as and for attorney’s fees.

Petitioners filed an omnibus motion for reconsideration and to admit newly discovered
evidence, alleging that while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to
secure the existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners
contended that the execution of the real estate mortgage had the effect of novating the contract
between them and the bank. Petitioners further averred that the mortgage was extrajudicially
foreclosed on 26 August 1986, that they were not informed about it, and the bank did not credit
them with the proceeds of the sale. The appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence, ratiocinating that such a second motion
for reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of Civil
Procedure. Furthermore, the appellate court said, the newly-discovered evidence being invoked
by petitioners had actually been known to them when the case was brought on appeal and when
the first motion for reconsideration was filed.

Petitioners elevated their case to the Supreme Court.

Issues:

1. Whether the 15.189% interest and the penalty of three (3%) percent per month or thirty-
six (36%) percent per annum imposed by private respondent bank on petitioners loan
obligation are exorbitant, iniquitous and unconscionable.

2. Whether the ten (10%) percent award of attorney’s fees is highly and grossly excessive,
unreasonable and unconscionable.

Ruling:

A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater

liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the
coercive force of the obligation and to provide, in effect, for what could be the liquidated
damages resulting from such a breach. The obligor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence and on the measure of damages caused
by the breach. Although a court may not at liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the
courts if it is iniquitous or unconscionable or if the principal obligation has been partly or
irregularly complied with.

The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the court. The
Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty
interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances,
not to mention the repeated acts of breach by petitioners of their contractual obligation, the Court
sees no cogent ground to modify the ruling of the appellate court.

Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that
has not been raised and ventilated before the courts below. In any event, the interest stipulation,
on its face, does not appear as being that excessive. The essence or rationale for the payment of
interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge or
a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an agreement
to that effect, the two being distinct concepts which may separately be demanded. 18 What may
justify a court in not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the non-payment or
reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a bank's existence.
Bearing in mind that the rate of attorney’s fees has been agreed to by the parties and intended to
answer not only for litigation expenses but also for collection efforts as well, the Court deems the
award of 10% attorney’s fees to be reasonable.

The petition is DENIED.

SENTINEL INSURANCE CO., INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, HON. FLORELIANA CASTRO-BARTOLOME,
Presiding Judge, Court of First Instance of Rizal, Seventh Judicial District, Branch XV, THE
PROVINCIAL SHERIFF OF RIZAL, and ROSE INDUSTRIES, INC.,

FACTS:
Sentinel Insurance Co., Inc., entered into a contract of suretyship as a surety with Nemesio
Azcueta, Sr., who is doing business under the name and style of 'Malayan Trading where both of them
bound themselves, 'jointly and severally, to fully and religiously guarantee the compliance with the terms
and stipulations of the credit line granted by private respondent Rose Industries, Inc., in favor of Nemesio
Azcueta, Sr., in the amount of P180,00.00.' Azcueta made various purchases of tires, batteries and tire
tubes from the private respondent but failed to pay therefor, prompting the latter to demand payment but
because Azcueta failed to settle his accounts, the case was referred to the Insurance Commissioner who
invited the attention of Sentinel Insurance Co., Inc. on the matter and the latter cancelled the Suretyship
Agreement on May 13, 1975 with due notice to the private respondent. Meanwhile, Rose Industries, Inc.
filed with the respondent court of Makati a complaint for collection of sum of money against herein
petitioner and Azcueta, alleging the foregoing antecedents and praying that said defendants be ordered to
pay jointly and severally unto the plaintiff.

a) The amount of P198,602.41 as its principal obligation, including interest and damage dues as of April
29, 1975;

b) To pay interest at 14% per annum and damage dues at the rate of 2% every 45 days commencing from
April 30, 1975 up to the time the full amount is fully paid.

ISSUE:

Whether there was a mistake in the dispositive portion of the decision made by the trial court as
stated in paragraph (b)

Whether the Court of Appeals acted out without authority in appending the award of damage dues
and erred in ordering the clarification of the decision of the trial court

HELD:
1. The CA examined the complaint filed against the petitioner and noted that the prayer as stated in
Paragraph (b) thereof was to "order defendant to pay interest at 14 per centum and damage dues at the rate
of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully paid."

Insofar as the findings and the dispositive portion set forth in respondent court's decision are
concerned, there is really no inconsistency as wittingly or unwittingly asserted by petitioner.

The findings made by respondent court did not actually nullify the judgment of the trial court.
More specifically, the statement that the imposition of 2% interest every 45 days commencing from April
30, 1975 on top of the 14% per annum (as would be the impression from a superficial reading of the
dispositive portion of the trial court's decision) would be usurious is a sound observation. It should,
however, be stressed that such observation was on the theoretical assumption that the rate of 2% is being
imposed as interest, not as damage dues which was the intendment of the trial court.

2. Petitioner's assertion that respondent court acted without authority in appending the award of
damage dues to the judgment of the trial court should be rejected. As correctly pointed out by private
respondent, the opening sentence of Paragraph l(a) of the dispositive portion of the lower court's decision
explicitly ordered petitioner to pay private respondent the amount of P198,602.41 as principal obligation
including interest and damage dues, which is a clear and unequivocal indication of the lower court's intent
to award both interest and damage dues.

Significantly, it bears mention that on several occasions before petitioner moved for a
clarificatory judgment, it offered to settle its account with private respondent without assailing the
imposition of the aforementioned damage dues.

Respondent court did not err in ordering the clarification of the decision of the trial court by
amending the questioned part of its dispositive portion to include therein the phrase damage dues to
modify the stated rate of 2%, and thereby obviate any misconception that it is being imposed as interest.

G.R. No. 84719             January 25, 1991

YONG CHAN KIM, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO, Presiding Judge, RTC,
6th Judicial Region, Branch 28 Iloilo City and Court of Appeals (13th
Division) respondents.

FACTS:

Petitioner Yong Chan Kim was employed as a Researcher at the Aquaculture Department of the
Southeast Asian Fisheries Development Center (SEAFDEC).

Petitioner was issued Travel Order No. 2222 (June 16- July 21, 1982) where he received
P6,438.00 as cash advance to defray his travel expenses. Petitioner was issued another travel
order, T.O. 2268, (June 30-July 4, 1982) and received a cash advance of P495.00.
When the Travel Expense Reports were audited, it was discovered that there was an overlap of 4
days (30 June to 3 July 1982) in the two (2) travel orders for which petitioner collected   per
diems twice. The total amount in the form of per diems and allowances charged and collected by
petitioner under Travel Order No. 2222, when he did not actually and physically travel as
represented by his liquidation papers, was P1,230.00.

Two complaints for Estafa were filed against Kim in MTC Iloilo and he was declared guilty.
RTC affirmed MTC decision upon appeal. Kim elevated the appeal to the CA who dismissed the
petition for having been filed out of time.

Hence, the present recourse.

ISSUES:

I. Whether the decision of the MTC Guimbal, Iloilo and the RTC Iloilo are
supported by the facts and evidence or contrary to law and that the two courts a
quo have acted with grave abuse of discretion amounting to lack of jurisdiction or
have acted without or in excess of jurisdiction.

RESOLUTION:

In order that a person can be convicted under for Estafa, it must be proven that he had the
obligation to deliver or return the same money, good or personal property that he had received.
The courts believes that under EO No. 10, petitioner is not obligated to return the same money
(cash advance) which he has received.

Liquidation simply means the settling of an indebtedness. An employee, such as herein

petitioner, who liquidates a cash advance is in fact paying back his debt in the form of a loan of
money advanced to him by his employer, as per diems and allowances. Similarly, as stated in the
assailed decision of the lower court, "if the amount of the cash advance he received is less than
the amount he spent for actual travel . . . he has the right to demand reimbursement from his
employer the amount he spent coming from his personal funds. In other words, the money
advanced by either party is actually a loan to the other. Hence, petitioner was under no legal
obligation to return the same cash or money, i.e., the bills or coins, which he received from the
private respondent.

Since ownership of the money (cash advance) was transferred to petitioner, no fiduciary
relationship was created. Absent this fiduciary relationship between petitioner and private
respondent, which is an essential element of the crime of estafa by misappropriation or
conversion, petitioner could not have committed estafa.

Additionally, it has been the policy of private respondent that all cash advances not liquidated are
to be deducted correspondingly from the salary of the employee concerned. The evidence shows
that the corresponding salary deduction was made in the case of petitioner vis-a-vis the cash
advance in question.
Consolidated Bank and Trust Corporation vs. CA 356 SCRA 671

FACTS: Respondents Corporation and Lim obtained from petitioner Consolidated Bank and Trust
Corporation a Letter of Credit in the amount of P1,068,150.00. On the same date, respondent
Corporation paid a marginal deposit of P320,445.00 to petitioner. The letter of credit was used to
purchase around five hundred thousand liters of bunker fuel oil from Petrophil Corporation, which the
latter delivered directly to respondent Corporation. In relation to the same transaction, a trust receipt
for the amount of P 1,001,520.93 was executed by respondent Corporation, with respondent Lim as
signatory.

Claiming that respondents failed to turn over the goods covered by the trust petitioner filed a complaint
for sum of money with application for preliminary attachment before the RTC. In answer to the
complaint, respondents averred that the transaction between them was a simple loan and not a trust
receipt transaction, and that the amount claimed by petitioner did not take into account payments
already made by them. Respondent Lim also denied any personal liability in the subject transactions.

The trial court rendered its Decision, dismissing the Complaint and ordering petitioner to pay
respondents the following amounts under their counterclaim: P490,228.90 representing overpayment
of respondent Corporation, with interest thereon at the legal rate from July 26, 1988 until fully paid.

ISSUES: Whether or not the transaction involved is a loan transaction or a trust receipt transaction.

RULING: Petitioner has failed to convince us that its transaction with respondent Corporation is really a
trust receipt transaction instead of merely a simple loan, as found by the lower court and the Court of
Appeals.

The recent case of Colinares v. Court of Appeals appears to be foursquare with the facts obtaining in the
case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust receipt
before the trust receipt itself was entered into, the transaction in question was a simple loan and not a
trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods
was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure
trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to
the importer in trust after the loan is granted.

In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the
trust receipt occurred long before the trust receipt itself was executed. More specifically, delivery of the
bunker fuel oil to respondent Corporation's Bulacan plant commenced on July 7, 1982 and was
completed by July 19, 1982. Further, the oil was used up by respondent Corporation in its normal
operations by August, 1982.14 On the other hand, the subject trust receipt was only executed nearly
two months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982.

People vs. Puig 563 SCRA 564

FACTS: On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before RTC, 112 cases of
Qualified Theft against respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the
Cashier and Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc.

INFORMATION

That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents], conspiring,
confederating, and helping one another, with grave abuse of confidence, being the Cashier and
Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of
the management of the Bank and with intent of gain, did then and there willfully, unlawfully and
feloniously take, steal and carry away the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine
Currency, to the damage and prejudice of the said bank in the aforesaid amount.

After perusing the Informations in these cases, the trial court did not find the existence of probable
cause that would have necessitated the issuance of a warrant of arrest based on the following grounds:

(1) the element of ‘taking without the consent of the owners’ was missing on the ground that it is the
depositors-clients, and not the Bank, which filed the complaint in these cases, who are the owners of
the money allegedly taken by respondents and hence, are the real parties-in-interest; and

(2) the Informations are bereft of the phrase alleging "dependence, guardianship or vigilance between
the respondents and the offended party that would have created a high degree of confidence between
them which the respondents could have abused."

Petitioner went directly to this Court, explaining that under Article 1980 of the New Civil Code, "fixed,
savings, and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto, Article 1953 of the same Code provides that "a
person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and quality." Thus, it posits that the
depositors who place their money with the bank are considered creditors of the bank. The bank acquires
ownership of the money deposited by its clients, making the money taken by respondents as belonging
to the bank.

ISSUE: Whether or not the 112 information for qualified theft sufficiently allege the element of taking
without the consent of the owner, and the qualifying circumstance of grave abuse of confidence.

RULING:

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer.
Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is very
clear not only from the express provisions of the law, but from established jurisprudence. The
relationship between banks and depositors has been held to be that of creditor and debtor. Articles
1953 and 1980 of the New Civil Code, as appropriately pointed out by petitioner, provide as follows:

Article 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning loan.

The Court held that since the teller occupies a position of confidence, and the bank places money in the
teller’s possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed. In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to the
confidence reposed in them, occupy positions of confidence.

BPI Family Bank vs. Franco 538 SCRA 184

FACTS:

Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity. We
reiterate this exhortation in the case at bench. Priniciple: object of simple loan.

Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current account with BPI-FB.
First Metro Investment Corporation (FMIC) also opened a time deposit account with the same branch of
BPI-FB with a deposit of ₱100,000,000.00, to mature one year thence.

Subsequently, Franco opened three accounts, namely, a current, savings, and time deposit, with BPI-FB.
The current and savings accounts were respectively funded with an initial deposit of ₱500,000.00 each,
while the time deposit account had ₱1,000,000.00. The total amount of ₱2,000,000.00 used to open
these accounts is traceable to a check issued by Tevesteco allegedly in consideration of Franco’s
introduction of Eladio Teves, who was looking for a conduit bank to facilitate Tevesteco’s business
transactions, to Jaime Sebastian, who was then BPI-FB SFDM’s Branch Manager. In turn, the funding for
the ₱2,000,000.00 check was part of the ₱80,000,000.00 debited by BPI-FB from FMIC’s time deposit
account and credited to Tevesteco’s current account pursuant to an Authority to Debit purportedly
signed by FMIC’s officers.

However, the signatures of FMIC’s officers on the Authority to Debit were forged. Tevesteco had already
effected several withdrawals from its current account (to which had been credited the ₱80,000,000.00
covered by the forged Authority to Debit) amounting to ₱37,455,410.54, including the ₱2,000,000.00
paid to Franco. BPI-FB debited Franco’s savings and current accounts for the amounts remaining.

Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Franco’s receipt of notice that his accounts were under garnishment. In fact, at the time the Notice of
Garnishment was served on BPI-FB, Franco had yet to be impleaded in the Makati case where the writ of
attachment was issued. Franco pre-terminated his time deposit account. BPI-FB deducted the amount of
₱63,189.00 from the remaining balance of the time deposit account representing advance interest paid
to him.

ISSUE: Whether Franco had a better right to the deposits in the subject accounts which are part of the
proceeds of a forged Authority to Debit

RULING:
Article 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.

If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in
good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid
therefor.

To begin with, the movable property mentioned in Article 559 of the Civil Code pertains to a specific or
determinate thing. A determinate or specific thing is one that is individualized and can be identified or
distinguished from others of the same kind.

In this case, the deposit in Franco’s accounts consists of money which, albeit characterized as a movable,
is generic and fungible. The quality of being fungible depends upon the possibility of the property,
because of its nature or the will of the parties, being substituted by others of the same kind, not having
a distinct individuality.

Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims ownership of
the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited from FMIC’s
account and credited to Tevesteco’s, and subsequently traced to Franco’s account. In fact, this is what
BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money itself which
passed from one account to another, commencing with the forged Authority to Debit.

There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB conveniently
forgets that the deposit of money in banks is governed by the Civil Code provisions on simple loan or
mutuum. As there is a debtor-creditor relationship between a bank and its depositor, BPI-FB ultimately
acquired ownership of Franco’s deposits, but such ownership is coupled with a corresponding obligation
to pay him an equal amount on demand. Although BPI-FB owns the deposits in Franco’s accounts, it
cannot prevent him from demanding payment of BPI-FB’s obligation by drawing checks against his
current account, or asking for the release of the funds in his savings account. Thus, when Franco issued
checks drawn against his current account, he had every right as creditor to expect that those checks
would be honored by BPI-FB as debtor.

Siga-an vs.Villanueva, 576 SCRA 696

FACTS: Respondent Alicia Villanueva filed a complaint for sum of money against petitioner Sebastian
Siga-an before RTC. Respondent alleged that she was a businesswoman engaged in supplying office
materials and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City,
while petitioner was a military officer and comptroller of the PNO.

Respondent claimed petitioner approached her inside the PNO and offered to loan her the amount of
₱540,000.00. Since she needed capital for her business transactions with the PNO, she accepted
petitioner’s proposal. The loan agreement was not reduced in writing. Also, there was no stipulation
as to the payment of interest for the loan.
Respondent issued a check worth ₱500,000.00 to petitioner as partial payment of the loan and another
check in the amount of ₱200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of ₱700,000.00 for the ₱540,000.00 worth of loan,
the excess amount of ₱160,000.00 would be applied as interest for the loan. Not satisfied with the
amount applied as interest, petitioner pestered her to pay additional interest. She paid additional
amounts in cash and checks as interests for the loan. She asked petitioner for receipt for the payments
but petitioner told her that it was not necessary as there was mutual trust and confidence between
them. According to her computation, the total amount she paid to petitioner for the loan and interest
accumulated to ₱1,200,000.00.

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the
previous loan in full, he agreed to grant her another loan. Later, respondent requested him to
restructure the payment of the loan because she could not give full payment on the due date. He
acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein
she would acknowledge her obligation to him, inclusive of interest, and that she would issue several
postdated checks to guarantee the payment of her obligation. Upon his approval of respondent’s
request for restructuring of the loan, respondent executed a promissory note dated 12 September 1994
wherein she admitted having borrowed an amount of ₱1,240,000.00, inclusive of interest, from
petitioner and that she would pay said amount in March 1995. Respondent also issued to him six
postdated checks amounting to ₱1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was honored. He
demanded that respondent settle her obligation, but the latter failed to do so.

The RTC rendered a Decision holding that respondent made an overpayment of her loan obligation to
petitioner and that the latter should refund the excess amount to the former. It ratiocinated that
respondent’s obligation was only to pay the loaned amount of ₱540,000.00, and that the alleged
interests due should not be included in the computation of respondent’s total monetary debt because
there was no agreement between them regarding payment of interest.

ISSUES: Whether there was interest due to the petitioner.

RULING: Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory interest. The right to interest arises only by virtue of
a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is
demanded.

Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that no
interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if: (1) there was an express stipulation
for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is prohibited by law.

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither
was there convincing proof of written agreement between the two regarding the payment of interest.
Respondent testified that although she accepted petitioner’s offer of loan amounting to ₱540,000.00,
there was, nonetheless, no verbal or written agreement for her to pay interest on the loan.

De Lima vs. Laguna Tayabas Co. 160 SCRA 70

FACTS: This action arose from a collision between a passenger bus of the Laguna Tayabas Bus Co. (LTB)
and a delivery truck of the Seven-up Bottling Co. of the Philippines which took place on June 3, 1958
resulting in the death of Petra de la Cruz and serious physical injuries of Eladia de Lima and Nemesio
Flores, all passengers of the LTB bus. Three civil suits were filed against herein respondents which were
consolidated for trial before the Court of First Instance.

Plaintiffs in the civil case seeks an award of legal interest on the amounts adjudged in their favor from
the date of the said decision but their motion was not acted upon by the court a quo. Only the said
defendants appealed the decision to the Court of Appeals.

In the motion of petitioners dated December 29, 1971 filed with the Court of Appeals, they sought for
an immediate decision of the case with a prayer for the granting of legal interest from the date of the
decision of the court a quo and for the increase to P12,000.00 of the civil indemnity of P3,000.00
awarded for the death of Petra de la Cruz.

On January 31, 1972, the now disputed decision of the Court of Appeals was promulgated.

Petitioners moved for a reconsideration of this decision seeking its modification so that the legal
interest awarded by the Appellate Court will start to run from the date of the decision of the trial court
on December 27, 1963 instead of January 31, 1972, the date of the decision of the Court of Appeals.
Petitioner Potenciano Requijo as heir of the deceased Petra de la Cruz further sought an increase in the
civil indemnity of P3,000.00 to P 12,000.00.

The Appellate Court denied the motion for reconsideration holding that since the plaintiffs did not
appeal from the failure of the court a quo to award interest on the damages and that the court on its
own discretion awarded such interest in view of Art. 2210 of the Civil Code, the effectivity of the interest
should not be rolled back to the time the decision of the court a quo was rendered.

ISSUES:
Whether or not the Court of Appeal; erred in granting legal interest on damages to start only from the
date of its decision instead of from the date of the trial court's decision;

Whether or not the Court of Appeals erred in not increasing the indemnity for the death of Petra de La
Cruz from P3,000 to P12,000.00.

RULING: It is true that the rule is well-settled that a party cannot impugn the correctness of a judgment
not appealed from by him, and while he may make counter assignment of errors, he can do so only to
sustain the judgment on other grounds but not to seek modification or reversal thereof, 6 for in such
case he must appeal. A party who does not appeal from the decision may not obtain any affirmative
relief from the appellate court other than what he has obtained from the lower court, if any, whose
decision is brought up on appeal.
However, respondents failed to note that the legal interest was awarded by the Appellate Court in its
discretion based on equitable grounds which is duly sanctioned by Art. 2210 of the Civil Code which
provides — Interest may, in the discretion of the court, be allowed upon damages awarded for breach of
contract. There is no doubt that the damages awarded in these civil cases arise from the breach of a
contractual obligation on the part of the defendants- appellants. But to grant the imposition of interest
on the amounts awarded to and as prayed for by one of the plaintiffs and deny the same to the others
considering that the cases arose from one single incident would be unfair and inequitous. In the light,
therefore, not only of the provision of the Civil Code above referred to, but also the facts and
circumstances obtaining in these cases. We believe that on equitable grounds legal interest, should be
allowed on the amounts adjudged in favor of the plaintiffs from the date of this decision up to the time
of actual payment thereof.

We take exception to the ruling of the Appellate Court as to the date when the legal interest should
commence to ran. We hold that the legal interest of six percent (6) on the amounts adjudged in favor of
petitioners should start from the time of the rendition of the trial court's decision on December 27, 1963
instead of January 31, 1972, the promulgation of the decision of the Court of Appeals.

As to the second issue, civil indemnity for the death of Petra de la Cruz was properly awarded by
virtue of Art. 1764 in relation to Art. 2206 of the Civil Code of the Philippines which allows a minimum
indemnity of P3,000.00 for the death of a passenger caused by the breach of contract by a common
carrier. In accordance with prevailing jurisprudence the indemnity of P3,000.00 should be increased to
P30,000.00 and not P12,000.00 as prayed for by petitioner.

If the transportation company had only accepted the judgment of the trial court and paid its just
awards instead of appealing the same to the Court of Appeals, no further delay would have been
occasioned on the simple issue of interest and indemnity. To mitigate the impact of such a great delay
in this case the Court finds ample justification in the aforesaid award for interest and indemnity.

Tan vs. Ladehueza 66 SCRA 61

FACTS:
Plaintiff-appellee Lucia Tan instituted an action against the defendants-appellants Arador Valdehueza
and Rediculo Valdehueza for (a) declaration of ownership and recovery of possession of the parcel of
land described in the first cause of action of the complaint, and (b) consolidation of ownership of two
portions of another parcel of (unregistered) land described in the second cause of action of the
complaint, purportedly sold to the plaintiff in two separate deeds of pacto de retro.

Plaintiff was the highest bidder in a public auction sale of a parcel of land. Due to the failure of
defendant to redeem the said land within the period of one year as being provided by law an ABSOLUTE
DEED OF SALE was executed in favor of the plaintiff LUCIA TAN.

Defendants have executed two documents of DEED OF PACTO DE RETRO SALE in favor of the plaintiff of
two portions of a parcel of land which is described in the second cause of action with the total amount
of P1,500.00. From the execution of the Deed of Sale with right to repurchase mentioned in the second
cause of action, defendants remained in the possession of the land.
The trial court in its judgement, made a finding on the second cause of action that the transactions
between the parties were simple loan, instead of an equitable mortgage.

ISSUE: Whether the transactions between the parties were simple loan, instead of an equitable
mortgage. Being an equitable mortgage, whether an imposition of legal interest is with legal basis

RULING: The trial court treated the registered deed of pacto de retro as an equitable mortgage but
considered the unregistered deed of pacto de retro "as a mere case of simple loan, secured by the
property thus sold under pacto de retro," on the ground that no suit lies to foreclose an unregistered
mortgage. Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the
validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code, this is
no longer so.

The Valdehuezas having remained in possession of the land and the realty taxes having been paid by
them, the contracts which purported to be pacto de retro transactions are presumed to be equitable
mortgages, whether registered or not, there being no third parties involved.

The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and P300,
respectively, is without legal basis, for, "No interest shall be due unless it has been expressly stipulated
in writing." (Article 1956, new Civil Code) Furthermore, the plaintiff did not pray for such interest; her
thesis was a consolidation of ownership, which was properly rejected, the contracts being equitable
mortgages.

Prima Construction & Development Corp vs. Mechavez 614 SCRA 590

FACTS: Pantaleon, the President and Chairman of the Board of PRISMA, obtained a ₱1,000,000.00 loan
from the respondent, with a monthly interest of ₱40,000.00 payable for six months, or a total obligation
of ₱1,240,000.00 to be paid within six months. To secure the payment of the loan, Pantaleon issued a
promissory note. Eventually, the petitioners failed to completely pay the loan within the stipulated six
months. The petitioners had already paid a total of ₱1,108,772.00. However, the respondent found that
the petitioners still had an outstanding balance of ₱1,364,151.00, to which it applied a 4% monthly
interest. Thus, respondent filed a complaint for sum of money with the RTC to enforce the unpaid
balance, plus 4% monthly interest.

The petitioners admitted the loan of ₱1,240,000.00, but denied the stipulation on the 4% monthly
interest, arguing that the interest was not provided in the promissory note.

The CA found that the parties agreed to a 4% monthly interest principally based on the board resolution
that authorized Pantaleon to transact a loan with an approved interest of not more than 4% per month.
The appellate court, however, noted that the interest of 4% per month, or 48% per annum, was
unreasonable and should be reduced to 12% per annum. The CA affirmed the RTC’s finding that PRISMA
was a mere instrumentality of Pantaleon that justified the piercing of the veil of corporate fiction. Thus,
the CA modified the RTC Decision by imposing a 12% per annum interest, computed from the filing of
the complaint until finality of judgment, and thereafter, 12% from finality until fully paid.

ISSUES: Whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of
interest apply to the 6-month payment period only or until full payment of the loan?
RULING: Interest due should be stipulated in writing; otherwise, 12% per annum

Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith. When the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning of its stipulations governs. In such cases, courts
have no authority to alter the contract by construction or to make a new contract for the parties; a
court's duty is confined to the interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material stipulations or read into the contract
words the contract does not contain. It is only when the contract is vague and ambiguous that courts are
permitted to resort to the interpretation of its terms to determine the parties’ intent.

In the case, no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent
to this rate was agreed upon.

Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been
expressly stipulated in writing." Under this provision, the payment of interest in loans or forbearance of
money is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is
required for the payment of interest at a stipulated rate.

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code."

Philippine Phosphate Fertilizer Corp. vs. Kamalig Resources Inc. 540 SCRA 139

FACTS: Kamalig purchased from and made advance payments for fertilizer products of various grades to
Philphos in the total sum of P4,548,152.53. Prior to the release of fertilizer products, Kamalig requested
for a readjustment of the various fertilizer grades. Later, Philphos informed Kamalig of its
overwithdrawal of various fertilizer stocks. According to Philphos, the cost of these overwithdrawals by
Kamalig amounted to P1,016,994.21. But since Philphos also had an obligation to Kamalig in the amount
of P470,348.91 representing the Capital Recovery Component, partial compensation took place by
operation of law thereby reducing Kamalig's obligation to P546,645.30. Thus, Philphos demanded that
this sum be settled, otherwise Kamalig would be charged 34% interest per annum. Kamalig, however,
denied that it had exceeded its withdrawals of fertilizer and thus contended that it should not be made
liable for any amount.

Thus, Philphos filed the case for collection of a sum of money against Kamalig. The Court of Appeals held
that there was no basis for the imposition of the 34% interest per annum on the principal claim of
Philphos, the same being merely a unilateral act on the part of Philphos and no evidence was presented
to show that the parties stipulated on the payment of interest. Besides, such interest cannot be
awarded since there were no overwithdrawals in the first place.

ISSUE: Whether there can be basis for the imposition of a 34% interest per annum on the outstanding
obligation of Kamalig to Philphos.

RULING: With respect to the 34% per annum interest claimed by Philphos, we agree with the Court of
Appeals that no evidence was presented that would show that the parties stipulated on the payment of
interest. Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly
stipulated in writing. Philphos presented only its demand letters insisting on payment of the value of
the overwithdrawals and imposition of 34% interest per annum if payment is not made in due time. Said
unilateral impositions of interest do not suffice as proof of agreement on the alleged 34% per annum
interest.

De la Paz vs. L&J Development Company 734 SCRA 364

Principle: No interest shall be due unless it has been expressly stipulated in writing.

FACTS: Rolando lent ₱350,000.00 without any security to L&J, a property developer with Atty. Esteban
Salonga (Atty. Salonga) as its President and General Manager. The loan, with no specified maturity date,
carried a 6% monthly interest, i.e., ₱21,000.00. From December 2000 to August 2003, L&J paid Rolando
a total of ₱576,000.007 representing interest charges. As L&J failed to pay despite repeated demands,
Rolando filed a Complaint against L&J and Atty. Salonga in his personal capacity before the MeTC,
Rolando alleged, among others, that L&J’s debt as of January 2005, inclusive of the monthly interest,
stood at ₱772,000.00; that the 6% monthly interest was upon Atty. Salonga’s suggestion; and, that the
latter tricked him into parting with his money without the loan transaction being reduced into writing.

L&J claimed that the failure to pay the same was due to a fortuitous event. They further argued that
Rolando cannot enforce the 6% monthly interest for being unconscionable and shocking to the morals.
The 12% per annum legal interest should have been applied from the time of the constitution of the
obligation. At 12% per annum interest rate, it asserted that the amount of interest it ought to pay from
December 2000 to March 2003 and from April 2003 to August 2003, only amounts to ₱105,000.00. If
this amount is deducted from the total interest payments already made, which is ₱576,000.00, the
amount of ₱471,000.00 appears to have been paid over and above what is due. Applying the rule on
compensation, the principal loan of ₱350,000.00 should be set-off against the ₱471,000.00, resulting in
the complete payment of the principal loan.

When L&J was in the process of borrowing the ₱350,000.00 from him, it was Arlene San Juan (Arlene),
the secretary/treasurer of L&J, who negotiated the terms and conditions thereof. She said that the
money was to finance L&J’s housing project. Rolando claimed that it was not he who demanded for the
6% monthly interest. It was L&J and Atty. Salonga, through Arlene, who insisted on paying the said
interest as they asserted that the loan was only a short-term one.

The MeTC upheld the 6% monthly interest since L&J agreed thereto and voluntarily paid the interest at
such rate from 2000 to 2003, it is already estopped from impugning the same. The CA applied the
principle of legal compensation under Article 1279 of the Civil Code. Accordingly, it set off the principal
loan of ₱350,000.00 against the ₱576,000.00 total interest payments made, leaving an excess of
₱226,000.00, which the CA ordered Rolando to pay L&J plus interest.

ISSUES: Whether the principal loan is deemed paid is dependent on the validity of the monthly interest
rate imposed.

RULING: The lack of a written stipulation to pay interest on the loaned amount disallows a creditor from
charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in
writing. Jurisprudence on the matter also holds that for interest to be due and payable, two conditions
must concur: a) express stipulation for the payment of interest; and b) the agreement to pay interest is
reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no interest is
due. The collection of interest without any stipulation in writing is prohibited by law. Even if the
payment of interest has been reduced in writing, a 6% monthly interest rate on a loan is unconscionable,
regardless of who between the parties proposed the rate.

While the Court recognizes the right of the parties to enter into contracts and who are expected to
comply with their terms and obligations, this rule is not absolute. Stipulated interest rates are illegal if
they are unconscionable and the Court is allowed to temper interest rates when necessary.

It has been ruled in a plethora of cases that stipulated interest rates of 3% per month and higher, are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to
morals, if not against the law. The Court, however, stresses that these rates shall be invalidated and
shall be reduced only in cases where the terms of the loans are open-ended, and where the interest
rates are applied for an indefinite period.

In the case at bench, there is no specified period as to the payment of the loan. Hence, levying 6%
monthly or 72% interest per annumis is definitely outrageous and inordinate.

Joven de Cortes vs. Venturazan 79 SCRA 709

FACTS: Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the instant action for foreclosure of real
estate against the defendants Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and Erlinda M.
Oledan. The plaintiffs owned 33 parcels of land, and sold the same to defendants all the improvements
thereon for the total sum of P716,573.90. With a balance of P576,573.90, the defendants bound
themselves to secure the payment of the said balance with a first mortgage upon the said 33 parcels of
land. Upon the registration of the deed of sale and mortgage with the office of the register of deeds new
certificates of title for the 33 parcels of land were issued in the names of the defendants and the
mortgage obligation was noted thereon.

The mortgage obligation fell, but despite repeated demands for payment, defendants failed and refused
to pay the said balance to plaintiffs. It is stipulated in the deed of sale with purchase money mortgage
that in the event of default by defendants to pay the obligation secured by the mortgage and a suit is
brought for the foreclosure of the mortgage or any other legal proceedings is instituted for the
enforcement of plaintiffs' right.

Defendants alleged that plaintiff's cause of action against them has been extinguished and, therefore,
did not become due against them. Even as regards their co-defendants, the mortgage obligation did not
become due having been a novation of the original agreement which affected material changes in the
manner and condition of time of payment of the balance of the mortgage obligation. By way of
affirmative defenses defendants Oledans alleged that the deed of sale with purchase money mortgage
fails to express the true intent and agreement of the parties thereto insofar as the nature of the liability
of the defendants is concerned, the true intention being to hold them (defendants Oledan) obligated
unto plaintiffs only to the extent of the proportion of their share, ownership and interests in the
property conveyed. Their obligation to plaintiffs has been extinguished by novation; that their obligation
to plaintiffs has been extinguished by the assumption of the obligation by defendants Venturanza as
provided for in the agreement among defendants, such assumption of the obligation being made with
full knowledge and consent of plaintiffs which partakes of the character of a novation of the original
agreement and that by their failure to seasonably interrupt any opposition to the assumption of any
obligation by defendants Venturanza and to take appropriate action thereon, plaintiffs have waived
their right to proceed against them.

Defendants claim that there had been a novation of the contract between them and plaintiffs on
account of the transfer made by defendants Oledans of their interest in the property in favor of their co-
defendants Venturanzas, with the knowledge and consent of the plaintiffs.

ISSUES:

Whether the payment of P576,573.90 with interest thereon at the stipulated rate of 6% per annum was
to be made dependent upon the consummation of the sale of the two haciendas of defendants
Venturanzas and, hence, there was a novation of the contract of sale with purchase money mortgage,
Exhibit B, as a result of a change in the manner of payment.

Whether the sale on December 28, 1959 by the defendants Oledans to their co-defendants Venturanzas,
of all their rights and interests in the property, subject-matter of the deed of sale with purchase money
mortgage, Exhibit B, likewise constituted a novation thereof and, therefore, had the effect of discharging
the defendants Oledans from their original obligation to the plaintiffs.
RULING:

The deed of sale with purchase money mortgage clearly indicates that the balance of P576,573.90 shall
be paid by the defendants, jointly and severally, within three years from January 1, 1959, with interest
at the rate of 6% per annum, until fully paid. On January 1, 1962, the defendants failed and refused to
pay their obligation. This is a clear case of an obligation with a definite period ex die, which period was
incidentally established for the benefit of the defendants. The evidence presented by the plaintiffs to
substantiate these facts approaches moral certainty, not merely preponderance of evidence. Hence,
defendants' defense of novation as to the period for payment, fails.

According to Manresa, novation is the extinguishment of an obligation by the substitution or change of

the obligation by a subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting the person of the debtor, or by subrogating a third
person to the rights of the creditor. Unlike other modes of extinction of obligations, novation is a
juridical act with a dual function - it extinguishes an obligation and creates a new one in lieu of the old.

Article 1293 of the New Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor.

Under this provision, there are two forms of novation by substituting the person of the debtor, and they
are: (1) expromision and (2) delegacion. In the former, the initiative for the change does not come from
the debtor and may even be made without his knowledge, since it consists in a third person assuming
the obligation. As such, it logically requires the consent of the third person and the creditor. In the
latter, the debtor offers and the creditor accepts a third person who consents to the substitution and
assumes the obligation, so that the intervention and the consent of these three persons are necessary.

Defendants Oledans' theory is that the Agreement and Deed of Sale of Undivided Share in Real Estate
executed and entered into by and between them and their co-defendants Venturanzas, and which in
effect transferred all their interest and participation in the property subject of the deed of mortgage to
their co-defendants Venturanzas, extinguished their obligation to the plaintiffs. In support of their
theory, they cited Article 1293 of the New Civil Code, quoted above, and then concluded that the
creditor's consent to the novation which consists in substituting a new debtor in place of the original
one "is entirely unnecessary and senseless."

In a Supreme Court case, in order that this novation may take place, the law requires the consent of
the creditor. Novation must be express, and cannot be presumed.

In the case at bar, the agreement relied upon by the defendants Oledans, does not show on its face that
the plaintiffs intervened in, much less gave their consent to, the substitution; as a matter of fact, plaintiff
Cortes vehemently denied having consented to the transfer of rights from the Oledans to the
Venturauzas alone. Res inter alios actor alteri nocere non debet. There is thus a complete absence of
animus novandi, whether express or implied, on the part of the creditors - the Corteses.

With respect, however, to the interest due to the plaintiffs on the indebtedness of the defendants, WE
are reminded of the mandate of Article 2212 of the New Civil Code, which provides:

"Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point."

Per stipulation, plaintiffs are entitled to collect from defendants interest at the rate of six per centum
(6%) per annum on the remaining balance of P576,573.90 from January 1, 1959. Hence, for the period
from January 1, 1959 to December 12, 1962, the date of the filing of the complaint, plaintiffs are entitled
to collect from the defendants, by way of interest at six percent per annum, the sum of P136,482.13.
Applying the aforequoted legal provision, this amount of P136,482.13 should be added to the principal
of P576,573.90. making a total of P713,056.03, which shall earn legal interest stipulated at six percent
per annum from December 13, 1962 until fully paid. Such interest is not due to stipulation; rather it is
due to the mandate of the law hereinabove quoted.
Security Bank Corp. vs. Spouses Mercado GR 192934 & 197010

FACTS: On September 13, 1996, Security Bank granted spouses Mercado a revolving credit line in the
amount of P1,000,000.00. To secure the credit line, the spouses Mercado executed a Real Estate
Mortgage in favor of Security Bank over their properties and another to secure an additional amount of
P7,000,000.00 under the same revolving credit agreement. The spouses Mercado defaulted in their
payment under the revolving credit line agreement, thus a petition for extrajudicial foreclosure.

The terms and conditions of the revolving credit line agreement included the following stipulations:

7. Interest on Availments – I hereby agree to pay Security Bank interest on outstanding Availments at a
per annum rate determined from time to time, by Security Bank and advised through my Statement of
Account every month. I hereby agree that the basis for the determination of the interest rate by Security
Bank on my outstanding Availments will be Security Bank's prevailing lending rate at the date of
availment. I understand that the interest on each availment will be computed daily from date of
availment until paid.

17. Late Payment Charges – If my account is delinquent, I agree to pay Security Bank the payment
penalty of 2% per month computed on the amount due and unpaid or in excess of my Credit Limit.7

On the other hand, the addendum to the revolving credit line agreement further provided that:

I hereby agree to pay Security Bank Corporation (SBC) interest on outstanding availments based on
annual rate computed and billed monthly by SBC on the basis of its prevailing monthly rate. It is
understood that the annual rate shall in no case exceed the total monthly prevailing rate as computed
by SBC. I hereby give my continuing consent without need of additional confirmation to the interests
stipulated as computed by SBC. The interests shall be due on the first day of every month after date of
availment.

On separate occasions, the foreclosure sale of the parcel of land in Batangas was held wherein Security
Bank was adjudged as the winning bidder. A similar foreclosure sale was conducted over the parcels of
land in Batangas where Security Bank was likewise adjudged as the winning bidder. The Certificate of
Sale over these properties were issued. Both Certificates of Sale were registered, respectively, with the
Registry of Deeds. The spouses Mercado offered to redeem the foreclosed properties for
P10,000,000.00. However, Security Bank allegedly refused the offer and made a counter-offer in the
amount of P15,000,000.00.

The spouses Mercado then filed a complaint for annulment of foreclosure sale, they averred that the
interests and the penalties imposed by Security Bank on their obligations were iniquitous and
unconscionable.

The RTC ruled that the stipulation as to the interest rate on the availments under the revolving credit
line agreement "where the fixing of the interest rate is the sole prerogative of the
creditor/mortgagee, belongs to the class of potestative condition which is null and void under Article
1308 of the New Civil Code. As such, no interest has been expressly stipulated in writing as required
under Article 1956 of the New Civil Code. The RTC ruled that since the spouses Mercado offered to pay
the higher amount of P10,000,000.00 and the bank unjustifiably refused to accept it, no interest shall
be due and demandable after the offer.
The CA holding that the interest provisions in the revolving credit line agreement and its addendum
violate the principle of mutuality of contracts.

ISSUES: Whether the provisions on interest rate in the revolving credit line agreement and its addendum
are void for being violative of the principle of mutuality of contracts.

RULING: The interest rate provisions in the parties' agreement violate the principle of mutuality of
contracts.

The principle of mutuality of contracts is found in Article 1308 of the New Civil Code, which states that
contracts must bind both contracting parties, and its validity or compliance cannot be left to the will
of one of them. The binding effect of any agreement between parties to a contract is premised on two
settled principles: (I) that any obligation arising from contract has the force of law between the
parties; and (2) that there must be mutuality between the parties based on their essential equality. As
such, any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Likewise, any stipulation regarding the validity or compliance of the
contract that is potestative or is left solely to the will of one of the parties is invalid. This holds true not
only as to the original terms of the contract but also to its modifications. Consequently, any change in a
contract must be made with the consent of the contracting parties, and must be mutually agreed upon.
Otherwise, it has no binding effect.

Stipulations as to the payment of interest are subject to the principle of mutuality of contracts. As a
principal condition and an important component in contracts of loan, interest rates are only allowed if
agreed upon by express stipulation of the parties, and only when reduced into writing. Any change to
it must be mutually agreed upon, or it produces no binding effect.

The spouses Mercado supposedly agreed to pay an annual interest based on a "floating rate of interest;"
to be determined solely by Security Bank; on the basis of Security Bank's own prevailing lending rate;
which shall not exceed the total monthly prevailing rate as computed by Security Bank; and without
need of additional confirmation to the interests stipulated as computed by Security Bank.

The adjustment should have still been subjected to the mutual agreement of the contracting parties.

First, the authority to change the interest rate was given to Security Bank alone as the lender, without
need of the written assent of the spouses Mercado. This unbridled discretion given to Security Bank is
evidenced by the clause "I hereby give my continuing consent without need of additional confirmation to
the interests stipulated as computed by Security Bank. The lopsidedness of the imposition of interest
rates is further highlighted by the lack of a breakdown of the interest rates imposed by Security Bank in
its statement of account accompanying its demand letter.

Second, the interest rate to be imposed is determined solely by Security Bank for lack of a stated, valid
reference rate. The reference rate of "Security Bank's prevailing lending rate" is not pegged on a market-
based reference rate as required by the BSP. There, we declared that escalation clauses are not basically
wrong or legally objectionable as long as they are not solely potestative but based on reasonable and
valid grounds. We held that the interest rate based on the "prevailing market rate" is valid because it
cannot be said to be dependent solely on the will of the bank as it is also dependent on the prevailing
market rates. Here, however, the stipulated interest rate based on "Security Bank's prevailing lending
rate" is not synonymous with "prevailing market rate." For one, Security Bank is still the one who
determines its own prevailing lending rate. More, the argument that Security Bank is guided by other
facts (or external factors such as Singapore Rate, London Rate, Inter-Bank Rate) in determining its
prevailing monthly rate fails because these reference rates are not contained in writing as required by
law and the BSP. Thus, we find that the interest stipulations here for being potestative.

In striking out these provisions, both in the original and the addendum, we note that there are no other
stipulations in writing from which we can base an imposition of interest. Unlike in cases involving
escalation clauses that allowed us to impose the original rate of interest, we cannot do the same here as
there is none. Nevertheless, while we find that no stipulated interest rate may be imposed on the
obligation, legal interest may still be imposed on the outstanding loan. Jurispudence provide that in the
absence of a stipulated interest. a loan obligation shall earn legal interest from the time of default,
i.e., from judicial or extrajudicial demand.

Spouses Silos vs. Philippine National Bank GR 181045

Principle: In loan agreements, it cannot be denied that the rate of interest is a principal condition, if not
the most important component. Thus, any modification thereof must be mutually agreed upon;
otherwise, it has no binding effect.

Facts: Spouses Eduardo and Lydia Silos (petitioners) operates a department store and buying and selling
of ready-to-wear apparel. To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB,
petitioners constituted in August 1987 a Real Estate Mortgage over a lot in Aklan. In July 1989, a
Supplement to the Existing Real Estate Mortgage was executed to cover the same credit line, which
was increased to ₱2.5 million, and additional security was given in the form of a 134-square meter lot.
In addition, petitioners issued eight Promissory Notes and signed a Credit Agreement. The eight
Promissory Notes, on the other hand, contained a stipulation granting PNB the right to increase or
reduce interest rates "within the limits allowed by law or by the Monetary Board.

In August 1991, an Amendment to Credit Agreement was executed by the parties. Under the
Amendment, petitioners issued in favor of PNB 18 Promissory Notes, which petitioners settled except
the last note covering the principal (PN 9701237 name ng promissory note).

Petitioners’ sole outstanding promissory note for ₱2.5 million – PN 9707237 became past due, and
despite repeated demands, petitioners failed to make good on the note. PN 9707237 provided for the
penalty equivalent to 24% per annum in case of default. PNB prepared a Statement of Account detailing
the amount due and demandable from petitioners in the total amount of ₱3,620,541.60 which
petitioners failed to pay thus foreclosing on the mortgage of the lots for the amount of ₱4,324,172.96.

Petitioners filed a civil case, seeking annulment of the foreclosure sale and an accounting of the PNB
credit. They theorized that after the first promissory note where they agreed to pay 19.5% interest,
the succeeding stipulations for the payment of interest in their loan agreements with PNB – which
allegedly left to the latter the sole will to determine the interest rate – became null and void.
Petitioners added that because the interest rates were fixed by respondent without their prior consent
or agreement, these rates are void, and as a result, petitioners should only be made liable for interest at
the legal rate of 12%.
In its Answer, PNB denied that it unilaterally imposed or fixed interest rates; that petitioners agreed that
without prior notice, PNB may modify interest rates depending on future policy adopted by it; and that
the imposition of penalties was agreed upon in the Credit Agreement. It added that the imposition of
penalties is supported by the all-inclusive clause in the Real Estate Mortgage agreement which provides
that the mortgage shall stand as security for any and all other obligations of whatever kind and nature
owing to respondent, which thus includes penalties imposed upon default or non-payment of the
principal and interest on due date.

The RTC dismissed the Civil Case saying that the Credit Agreement allows PNB to unilaterally increase its
spread over the floating interest rate at any time depending on whatever policy it may adopt in the
future, it likewise allows for the decrease at any time of the same. Thus, such stipulation authorizing
both the increase and decrease of interest rates as may be applicable is valid.

The CA noted that PNB wrongly applied an interest rate of 25.72% instead of the agreed 25%; thus it
overcharged petitioners, and the latter paid, an excess of ₱736.56 in interest.

On the issue of penalties, the CA ruled that the express tenor of the Real Estate Mortgage agreements
contemplated the inclusion of the PN 9707237-stipulated 24% penalty in the amount to be secured by
the mortgaged property.

The CA declared valid the foreclosure and sale of which as a result of petitioners’ failure to pay the
outstanding obligation upon demand.

ISSUES: Whether the interest rate provision in the Credit Agreement and the Amendment to Credit
Agreement should be declared null and void

RULING: The unilateral action of the PNB in increasing the interest rate on the private respondent’s loan
violated the mutuality of contracts ordained in Article 1308 of the Civil Code.

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void . . . . Hence, even assuming that the . . . loan agreement between the PNB
and the private respondent gave the PNB a license (although in fact there was none) to increase the
interest rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal footing, the
weaker party’s (the debtor) participation being reduced to the alternative "to take it or leave it" . . . .
Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against
abuse and imposition.

The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. Any contract which appears
to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of
the parties, is likewise, invalid.

In the facts, Respondent bank unilaterally altered the terms of its contract with petitioners by increasing
the interest rates on the loan without the prior assent of the latter. Petitioners never agreed in writing
to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their
credit agreement.

PNB successively increased the interest from 18% to 32%, then to 41% and then to 48%. This Court
declared the increases unilaterally imposed by PNB to be in violation of the principle of mutuality as
embodied in Art.1308 of the Civil Code, which provides that "[t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them.