Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No.

L-33084 November 14, 1988 ROSE PACKING COMPANY, INC., petitioner, vs. THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance of Rizal (Br. III), PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF RIZAL, respondents.

vice-president Roberto S. Benedicto as its representative in petitioner's board of directors. On November 3, 1965 the National Investment & Development Corporation (NIDC), the wholly owned investment subsidiary of the Philippine National Bank, approved a P2.6 million loan application of petitioner with certain conditions. Pursuant thereto, the NIDC released to petitioner on November 7, 1965 the amount of P100,000.00. Subsequently, petitioner purchased five (5) parcels of land in Pasig, Rizal making a down payment thereon. On January 5,1966, the NIDC released another P100,000.00 to petitioner and on January 12, 1966, the aforesaid releases totalling P200,000.00 were applied to the payment of preferred stock which NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme as per agreement. Thereafter, the NIDC refused to make further releases on the approved loan of petitioner. On August 3, 1966 and October 5, 1966, respondent PCIB approved additional accomodations to petitioner consisting of a P710,000.00 loan for the payment of the balance of the purchase price of those lots in Pasig required to be bought, P500,000.00 loan for operating capital, P200,000.00 loan to be paid directly to petitioner's creditors, while consolidating all previous accommodations at P1,597,000.00all of which were still secured by chattel and real estate mortgages. However, PCIB released only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands and some P300,000.00 for operating capital. On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for a loan of P1,840,000.00 and a guarantee for $652,682.00 for the purchase of can making equipment. Immediately upon receipt of notice of the approval of the Development Bank of the loan, petitioner advised respondent PCIB of the availability of P800,000.00 to partially pay off its account and requested the release of the titles to the Pasig lots for delivery to the Development Bank of the Philippines. Respondent PCIB verbally advised petitioner of its refusal, stating that all obligations should be liquidated before the release of the titles to the Pasig properties. Following the PCIB's rejection of petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela, Bulacan with the P800,000.00 DBP loan, with the latter's consent. On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene Knecht, its president for the collection of petitioner's indebtedness to respondent bank, which complaint was docketed as Civil Case No. 71697 of the Court of First Instance of Manila. On January 22, 1968, PCIB gave petitioner notice that it would cause the real estate mortgage to be foreclosed at an auction sale, which it scheduled for February 27,1968. Thus, respondent Sheriff served notice of sheriffs sale (of the real properties mortgaged to respondent PCIB) on July 18,1968 at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto. Domingo, municipality of Cainta); T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio San Joaquin, Pasig, Rizal). Subsequently, on July 15, 1968, petitioner filed a complaint docketed as Civil Case No. 11015 in the Court of First Instance of Rizal to enjoin respondents PCIB and the sheriff from proceeding with the foreclosure sale, to ask the lower court to fix a new period for the payment of the obligations of petitioner to PCIB and for other related matters. Petitioner likewise prayed, pending final judgment, for the

PARAS, J.: This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated on December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing, this Court hereby renders judgment: 1. Denying the petition to set aside and annul the questioned orders dated January 31, 1969 and May 7,1969 rendered by respondent Judge, the same having been issued in consonance with the exercise of the Court's discretion. 2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of ownership over the properties sold at such sale to have been prematurely executed thereby rendering it void ab initio. 3. In accordance with this Court's resolution dated May 8, 1970, petitioner is hereby granted sixty (60) days from receipt of a copy of this decision within which to redeem the properties sold at the foreclosure sale of May 9, 1969. 4. Dismissing the charge of contempt against PCIB and its Executive Vice-President and General Manager, Eugenio R. Unson,. for lack of merit. and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration. The facts of the case as presented by petitioner and as embodied in the decision of the Court of Appeals are as follows: On December 12, 1962 respondent bank (PCIB) approved a letter- request by petitioner for the reactivation of its overdraft line of P50,000.00, discounting line of P100,000.00 and a letter of credit-trust receipt line of P550,000.00 as wen as an application for a loan of P300,000.00, on fully secured real estate and chattel mortgage and on the further condition that respondent PCIB appoint as it did appoint its executive

issuance ex-parte of a writ of preliminary injunction enjoining herein respondents from proceeding with the foreclosure sale scheduled to be held on July 18, 1968. On January 31, 1969, the lower court issued ail order denying the application for preliminary injunction and dissolving its restraining order which had been issued on July 17, 1968. Petitioner promptly filed a motion for reconsideration which was denied by the lower court on May 7, 1969. On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with application for a restraining order and preliminary injunction against the foreclosure sale (Rollo, p. 54).<re||an1w> On May 13, 1969 respondent Court resolved to issue a writ of preliminary injunction upon filing by petitioner of a bond in the amount of P60,000.00. However, petitioner moved for amendment of the Order issuing the preliminary injunction, on the ground that the aforementioned resolution of respondent Court came too late to stop the foreclosure sale which was held on May 9, 1969, praying instead that the preliminary injunction should now enjoin respondents, particularly respondent Provincial Sheriff, from proceeding to give effect to the foreclosure sale of May 9, 1969; that said sheriff should refrain from issuing a deed of certificate of sale pursuant thereto and from registering the certificate of deed of sale in the Registry of Deeds; and to toll or stop the running of the period of redemption. Respondent Court resolved to deny said motion in its Resolution dated May 28, 1969 (Rollo, pp. 237-242). On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty (60) days from receipt of the decision to be rendered in CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one declaring the execution sale in dispute to be valid (Rollo, p. 231). Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R. Unson for and in behalf of respondent PCIB concerning the properties involved in the instant petition for certiorari, was registered with the Register of Deeds of Pasig, Rizal at 8:00 a.m.. Consequently, the old transfer certificates of title covering the aforementioned properties were cancelled and new ones issued in the name of respondent PCIB, the buyer at the foreclosure sale. In view thereof, petitioner filed a motion charging respondent PCIB and its Executive Vice-President and Assistant General Manager Eugenio R. Unson with contempt of court. Petitioner prayed that (a) the Deed of Sale dated May 12, 1970 and the consolidation of ownership of the same date be declared null and void; (b) that the new transfer certificates of title TCT Nos. 286174, 286175, and 286176be cancelled and the old ones, TCT Nos. 177019,175595, and 73620 be restored or revived by the Register of Deeds of Rizal; and (c) that the respondent PCIB be ordered to surrender and deposit the TCT Nos. 177019, 175595, and 73620 with respondent Court for safekeeping (Rollo. p. 243). On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249). On January 12, 1971 it resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated January 5, 1971 (Rollo, p. 250) and on January 22, 1971 it again resolved (Rollo, p. 281) to deny petitioner's supplement to motion for reconsideration dated January 18, 1971 (Rollo, p. 260). The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16, 1971. On February 23, 1971, the Court resolved to give due course to the petition and ordered the issuance of preliminary injunction enjoining respondents from enforcing or implementing the appealed decision of respondent Court of

Appeals, upon petitioner's posting a bond of P50,000.00 (Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p. 619). The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents was filed on September 20, 1971 (Rollo, p. 655). The Reply Brief was filed on December 6, 1971 (Rollo, p. 678). On April 2, 1971 respondent PCIB filed a motion for leave to lease real estate properties in custodia legis, more specifically the 31, 447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT No. 286176 (Rollo, p. 697). Petitioner filed its opposition to the motion on May 27, 1971 (Rollo, p. 712). The reply to the opposition was filed on December 6,1971 (Rollo, p. 730); the rejoinder to respondent PCIB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case was transferred to the Second Division, by a Resolution of the First Division dated January 17, 1983 (Rollo, p. 752). The issues raised in this case are the following: 1. WHETHER OR NOT RESPONDENT COURT ERRED IN FINDING THAT THE LOWER COURT DID NOT COMMIT AN ABUSE OF DISCRETION IN DENYING PETITIONER'S APPLICATION FOR A PRELIMINARY INJUNCTION AND DISSOLVING THE RESTRAINING ORDER PREVIOUSLY ISSUED. (Brief for Petitioner, pp. 21-47); 2. WHETHER OR NOT RESPONDENT COURT ERRED IN DECLARING VALID THE FORECLOSURE SALE ON MAY 9,1969 OF THE MORTGAGED PROPERTIES EN MASSE WHEN THEY REFER TO SEVERAL REAL ESTATE MORTGAGES EXECUTED ON DIFFERENT DATES. (Brief for Petitioner, pp. 47-50). The main issue is whether or not private respondents have the right to the extrajudicial foreclosure sale of petitioner's mortgaged properties before trial on the merits. The answer is in the negative. Petitioner filed Civil Case No. 11015 in the Court of First Instance of Rizal, Branch II, to obtain judgment (1) enjoining defendants (respondents herein) from proceeding with the foreclosure sale of the subject real estate mortgages, (2) fixing a new period for the payment of the obligations of plaintiff to defendant PCIB sufficiently long to enable it to recover from the effects of defendant PCIB's inequitable acts, (3) ordering defendant PCIB to immediately give up management of plaintiffs canning industry and to pay plaintiff such damages as it may prove in the concept of actual, compensatory and exemplary or corrective damages, aside from attorney's fees and expenses of litigation, plus costs (Rollo, p. 98). It is to be noted that petitioner filed the above case mainly to forestall the foreclosure sale of the mortgaged properties before final judgment. The issuance of a writ of preliminary injuction could have preserved the status quo of the parties in relation to the subject matter litigated by them during the pendency of the action (Lasala v. Fernandez, 5 SCRA 79 [1962]; De Lara v. Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969]. When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it had previously issued, in its order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated the case before trial on the merits.

While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank (Brief for Petitioner, pp. 7-11), there were matters that needed the preservation of the status quo between the parties. The foreclosure sale was premature. First was the question of whether or not petitioner corporation was already in default. In its letter dated August 12,1966 to petitioner corporation, among the conditions that respondent bank set for the consolidation of the outstanding obligations of petitioner was the liquidation of the said obligations together with the latter's other obligations in the financing scheme already approved by the NIDC and PDCP. To quote: a) These facilities shall be temporary and shall be fully liquidated, together with other obligations from a refinancing scheme already approved by the NIDC and PDCP totalling Pl million in equity and P2.6 million in long term financing. In this connection, the firm shall present to this Bank a certified copy of the terms and conditions of the approval by the NIDC and PDCP. (Brief for the Respondent, p. 41). In other words, the loans of petitioner corporation from respondent bank were supposed to become due only at the time that it receives from the NIDC and PDCP the proceeds of the approved financing scheme. As it is, the conditions did not happen. NIDC refused to make further releases after it had made two releases totalling P200,000.00 which were all applied to the payment of the preferred stock NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme (Brief for Petitioner, p. 9). The efficacy or obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain event so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed (Gaite v. Fonacier, 2 SCRA 831 [1961]).<re||an1w> Petitioner corporation alleges that there had been no demand on the part of respondent bank previous to its filing a complaint against petitioner and Rene Knecht personally for collection on petitioner's indebtedness (Brief for Petitioner, p. 13). For an obligation to become due there must generally be a demand. Default generally begins from the moment the creditor demands the performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default will not arise (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973]; Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]). Whether petitioner corporation is already in default or not and whether demand had been properly made or not had to be determined in the lower court. Granting that the findings of the lower court after trial on the merits answer both questions in the affirmative, another question that had to be determined was the question of cause or consideration. The loan agreements between petitioner and respondent Bank are reciprocal obligations (the obligation or promise of each party is the consideration for that of the other Penacio v. Ruaya, 110 SCRA 46 [1981], cited. in Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985] ). A contract of loan is not a unilateral contract as respondent Bank thinks it is (Brief for the Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of respondent bank to furnish the loan (Ibid.).

Respondent bank had complete control of the financial affairs and the management of petitioner corporation. It appointed its executive vice-president Roberto S. Benedicto as its representative in petitioner's board of directors, giving him the position of vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S. Benedicto as vice-president and member of the board of directors of petitioner corporation on December 29, 1965 (Brief for Petitioner, p. 8), respondent bank designated Rafael Ledesma as its representative in petitioner corporation's board of directors, due representation in the board of petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). In fact, Rafael Ledesma was designated Chairman of the Board of Directors (Rollo, p. 169). Respondent bank required petitioner to appoint Sycip, Gorrez, Velayo & Co. as full-time comptrollertreasurer of the corporation at a monthly salary of P1,500.00 (Brief for Petitioner, p. 9; Brief for the Respondent, p. 41). On January 2, 1967, it also required petitioner to replace its then manager, the Management & Investment Development Associates (MIDA) and to appoint instead Edmundo Ledesma at a monthly salary of P3,000.00 and transportation allowance of P1,000.00 plus an assistant manager, Venancio Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by defendant's designated manager, no meeting of the board of directors of petitioner was called- Edmundo Ledesma exercised full control and management (Brief for Petitioner, pp. 10-11; Rollo, p. 167). Respondent Bank has not given up management of petitioner's food canning industry and continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied by respondent bank. Respondent bank's designation of its own choice of people holding key positions in petitioner corporation tied the hands of petitioner's board of directors to make decisions for the interest of petitioner corporation, in fact, undermined the latter's financial stability. During the 18 months of Edmundo Ledesma's management, petitioner's factory produced some P200,000.00 worth of canned goods which according to petitioner is only equivalent to its normal production in three weeks (Brief for Petitioner, pp.10-11). Respondent bank justifies the underproduction by averring that petitioner at that time did not have sufficient capital to operate the factory, and that said factory was only operating for the purpose of avoiding spoilage and deterioration of the raw materials then in store at the petitioner's factory (Rollo. p. 168) and yet respondent bank insists, that it had released the entire amount of P500,000.00 loan to petitioner (Rollo, p. 167) earmarked for operating capital purposes (Brief for the Respondent, p. 43) and admits having granted a P40,000.00 loan at a higher interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo, p. 167). After the Development Bank of the Philippines had approved on June 29, 1967 a loan of P1,840,000.00 applied for by petitioner in 1961, respondent bank informed of the availability of P800,000.00 to pay off partially petitioner's account with it and requested to release the titles of the Pasig parcels for delivery to the Development Bank of the Philippines, and the amount actually released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's board of directors wrote a letter to the Development Bank of the Philippines stating that Rene Knecht, petitioner's president, had no authority to borrow for petitioner, being a mere figurehead president, although Rene Knecht, controlled 87% of the stockholding of petitioner and the by-laws authorized the president to borrow for the company (Brief for Petitioner, pp. 11-13).<re||an1w> That Rafael Ledesma wrote a letter to the Development Bank of the Philippines is admitted by respondent bank (Rollo, p. 169). The Development Bank of the Philippines refused to

make further releases on the approved loan or to issue the dollar guaranty for the importation of can making machinery. It was Atty. Juan de Ocampo, the corporate counsel retained by petitioner at the insistence of respondent bank that instituted the collection suit and extra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo, p. 79). It is apparent that it is respondent bank practically managing petitioner corporation through its representatives occupying key positions therein. Not even the president of petitioner corporation could escape control by respondent bank through the Comptroller Treasurer assigned "to countersign all checks and other disbursements and decide on all financial matters regarding the operations and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41). There is basis for petitioner's complaint of interference by respondent bank with petitioner's financing (Brief for Petitioner, pp. 3132) and such interference is only a consequence of respondent bank's management of petitioner corporation through the officers occupying key positions therein. Thus, if ever petitioner corporation was in financial straits instead of being rehabilitated this can be attributed to the mismanagement of respondent corporation through its representatives in petitioner corporation. In a similar case, Filipinas Marble Corporation v. Intermediate Appellate Court (142 SCRA 180 [1986]) where the lending institution took over the management of the borrowing corporation and led that corporation to bankcruptcy through mismanagement or misappropriation of the funds, defeating the very purpose of the loan which is to develop the projects of the corporation, the Court ruled that it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent DBP to deliver the consideration for which the mortgage and the assignment of deed were executed. It cannot be determined at this point how much of the total loan, most especially the P500,000.00 loan for operating capital and the P40,000.00 loan of the manager, Edmundo Ledesma, had been mismanaged or misspent by respondent bank through its representatives. This matter should rightfully be litigated below in the main action (Filipinas Marble Corportion v. Intermediate Appellate Court. (supra). Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan agreement. By its own admission it failed to release the P710,000.00 loan (Rollo, p. 167) it approved on October 13, 1966 (Brief for Respondent, p. 44) in which case, petitioner corporation, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages in either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]). As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed to satisfy its total debt to respondent bank. (Central Bank of the Philippines v. Court of Appeals, supra.) The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not must be answered in the negative. The rule of indivisibility of a real estate mortgage refers to the provisions of Article 2089 of the Civil Code, which provides: Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as the debt is not completely satisfied. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. Respondent bank cites the above-quoted article in its argument that the mortgage contract is indivisible and that the loan it secures cannot be divided among the different lots (Brief for Respondent, p. 27). Respondent Court upheld the validity of the sale en masse (Rollo, p. 246). The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor or creditor which does not obtain in this case (Central Bank of the Philippines v. Court of Appeals, supra.) Furthermore, granting that there was consolidation of the entire loan of petitioner corporations approved by respondent bank, the rule of indivisibility of mortgage cannot apply where there was failure of consideration on the part of respondent bank for the mismanagement of the affairs of petitioner corporation and where said bank is in default in complying with its obligation to release to petitioner corporation the amount of P710,000.00. In fact the real estate mortgage itself becomes unenforceable (Central Bank of the Philippines v. Court of Appeals, supra). Finally, it is noted that as already stated hereinabove, the exact amount of petitioner's total debt was still unknown. PREMISES CONSIDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it sustained: (a) the lower court's denial of petitioner's application for preliminary injunction and (b) the validity of the foreclosure sale; (2) the lower court is ordered to proceed with the trial on the merits of the main case together with a determination of exactly how much are petitioner's liabilities in favor of respondent bank PCIB so that proper measures may be taken for their eventual liquidation; (3) the preliminary injunction issued by this Court on April 28, 1971 remains in force until the merits of the main case are resolved; and (4) the motion of respondent bank dated April 1, 1981 for leave to lease the real properties in custodia legis is DENIED. SO ORDERED.

BPI Investment Corporation vs. Court of Appeals and ALS Mgt. & Dev. Corp. G.R. No. 133632 | Feb. 15, 2002

Facts: Frank Roa obtained a loan with an interest rate of 16 % per annum from Ayala Investment and Development Corporation, predecessor of BPIIC. To secure the loan, Roa's house and lot were mortgaged. Later, Roa sold the house and lot to ALS and Antonio Litonjua, who assumed Roa's P500,000 debt with Ayala Investment. Ayala Investment, however, was unwilling to grant ALS and Litonjua the same interest rate so they granted a new loan to be applied to Roa's debt, secured by the same property at a different interest rate of 20% per annum. The amortization for this loan was to begin on May 1, 1981. In Aug. 1982, BPIIC applied the loan of ALS and Litonjua to the balance of Roas debt, P457,204.90. However it was only on Sept. 13, 1982 that BPIIC released P7,146.87, the balance of the loan after applying the proceeds to the full payment of Roas loan.

Held: A loan contract is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. Although a perfected consensual contract can give rise to an action for damages, it does not constitute a real contract which requires delivery for perfection. A perfected real contract gives rise only to obligations on the part of the borrower. In this case, the loan contract was only perfected on Sept. 13, 1982, which was the second release of the loan. The payment of amortization should accrue from the time BPIIC released the loan amount to ALS and Litonjua because it was only at that time (the delivery of the amount -- the object of the contract) that the loan contract was perfected. A contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. In reciprocal obligations neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. It is only when a party has performed his part of the contract can he demand that the other party also fulfills his own obligation and if the latter fails, default sets in.

In June 1984, BPIIC instituted the foreclosure of mortgage alleging that ALS and Litonjua failed to pay their debt from May 1, 1981 up to June 30, 1984.

On Feb. 28, 1985, ALS and Litonjua filed a civil case against BPIIC alleging that they were not in arrears in their payment, but they in fact made an overpayment as of June 30, 1984. They contend that they should not be made to pay amortization before the actual release of the P500,000 loan in Aug. and Sept. 1982. And that out of the P500,000 loan, only the total amount of P464,351.77 was released to them, thus, the balance of P35,648.23 should be applied to the initial monthly amortization for the loan.

Thus, BPIIC could only demand payment of amortization after Sept. 13, 1982 for it was only then that it complied with its obligation under the loan contract. Therefore, in computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is Oct. 13, 1982 and not May 1, 1981.

The trial court rendered a judgment in favor of ALS and Litonjua holding that the amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77 and that suffered compensable damages when BPI caused their publication in a newspaper of general circulation as defaulting debtors. This was affirmed by the CA which also ruled that a simple loan is perfected upon the delivery of the object of the contract, thus, the loan contract in this case was perfected only on Sept. 13, 1982.

BPIIC claims that a contract of loan is a consensual contract, and a loan contract is perfected at the time the contract of mortgage is executed.

Issue: WON a contract of loan is a consensual contract? NO.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22001 November 4, 1924

payment thereof is judicially demanded, although the obligation may be silent on the matter. As to the part of the judgment sentencing all the defendants to pay the plaintiff the sum of P50,000, it is necessary to take into account the previous transactions that gave rise to this liability of the defendants. Lichauco & Company, Inc., owed the plaintiff a large sum by way of loan. On September 5, 1921, Faustino Lichauco and his wife Luisa F. de Lichauco executed a document (Exhibit C) in favor of the plaintiff whereby they secured with a mortgage upon the property described in the document the payment of a part of this loan in the amount of P50,000 with interest at 9 per cent per year. It was agreed that in case of non-fulfillment of the contract, this mortgage would stand as security also for the payment of all the costs of the suit and expenses of any kind, including attorney's fees, which by way of liquidated damages are fixed at 5 per cent of the principal. It is stated lastly in this document that if Faustino Lichauco and Luisa F. de Lichauco should fail to pay this amount of P50,000, the mortgage shall be in full force and effect. On the 20th of December, 1922, Lichauco & Co., Inc., Faustino Lichauco, and Luisa F. de Lichauco executed another document (Exhibit D) in which, among the other things, they ratified the former mortgage and stated that the payment of the P50,000 shall continue to be secured in the same manner and with the same property, and shall earn interest at 12 per cent per year from October 20, 1920. 1awphil.net The appellants argue in this court that the obligation of Faustino Lichauco and Luisa F. de Lichauco lacked consideration, because what they guaranteed with this mortgage was a debt of Lichauco & Co., Inc. This contention does not find support in law. As a mortgage is an accessory contract, its consideration is the very consideration of the principal contract, from which it receives its life, and without which it cannot exist as an independent contract, although, as in the instant case, it may secure an obligation incurred by another (art. 1857 of the Civil Code). That this amount of P50,000 is to earn interest, and that 5 per cent must be paid in addition for judicial expenses and attorney's fees, was expressly stipulated in the contract. The trial court, however, fixed this interest at 12 per cent from September 5, 1921, which we believe is an error. In the contract of December 20, 1922, it was stipulated that from October 20, 1920, the interest must be 12 per cent. Undoubtedly a clerical error was committed in the writing of this date, inasmuch as then Faustino Lichauco and Luisa F. de Lichauco had not executed the mortgage yet. The lower court held that this date must be September 5, 1921, but this view is groundless, since in the contract of September 5, 1921, this interest was fixed at 9 per cent. This date must, therefore, be construed to be the date of the second contract, December 20, 1922, as it cannot be presumed that the parties ever intended to make it effective from a former date. For the foregoing, it being understood that the defendants must pay interest at 9 per cent from September 5, 1921, and 12 per cent from December 20, 1922, the judgment appealed from is affirmed in all other respects, without special pronouncement as to costs. So ordered.

CHINA BANKING CORPORATION, in substitution of Filipinas Compania de Seguros, plaintiffs-appellee, vs. FAUSTINO LICHAUCO, ET AL., defendants-appellants. Jose A. Espiritu for appellants. Feria and La O and P. J. Sevilla for appellee.

AVANCEA, J.: The dispositive part of the judgment appealed from is literally as follows: For all of the foregoing it is adjudged and decreed that the defendant Faustino Lichauco be, as is hereby, sentenced to pay the plaintiff the sum of P21,500, with interest at 12 per cent per year from September 13, 1922 until full payment thereof, and in addition, interest at 6 per cent per annum from the filing of the complaint upon P1,935, interest of the sum claimed for 9 months prior to the filing of the complaint, and of such sums as subsequently have become or may become due, from their respective dates of maturity until the payment of said interest; he is further sentenced to pay the sum of P14,200 as fees of plaintiff's attorney, expenses and troubles caused by the litigation for the collection of said sum of P21,500, with interest thereon; and all the defendants are sentenced to pay the sum of P50,000 with interest at the rate of 12 per cent per annum from September 5, 1921, capitalized monthly to earn the same interest as the principal, until full payments thereof, and in addition 5 per cent of P50,000 and the interest due at the time of the filing of the complaint, as costs of suit and other expenses of whatever kind, including attorney's fees, incurred by the plaintiff for the recovery of said sum, and it is ordered that the payment of all these amounts be made within three months from the date of the judgment and that in case of nonpayment of all these amounts within the aforesaid period, the mortgaged property be sold for the payment of the amount or amounts not paid. The judgment appealed from contains a complete and exact statement of all the facts from which the liability of the defendants arose. There is no question in this appeal but that the defendant Faustino Lichauco owes the plaintiff the sum of P21,500, with interest thereon at the rate of 12 per cent per year from September 13, 1922. Nor is there about the fact that, at the filing of the herein complaint, Faustino Lichauco owed the sum of P1,935, as interest for the preceding nine months. But it is alleged that the lower court erred in allowing legal interest at the rate of 6 per cent from the filing of the complaint upon this sum of P1,935, the amount of interest due on that date. This is no error. Article 1109 of the Civil Code expressly provides that interest due shall earn legal interest from the date

Celestina Naguiat v. Court of Appeals, et al., G.R. No. 118375, 3 October 2003 FACTS: Queao applied with Naguiat for a loan in the amount of P200,000.00, which Naguiat granted. Naguiat indorsed to Queao Associated Bank Check No. 090990 for the amount of P95,000.00, which was earlier issued to Naguiat by the Corporate Resources Financing Corporation. She also issued her own Filmanbank Check No. 065314, to the order of Queao, also dated 11 August 1980 and for the amount of P95,000.00. The proceeds of these checks were to constitute the loan granted by Naguiat to Queao. To secure the loan, Queao executed a Deed of Real Estate Mortgage. On the same day, the mortgage deed was notarized, and Queao issued to Naguiat a promissory note for the amount of P200,000.00, with interest at 12% per annum. Queao also issued a check for the amount of P200,000.00 and payable to the order of Naguiat. Upon presentment on its maturity date, the P200,000 check was dishonored for insufficiency of funds. Queao requested Security Bank to stop payment of her postdated check, but the bank rejected the request pursuant to its policy not to honor such requests if the check is drawn against insufficient funds. Queao received a letter from Naguiats lawyer, demanding settlement of the loan. Queao told Naguiat that she did not receive the proceeds of the loan, adding that the checks were retained by Ruebenfeldt, who purportedly was Naguiats agent. Naguiat applied for the extrajudicial foreclosure of the mortgage. Three days before the scheduled sale, Queao filed the case before the Pasay City RTC, seeking the annulment of the mortgage deed. ISSUE: Whether or not the issuance of the checks did not result in the perfection of the contract of loan?

HELD: NO. Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only when they have been cashed.20 It is only after the checks have produced the effect of payment that the contract of loan may be deemed perfected. Art. 1934 of the Civil Code provides: "An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract." A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the object of the contract. In this case, the objects of the contract are the loan proceeds which Queao would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If indeed the checks were encashed or deposited, Naguiat would have certainly presented the corresponding documentary evidence, such as the returned checks and the pertinent bank records. Since Naguiat presented no such proof, it follows that the checks were not encashed or credited to Queaos account.

[G.R. No. 115324. February 19, 2003] PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK) vs. HON. COURT OF APPEALS AND FRANKLIN VIVES FACTS: Franklin Vives was asked by his neighbor and friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services (Sterela for brevity). Sanchez asked F. Vives to deposit in a bank a P200,000.00 in the bank account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his money from said account within a months time. Private respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name of Sterela in the Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter from Doronilla authorizing Sanchez and her companions, in coordination with Mr. Rufo Atienza, to open an account for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives. Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to him. They then went to the Bank to verify if their money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00 remained therein and told them that Mrs. Vives could not withdraw said remaining amount because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts necessary to cover overdrawings in Current Account No. 10-0320. Private respondent tried to get in touch with Doronilla through Sanchez. Doronilla issued a postdated check for P212,000.00 in favor of private respondent. However, upon presentment thereof the check was dishonored. Private respondent instituted an action for recovery of sum of money and criminal case in the RTC against Doronilla, Sanchez, Dumagpi and petitioner. The RTC promulgated its Decision in Civil Case rendered defendants liable jointly and severally the amount of P200,000.00, moral damages, exemplary damages, attorneys fees, the costs of the suit. The appellate court affirmed in toto the decision of the RTC. It likewise denied with finality petitioners motion for reconsideration. Hence, this present petition.

ISSUE: WHETHER THE TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION.

RULING: A circumspect examination of the records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise: By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous.Simple loan may be gratuitous or with a stipulation to pay interest.In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the contract would be a mutuum. However, there are some instances where a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code provides: Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is a commodatum and not a mutuum. The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in such determination. As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear that said firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30) days. Private respondent merely accommodated Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterelas savings account and would be returned to private respondent after thirty (30) days.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

the property within the redemption period of one (1) year from the date the certificate of sale was registered. The deed of sale was presented to the Register of Deeds of Manila who issued Transfer Certificate of Title No. 136368 in the name of Masantol Bank. After it had consolidated its ownership of the Barrio Obrero house and lot, Masantol Bank filed in the Regional Trial Court of Manila, Branch 4 sitting as a land registration court, an ex parte motion for issuance of a writ of possession. 4 The land registration court allowed the Soriano spouses time to controvert the allegations in the motion filed by Masantol Bank but the period granted them lapsed without their having filed any pleading. On 18 August 1981, the land registration court issued an Order the dispositive portion of which reads as follows: WHEREFORE, let the corresponding writ of possession be issued directing the Sheriff of Manila or his duly authorized representative to place the herein petitioner in possession of the property described in said Transfer Certificate of Title No. 136368 and to eject therefrom the mortgagors, occupants, lessees, representatives and all persons claiming rights under them. SO ORDERED. 5 The Soriano spouses questioned the above Order granting the writ of possession before this Court in G.R. No. 69171; however, the petition for certiorari and mandamus was referred by the Court to the Intermediate Appellate Court on 26 November 1984. On 28 November 1984, the Intermediate Appellate Court restrained the enforcement of the writ of possession. The restraining order was later lifted and vacated when the Intermediate Appellate Court eventually dismissed the petition in its Decision dated 8 April 1985. The Soriano spouses filed a motion for reconsideration which was denied. On 30 May 1985, the Soriano spouses filed with us a petition for review of the decision and resolution of the Intermediate Appellate Court, now docketed as G.R. No. 70937. The Court issued a temporary restraining order enjoining enforcement or implementation of the writ of possession dated 18 August 1981. 6 The Soriano spouses alleged in their petition for review that the Intermediate Appellate Court had erred 1. In sustaining the writ of possession issued by the respondent land registration court upon a reliance on private respondent's alleged "title" to the controverted property; 2. In ruling that the respondent land registration court did not commit grave abuse of discretion amounting to lack of jurisdiction in issuing the questioned writ considering that: a. private respondent's alleged title was illegal and void and; b. serious questions and objections affecting said title raised in the summary proceedings. 3. In applying to the case before it the doctrine enunciated IFC Service Leasing and Barrameda. Earlier, i.e. on 21 May 1984 pending litigation of the validity of the writ of possession, Remedios Soriano who had been separated from her husband for a period of at least one

G.R. No. 97132 December 10, 1991 MASANTOL RURAL BANK, INC., petitioner, vs. THE HON. COURT OF APPEALS and REMEDIOS B. SORIANO, respondents. G.R. No. 70937 December 10, 1991 SPS. ANTONIO SORIANO and REMEDIOS B. SORIANO, petitioner, vs. HON. INTERMEDIATE APPELLATE COURT (Third Special Cases Division), HON. HERMINIO C. MARIANO (Presiding Judge, Regional Trial Court of Manila, Branch IV), THE SHERIFF OF MANILA and MASANTOL RURAL BANK, INC., respondents. Andres B. Soriano & Associates Law Office for Sps. Antonio and Remedios Soriano. Gono Law Office for Masantol Rural Bank.

FELICIANO, J.:p Petitioner spouses Antonio and Remedies Soriano in G.R. No. 70937 urge the Court to set aside the Order of the Regional Trial Court of Manila in LRC Record No. 302 granting a writ of possession to private respondent therein, the Masantol Rural Bank, Inc. ("Masantol Bank"), which Order was affirmed by the then Intermediate Appellate Court in its Decision and Resolution in A.C.- G.R. SP No. 04821. Upon the other hand, petitioner Masantol Bank in G.R. No. 97132 seeks to annul the Decision of the Regional Trial Court of Manila in Civil Case No. 84-24524 declaring its auction sale and consolidation of ownership of the property owned by private respondent Soriano spouses null and void ab initio, which Decision was affirmed by the Court of Appeals in C.A.-G.R. CV No. 21337. The spouses Antonio Soriano and Remedies Soriano had, on two occasions, obtained from Masantol Bank three (3) loan accounts in the aggregate amount of P25,000.00. Each loan was covered by a promissory note and secured by a real estate mortgage constituted over a parcel of land and house owned the Soriano spouses located at 3392 J.C. Cruz, Barrio Obrero Tondo, Manila. The real estate mortgage contained a special power of attorney authorizing Masantol Bank to foreclose the property extrajudicially in the event the Soriano spouses de faulted on their obligations. 1 Because the Soriano spouses were unable to pay their indebtedness on the dates of each of the loans respectively fell due Masantol Bank caused the mortgaged property to be foreclose extrajudicially. The auction sale was initially scheduled for 2 October 1977 but for one reason or another, it did not take place on that date. At the auction sale subsequently held on 22 June 1978, Masantol Bank was the lone bidder and bought the mortgaged property for the sum of P38,280.44. The Sheriff of Manila who conducted the auction sale then executed a certificate of sale 2 in the name of Masantol Bank which, in turn, had the fact of sale annotated on the back of the certificate of title standing in the name of the Soriano spouses. On 10 December 1979, Masantol Bank, as attorney-in-fact, executed a deed of sale 3 assigning the property to itself for failure of the Soriano spouses to redeem

year, filed complaint in the Regional Trial Court of Manila, Branch 26 seeking, among other things, the annulment of: (1) the auction sale held on 22 June 1978 of the foreclosed Barrio Obrero property; (2) the deed of sale executed in favor of Masantol Bank; and (3) the transfer certificate of title issued in the name of Masantol Bank. After the issues were joined, the case proceeded to trial. On 20 July 1987, the trial court rendered decision with the following dispositive portion: WHEREFORE, premises considered, judgment is hereby rendered declaring the foreclosure sale and consolidation of ownership Masantol Rural Bank, Inc. of the property covered by Transfer Certificate of Title No. 22324 null and void ab initio; and ORDERS the following: (a) the cancellation of Transfer Certificate of Title No. 136368 in the name of Masantol Rural Bank, Inc. and the reinstatement Transfer Certificate of Title No. 22324 in the name of Antonio Soriano and Remedios B. Soriano; (b) the defendant Masantol Rural Bank, Inc. to allow the plaintiff Remedios B. Soriano to redeem the mortgaged property covered by Transfer Certificate of Title No. 22324 in the amount of twenty five thousand (P25,000.00) pesos plus interest from the dates of the loan to June 1980, when plaintiff first offered to redeem the property; (c) the defendant Masantol Rural Bank, Inc. to pay the plaintiff the amount of P10,000.00 as moral and exemplary damages; and pay the cost of litigation. No award is ordered for attorney's fees. SO ORDERED. 7 On appeal to the Court of Appeals, the trial court's decision was affirmed except that the award of P10,000.00 for moral and exemplary damages was deleted. Masantol Bank accordingly filed the instant Petition for Review docketed as G.R. No. 97132. Its position is anchored on the following grounds: 1. Resolution No. 542, Series of 1956 of the Municipal Board of the City of Manila and the case of Citizens' Surety Insurance Co., Inc. vs. Hon. Ricardo Puno, et al. (119 SCRA 216 [1982]) are not applicable to the instant case. 2. Under the prevailing circumstances, the foreclosure auction sale and consolidation of ownership cannot be declared null and void ab initio. 3. The redemption of the mortgaged property, and the suspension of the running of interest from June 1980 are without basis in law. 4. The issue of republication was not admitted as an issue in the trial court and therefore should not have been pawed upon by the Court of Appeals. 8

Ordinarily, G.R. No. 97132, as the case with the higher or later general records number, should have been consolidated with G.R. No. 70937. However, since the principal litigated in G.R. No. 70937, i.e., the validity of the writ of possession issued on the basis of Masantol Bank's title, is peripheral to the principal issue in G.R. No. 97132 where the validity of Masantol Bank's title itself is directly questioned, the Court decided to consolidate G.R. No. 70937 with G.R. No. 97132. The ultimate question of the validity of Masantol Bank's title to the house and lot in Barrio Obrero relates to two (2) issues: firstly, the issue of whether or not Masantol Bank was legally qualified to acquire ownership of the house and lot in Barrio Obrero; and secondly, the issue of whether or not the necessary notices for the foreclosure auction sale at which Masantol Bank bought the Barrio Obrero real property had been given. Turning to the first issue, the complete text of Resolution No. 168, as amended by Resolution No. 542, of the Municipal Board of the City of Manila, dated 29 November 1956, reads as follows: RESOLVED, That Resolution No. 168, Series of 1922, as Amended by Resolution No. 218, Series of 1946, Resolution No. 228, Series of 1948, Resolution No. 66, Series of 1950 and Resolution No. 283, Series of 1954 be, and the same hereby is, further amended, by deleting Item No. 6 therefrom, so that same shall read as follows: BE IT RESOLVED by the Municipal Board of the City of Manila that: The following shall be the plan in establishing the Barrio Obrero: 1. The Barrio Obrero shall be parcelled out in accordance wit the plan now under preparation by the City Engineer. 2. Each lot, according to said plan, shall contain 108 square meters with a frontage of 9 and a depth of 12 meters. 3. Not more than one lot shall be sold to a person or person belonging to the same household. 4. Only Filipino laborers who are bona fide residents in Manila whose wages do not exceed P180.00 per month, or P6.00 per day, according as they receive monthly or daily compensation shall have the privilege of buying lots in the Barrio. 5. Only residential houses shall be built in the Barrio. xxx xxx xxx 7. The lots shall be paid for at a price to be fixed by the Appraisal Committee within ten years in 120 equal monthly installments, an shall be mortgaged in favor of the City to guarantee payment of the entire price: Provided, That non-payment of six consecutive installments shall be considered sufficient cause for the forfeiture of laborer's right to purchase and of all the installments previously paid. 8. The awarding of lots shall be done by lot. (Emphasis supplied)

In Citizens' Surety and Insurance Co., Inc. v. Judge Rica C. Puno, et al ., 9 Maria Barcelon, owner of a piece of land in Barrio Obrero, mortgaged the land to Citizens' Surety a Insurance Co., Inc. (Citizens') to secure a loan. Citizens' or closed the mortgage extrajudicially when the loan was not paid. Citizens' bought the land at the foreclosure sale and, expiration of the period of redemption, sought to consolidate in ownership. The Register of Deeds of Manila refused to register the consolidation. Citizens' then brought suit against Register of Deeds and the City of Manila, praying that Resolution No. 542 of the City of Manila be declared null and void and the Register of Deeds ordered to register the consolidation of title. The trial Judge dismissed the suit. The Court, in affirming the decision of the trail court, held the Citizen's, being a corporate entity, was not qualified to acquire the lot and hence not competent to raise the question of invalidity of Resolution No. 542. In effect, the Court held that only persons qualified under paragraph 4 of Resolution No. 542 (quoted above) could acquire ownership of a Barrio Obrero lot whether the sale be a voluntary one or a forced sale on execution. Remedies Soriano invokes and relies upon the Citizens' Surety case. Upon the other hand, Masantol Bank, a juridical entity licensed by the Central Bank to operate as a rural bank, in effect asks us to re-examine and overrule Citizens' Surety and to hold that paragraph 4 of Resolution No. 542 is not applicable to a subsequent purchaser in an auction sale of a Barrio Obrero lot. We believe that the rule in Citizens' Surety should be reaffirmed. As noted earlier, Resolution No. 542, amended Resolution No. 168, as previously amended by deleting paragraph 6 from Resolution No. 168, which deleted paragraph read as follows: 6. No lot shall be transferred, leased, mortgaged or otherwise encumbered without the express approval of the Mayor of the City of Manila. The mortgage or other encumbrance shall not be for an amount greater than the original purchase price nor for a period of more than five (5) years: Provided, however, that in case of foreclosure or auction sale, the City of Manila reserves the right to redeem the lot so foreclosed at not more than the price of its original acquisition excluding necessary costs and expenses. Clearly, the deleted paragraph 6 had imposed onerous limitations in respect of mortgages established on Barrio Obrero lots: (a) the Mayor of the City of Manila had to approve transfers, leases, or mortgages of a Barrio Obrero lot; (b) a loan secured by the mortgage could not exceed the original purchase price of the lot nor could the life of the mortgage exceed five (5) years; and (c) in case of a foreclosure or auction sale, the City of Manila had a right to redeem the lot at not more than the original selling price to the mortgagor. Deletion of paragraph 6 thus indicated an intent on the part of the Municipal Board to mitigate th restrictions attaching to Barrio Obrero lots. By the same token, however, the Municipal Board had the opportunity to exclude foreclosures or auction sales from the application of paragraph 4; the Municipal Board did not, however, choose to do so and did not go beyond deleting paragraph 6. The Court is aware th the rule in Citizens' Surety does not necessarily make good economic or financial sense. It is not even necessarily good the Filipino laborers or lowly-paid employees themselves who must expect to find difficulties in securing bank credit since banks would naturally be reluctant to accept Barrio Obrero lots as collateral if the banks cannot bid for such lots even to a themselves from loss in case of default. Moreover, there realistically would not be many Filipino laborers resident in Manila whose wages do not exceed P180.00 a month or P6.00 a day (or perhaps, the current minimum daily wage of P118.00) who would be in a position to bid for and purchase a Barrio Obrero lot in a foreclosure sale. We believe, however, that further modification of

Resolution No. 168 as amended by Resolution No. 542 should be left to the Municipal Board of Manila, that the Municipal Board should be given the opportunity to correct the difficulty posed by the unqualified language of paragraph just as the Board corrected some of the difficulties created by the restrictions in the original paragraph 6 of Resolution 168. It is essential to note, however, that the application of the rule in Citizens 'Surety does not in any way affect the validity or th enforceability of the mortgage lien held by Masantol Bank; the mortgage lien continues to be good and valid and effective a against the debtor and the whole world. The obligation secure by the mortgage remained valid and enforceable and that obligation could be enforced by foreclosure so long as the successful bidder is a person qualified under paragraph 4 of Resolution No. 542. There is another reason why the sale in favor of the mortgagee Masantol Bank must be set aside: Masantol Bank failed comply with the requirements of publication. Act No. 3135, amended, which governs the extrajudicial foreclosure of mortgages on real property specifies the following publication requirements: Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city . (Emphasis supplied) Republic Act No. 720, as amended, the Rural Banks Act, provided; for exemption of foreclosures of mortgages securing loans granted by rural banks in the case of loans not exceeding P10,000.00 (including interest due and unpaid). The loans secured by the mortgage on the Obrero lot in favor of Masantol Bank were well in excess of P10,000.00. Notice of the first auction the scheduled for 20 October 1977 had been duly published as required by Section 3 of Act No. 3135, amended. No auction sale, however, took place on that day. The auction sale during which Masantol Bank bought the property as sole bidder was conducted eight (8) months later, on 22 June 1978. Masantol Bank alleged that there was re-publication of the notice of the 22 June 1978 auction sale; Remedies B. Soriano contends otherwise. The evidence submitted by Masantol Bank as tending to prove its compliance with the publication requirement in respect of the 22 June 1978 auction sale, consisted simply of the testimony of Atty. Venancio Viray 10 and a provisional receipt of payment of the alleged publication expenses signed by a stenographer of the newspaper Economic Monitor. 11 Remedies Soriano, upon the other hand, presented a solicitor of the Economic Monitor where the notice of auction sale was supposed to have been published who testified that he had not seen from their records any document indicating that the notice of auction sale was in fact published. 12 It is settled doctrine that failure to publish the notice of auction sale as required by the statute constitutes a jurisdictional defect which invalidates the sale. 13 The Court is not persuaded either that the evidence presented by Masantol Bank sufficiently established its compliance with the statuto requirement of notice, or that the testimony of Remedios Soriano's witness showed non-compliance with such requirement. In Tambunting v. Court of Appeals, 14 this Court said One issue of a newspaper of general circulation is not substantial compliance with the required publication of once (1) a week for at least three (3) consecutive weeks. Petitioners claim the publisher's affidavit of publication is merely a customary proof, hence, it should not be considered as the sole evidence of publication. That may be so in the presence of equally convincing evidence. In the case at bar, however

there is no such other proof of publication. To show compliance, the published notices and certificate of posting by the sheriff of the notice sale of 26 January 1968 should have been presented. They do no appear in the record. Neither can the sale be considered as an adjournment of an earlier sale under Sec. 24 of Rule 39 of the Rules of Court As correctly posed by the Court of Appeals, why was there one (1) publication of the notice of sale scheduled on 26 January 1968? The presumption of compliance with official duty has been rebutted by the failure to present proof of posting and publication of the notice of sale of 26 January 1968. (Emphasis supplied) Masantol Bank argues that the issue on publication or re-publication of notice of auction sale should not have been passed upon by the Court of Appeals, since that issue had not been admitted as such at the pre-trial of the case. The pre-trial order of the trial court dated 25 April 1985 had narrowed down the issues to the following: (a) the validity of the auction sale of 2 June 1978; (b) the applicability of Resolution No. 542, Series of 1956, of the Municipal Board of the City of Manila; and (c) the amount of damages each party may be entitled to claim from the other. While the issue of re-publication had not been specifically identified and included in the above list of issues, that issue is properly deemed included within the broader question relating to the validity of the auction sale. We turn to the question of suspension of the running or accruing of interest on the loans. of the Soriano spouses from Masantol Bank starting from June 1980. In its questioned decision, the Court of Appeals ruled that interest at the rate of twelve percent (12%) per annum was due on each of the loans from the date they were obtained and until June 1980, when Remedies Soriano first asked for an accounting of the loan, at the same time offering to pay the same. A mere offer to pay, not accompanied or promptly followed by consignation in court of the amount tendered but refused by the creditor, is not sufficient to cause cessation of the running of interest. The applicable rule was stated by the Court in State Investment House, Inc. v. Court of Appeals, 15 in the following manner: Where the creditor unjustly refuses to accept payment, the debtor desirous of being released from his obligation must comply with two (2) conditions: (a) tender of payment; and (b) consignation of the sum due. Tender of payment must be accompanied or followed by consignation in order that the effects of payment may be produced. Thus, in Llamas vs. Abaya, the Supreme Court stressed that a written tender of payment alone, without consignation in court of the sum due, does not suspend the accruing of regular or monetary interest. In the instant case, respondent spouses Aquino, while they are properly regarded as having made a written tender of payment to petitioner State, failed to consignation in court the amount due at the time of the maturity of Account No. IF-82-0904-AA. It follows that their obligation to pay principal-cum-regular or monetary interest under the terms and conditions of Account No. IF-82-0904-AA was not extinguished by such tender of payment alone. For the respondent spouses to continue in possession of the principal of the loan amounting to P110,000.00 and to continue to use the same after maturity of the loan without payment of regular or monetary interest, would constitute unjust enrichment on the part of the respondent spouses at the expense of petitioner State even though the spouses had not been guilty of mora. It is precisely this unjust enrichment which Article 1256 of the Civil Code prevents by requiring,

in addition to tender of payment, the condition of the amount due in court which amount would thereafter be deposited by the Clerk of Court in a bank and earn interest to which the creditor would be entitled. (Emphasis supplied) Both Remedies Soriano and Antonio Soriano had failed to consign in court the amount due to Masantol Bank. Accordingly, regular or monetary interest did not cease to run or accrue in respect of the loans granted to the Soriano spouses, and it was reversible error for the Court of Appeals to have held otherwise. Remedios Soriano asks us to restore the award for moral and exemplary damages made by the trial court; but we see no reason for overturning the Decision of the Court of Appeals deleting such award. WHEREFORE, the Decision dated 8 April 1985 and the Resolution dated 9 May 1985 of the then Intermediate Appellate Court in A.C.-G.R. SP No. 04821 as well as the Decision dated 23 August 1990 and the Resolution dated 23 January 1991 of the Court of Appeals in C.A.-G.R. CV No. 21337 are hereby SET ASIDE. A new judgment is hereby rendered providing as follows: (1) Declaring null and void: (a) the auction sale held on 22 June 1978; (b) the sale of the property located in 3392 J.C. Cruz, Barrio Obrero, Tondo, Manila to Masantol Bank; (c) Transfer Certificate of Title No. 136368 issued in the name of Masantol Bank; and (d) the writ of possession granted by the land registration court. (2) Ordering the Register of Deeds of Manila to cancel Transfer Certificate of Title No. 136368 issued in the name of Masantol Bank and to reinstate Transfer Certificate of Title No. 22324 in the names of the spouses Antonio Soriano and Remedios Soriano and to annotate thereon the mortgage lien of Masantol Bank; (3) Requiring Antonio Soriano and/or Remedies Soriano to pay forthwith Masantol Bank the principal amount of their obligation which is P25,000.00, or so much thereof as has remained unpaid, plus interest thereon at the rate of twelve percent (12%) per annum computed from the time each of the loans were obtained and until full actual payment thereof. After full payment, the mortgage lien of Masantol Bank shall be cancelled; (4) Declaring Masantol Bank as entitled, in case of failure of the spouses Antonio and Remedios Soriano to pay in full their obligation with interest as above stated within sixty (60) days from notice hereof, to foreclose its mortgage on the Barrio Obrero property, after due compliance with publication requirements, at a public auction sale where only persons qualified under Resolution No. 168 as amended by Resolution No. 542, dated 29 November 1956, of the Municipal Board of the City of Manila, shall be allowed to bid for and purchase the mortgaged property. No pronouncement as to costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. On December 12, 1980, PNB extended the period of payment of the loan to June 5, 1981, thus converting the loan from a short-term to a medium-term loan, i.e., a loan which matured over two to five years. 6 PNB also increased the rate of interest per annum, first to 14%, effective December 1, 1979; 7 then to 22% effective February 21, 1983; 8 to 22.5% effective June 20, 1983; 9 to 23% from November 2, 1983; 10 to 25% effective March 2, 1984; 11 and finally to 28% from April 10, 1984. 12 Because private respondents defaulted in paying their obligation, the Provincial Sheriff of Nueva Ecija scheduled the extrajudicial foreclosure of the mortgage on June 15, 1984 to pay private respondents' indebtedness which, according to PNB, had increased from P15,000.00 to P35,125.84, plus 28% annual interest. 13 Private respondents brought suit against PNB, its Branch Manager Jetro Godoy, and the Provincial Sheriff of Nueva Ecija Numeriano Y. Galang (1) for a declaration of nullity of C.B. Monetary Board Resolution No. 2126 dated November 29, 1979 (embodied in C.B. Circular No. 705 dated December 1, 1979), which increased the ceiling on the interest rate of secured and unsecured loans to 16% per annum and 14% per annum, respectively, on the ground that it was contrary to the Usury Law, good morals, public policy, customs and traditions, social justice, due process and the equal protection clause of the Constitution; and (2) for a declaration that the interest rate increases on their loan were contrary to Art. 1959 of the Civil Code which provides that interest due and unpaid shall not earn interest. Pending final determination of the case, private respondents asked that the auction sale be enjoined. PNB filed an answer with compulsory counterclaim. It alleged that private respondents had no cause of action because 1-a of the Usury Law, as amended by P.D. No. 1684, did not limit the number of times the interest could be increased and that private respondents were estopped from questioning the increases because they failed to object to the same. PNB asked that the complaint be dismissed and that private respondents be ordered to pay P35,125.84, plus interest from April 10, 1984, until the obligation was fully paid, attorney's fees and moral damages in such amount as may be determined by the court. On June 13, 1984 private respondents deposited with the clerk of court P8,000.00 January 15, 1985 P2,000.00, 15 in partial payment of their loan.
14

G.R. No. 109563 July 9, 1996 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, MARIA AMOR BASCOS and MARCIANO BASCOS, respondents.

MENDOZA, J.:p This is a petition seeking review of the decision dated August 10, 1992, of the Eighth Division of the Court of Appeals and its resolution dated March 25, 1993, 2 both rendered in CA-G.R. CV No. 27653, which affirmed the decision of the Regional Trial Court (RTC) of San Jose City (Branch 38). The facts are as follows: On June 4, 1979, private respondent spouses Maria Amor and Marciano Bascos obtained a loan from the Philippine National Bank in the amount of P15,000.00 evidenced by a promissory note and secured by a real estate mortgage. The promissory note contained the following stipulation: 3 For value received, I/we, [private respondents] jointly and severally promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in San Jose City, Philippines, the sum of FIFTEEN THOUSAND ONLY (P15,000.00), Philippine Currency, together with interest thereon at the rate of 12% per annum until paid, which interest rate the Bank may at any time without notice, raise within the limits allowed by law , and I/we also agree to pay jointly and severally ____ % per annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed on due date. Payment of this note shall be as follows: * THREE HUNDRED SIXTY FIVE DAYS * AFTER DATE On the reverse side of the note the following condition was stamped: 4 All short-term loans to be granted starting January 1, 1978 shall be made subject to the condition that any and/or all extensions hereof that will leave any portion of the amount still unpaid after 730 days shall automatically convert the outstanding balance into a medium or long-term obligation as the case may be and give the Bank the right to charge the interest rates prescribed under it policies from the date the account was originally granted. To secure payment of the loan the parties executed a real estate mortgage contract which provided: 5 (k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this contract to such an increase within the rate allowed by
1

and on

On June 15, 1990, the RTC rendered a decision, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered as follows: 1. There having [sic] no evidence against the defendants Jetro Godoy, and the Provincial Sheriff of Nueva Ecija, Numeriano Galang, the case against them is dismissed; 2. The increase in interest rates based on the escalation clauses in the Promissory Note and the Real Estate Mortgage, par. K, being contrary to Sec. 3, P.D. No. 116 are declared null and void, that henceforth, the defendant PNB is hereby directed to desist from enforcing the increased rate of interest more than TWELVE (12%) per cent on plaintiffs' loan; 3. The compulsory counterclaim of the defendants is also dismissed; 4. On the other hand, the plaintiffs can settle their unpaid obligation with the defendant PNB at the interest rate of TWELVE (12%) per cent per annum computed from the inception of the loan until the same is fully paid; advances made by the PNB for insurance premiums and penalties added; and the P10,000.00 paid to and defendant bank to be credited as payment by the plaintiffs; 5. Plaintiff's claim for damages is, likewise, dismissed; and 6. The parties shall each bear out [sic] the expenses incurred by them.

SO ORDERED. The RTC invalidated the stipulations in the promissory note and the real estate mortgage, which authorized PNB to increase the interest rate, on the ground that there was no corresponding stipulation that the interest rate would be reduced in the event the law reduced the applicable maximum rate as provided under P.D. No. 1684; that P.D. No. 116, which sets a ceiling of 12% interest on secured loans, is a "law," which should prevail over Circular No. 705, used by PNB to increase the interest; that collection of the increased interest sanctions unjust enrichment contrary to Art. 22 of the Civil Code; and that the promissory note and real estate mortgage were contracts of adhesion which should be interpreted in favor of private respondents. PNB appealed. However, the Court of Appeals affirmed the trial court's decision. The appellate court held that the escalation clause in the promissory note could not be given effect because of the absence of a provision for a de-escalation in the event a reduction of interest was ordered by law. In addition it held that pursuant to the escalation clause any increase in interest must be within "the limits allowed by law" but C.B. circulars, on the basis of which PNB increased the interest, could not be considered "laws". PNB moved for a reconsideration. As its motion was denied, it filed this petition. PNB's argument is that the Court of Appeals erred in applying 2 of P.D. No. 1684, which makes the validity of an escalation clause turn on the presence of a de-escalation clause, to the promissory note and real estate mortgage in this case. PNB contends that the two had been executed on June 4, 1979, before the effectivity of P.D. No. 1684 on March 17, 1980. To begin with, PNB's argument rests on a misapprehension of the import of the appellate court's ruling. The Court of Appeals nullified the interest rate increases not because the promissory note did not comply with P.D. No. 1684 by providing for a de-escalation, but because the absence of such provision made the clause so one-sided as to make it unreasonable. That ruling is correct. It is in line with our decision in Banco Filipino Savings & Mortgage Bank v. Navarro 16 that although P.D. No. 1684 is not to be retroactively applied to loans granted before its effectivity, there must nevertheless be a de-escalation clause to mitigate the one-sideness of the escalation clause. Indeed because of concern for the unequal status of borrowers vis-a-vis the banks, our cases after Banco Filipino have fashioned the rule that any increase in the rate of interest made pursuant to an escalation clause must be the result of agreement between the parties. Thus in Philippine National Bank v. Court of Appeals, 17 two promissory notes authorized PNB to increase the stipulated interest per annum "within the limits allowed by law at any time depending on whatever policy [PNB] may adopt in the future; Provided, that the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." The real estate mortgage likewise provided: The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGEE, in accordance with the provisions hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. Pursuant to these clauses, 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." As the Court explained: 18 In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).

Hence, even assuming that the P1.8 million loan agreement between the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. A similar ruling was made in Philippine National Bank v. Court of Appeals. agreement in that case provided:
19

The credit

The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Boar. . . . As in the first case, PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only two years, 42%. In declaring the increases invalid, we held: 20 We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. Only recently we invalidated another round of interest increases decreed by PNB pursuant to a similar agreement it had with other borrowers: 21 [W]hile the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. In this case no attempt was made by PNB to secure the conformity of private respondents to the successive increases in the interest rate. Private respondents' assent to the increase can not be implied from their lack of response to the letters sent by PNB, informing them of the increases. For as stated in one case, 22 no one receiving a proposal to change a contract is obliged to answer the proposal. WHEREFORE, the decision of the Court of Appeals is AFFIRMED. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in the maximum interest rate. The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law." The Real Estate Mortgage contract likewise provided that (k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by this mortgage as well as the interest on the amount which may have been advanced by the MORTGAGE, in accordance with the provision hereof, shall be subject during the life of this contract to such an increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its debtors. On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by the PNB, for which (private respondents) executed another Promissory Note, which was to mature on April 1, 1985. Other than the date of maturity, the second promissory note contained the same terms and stipulations as the previous note. The parties likewise executed a new Credit Agreement, changing the amount of the loan from P50,000.00 to P100,000.00, but otherwise preserving the stipulations contained in the original agreement. As additional security for the loan, (private respondents) constituted another real estate mortgage over 2 parcels of registered land, with a combined area of 311 square meters, located at Guadalupe, Cebu City. The land, upon which several buildings are standing, was appraised by the PNB to have a value of P40,000.00 and a loan value of P28,000.00. In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate of your CIGLF loan account with us is now 25% per annum plus a penalty of 6% per annum on past dues." The PNB further increased this interest rate to 30% on October 15, 1984; and to 42% on October 25, 1984. The records show that as of December 1985, (private respondents) had an outstanding principal account of P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the interest, and the rest to penalty and other charges. Thus, as of said date, the unpaid principal obligation of (private respondent) amounted to P62,830.32. Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest and to condone the present interest and penalties due; but to no avail. 2 (Citations omitted.) On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB and the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th Judicial Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order: 1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage; 2. The PNB to pay pecuniary consequential damages for the destruction of (private respondents') enterprise;

G.R. No. 107569 November 8, 1994 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents. Vidad, Corpus & Associates for petitioner. Remedios Jayme-Fernandez for privaate respondents.

PUNO, J.: Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in CA G.R. CV No. 27195, the dispositive portion of which reads as follows: WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered ordering defendant-appellee PNB to re-apply the interest rate of 12% per annum to plaintiffs-appellants' (referring to herein private respondents) indebtedness and to accordingly take the appropriate charges from plaintiffs-appellants' (private respondents') payment of P81,000.00 made on December 26, 1985. Any balance on the indebtedness should, likewise, be charged interest at the rate of 12% per annum. SO ORDERED. The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.: On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually. To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo City, which was appraised by the PNB at P1,062.52 and given a loan value of P531.26 by the Bank. In addition, (private respondents) executed a Chattel Mortgage over a thermo plastic-forming machine, which had an appraisal value of P8,800 and a loan value of P4,400.00. The Credit Agreement provided inter alia, that (a) The BANK reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board. In either

3. The PNB to pay moral and exemplary damages as well as the costs of suit; and 4. Granting (private respondents') such other relief as may be found just and equitable in the premises. 4 On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB-5610. On October 15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the increases in interest rates. Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that the increase in interest rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes are not the law between the parties; (3) that CB Circular No. 773 and CB Circular No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the increase of rate interest made by petitioner." 5 The petition is bereft of merit. In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in their credit agreement which provides, as follows: The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future and provided, that, the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease in maximum interest rate. This clause is authorized by Section 2 of Presidential Decree No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus: (P.D.)

P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party to unilaterally raise the interest rate without the other's consent. It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. 6 Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held . . . 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 or 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. (Citation omitted.) Private respondents are not also estopped from assailing the unilateral increases in interest rate made by petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer the proposal, and his silence per se cannot be construed as an acceptance. 7 In the case at bench, the circumstances do not show that private respondents implicitly agreed to the proposed increases in interest rate which by any standard were too sudden and too stiff. IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner. SO ORDERED.

Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as follows: Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board; Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the maximum rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides: Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial Intermediaries) is hereby amended to read as follows: Sec. 1303. Interest and Other Charges. The rate of interest, including commissions, premiums, fees and other charges, on any loan, or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.

Republic of the Philippines SUPREME COURT Baguio City FIRST DIVISION

increased from an initial 21% to a high of 68% between March of 1984 to September, 1986. 4 Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations. Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of the mortgaged property. On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5 As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case. On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for reconsideration of the said order. On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong. For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders of the Regional Trial Court: 1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990; 2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663; 3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ of preliminary injunction; and

G.R. No. 113412 April 17, 1996 Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner, vs. THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

KAPUNAN, J.:p On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below: SPECIAL CONDITIONS xxx xxx xxx The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-annually in arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not rendered when due. xxx xxx xxx III. OTHER CONDITIONS (c) Interest and Charges (1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1 Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration. On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by respondent court in its resolution dated January 10, 1994. Hence the instant petition. This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D. 385. In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984. The instant petition is impressed with merit. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or deescalation; 2) within the limits allowed by law; and 3) upon agreement. Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. The interest provision states: (c) interest and Charges (1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate

agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held: CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates . . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law. but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to once every twelve months. Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code: Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing." The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24% per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable. Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's vehement protests, were arbitrary. Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agreements are perfectly valid and do not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject to laws and provisions governing agreements between parties, which agreements while they may be the law between the contracting parties implicitly incorporate provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the instant case. Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority. Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed by law," obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments and administrative circulars and issuances, the agreement would not have gone as far as making a distinction between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that: What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not. The Escalation Clause reads as follows: I/We hereby authorize Banco Filipino to correspondingly increase. the interest rate stipulated in this contract without advance notice to me/us in the event. a law increasing the lawful rates of interest that may be charged on this particular

kind of loan. (Paragraphing and emphasis supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned." The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 ( supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased " by law or by the Monetary Board." To quote: Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis supplied). It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already previously paid by the spouses. Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored. We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable. Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government's development projects all over the country by large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans. 10 In facilitating collection of debts through its automatic foreclosure provisions, the government is however, not exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of the Constitution. 11 In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on merit in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the loan, and only after the spouses refused to meet their obligations following such determination. In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that: We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families. Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits. In Republic Planters Bank v. Court of Appeals Filipinas Marble Corporation, held:
13

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB closets have to be exposed in public so that the same may NEVER be repeated. It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below to present their evidence. Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith, to gain the upper hand over petitioners. In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that which was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed. WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings. SO ORDERED.

the Court reiterating the dictum in

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-46591 July 28, 1987

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months. The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated. On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976. On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows: September 24, 1976 Mr. Florante del Valle 14 Palanca Street B.F. Homes, Paranaque Rizal Dear Mr. del Valle: This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum. A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note: I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498: l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that: a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and 2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the legality or validity of such escalation clauses. We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino.

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents. MELENCIO-HERRERA, J.: This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees: WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan. SO ORDERED. The facts are not in dispute: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO 1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank. Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads: 3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum. xxx xxx xxx

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended." CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides: Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows:

Very truly yours, (Sgd.) MERCEDES C. PAREDES Director Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan. For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494. In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan. It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law. On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no force and effect as if the case was never filed," since the parties would like to end this matter once and for all." However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings. At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court allowed the intervention of Lolita Perono 2 and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO. The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan." The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730

days as of the effectivity of the law or regulation authorizing such an increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."3 The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid. Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.4 The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable. Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.5 What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not. The Escalation Clause reads as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law increasing the lawful rates of interest that may be charged on this particular kind of loan. (Paragraphing and emphasis supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no longer be questioned. "8 The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976

(supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote: Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied). It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender. 2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage. Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty. On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).1avvphi1 On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section, 10 the

Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read: SEC. 3. Section two of the same Act is hereby amended to read as follows: SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. SEC. 4. Section three of the same Act is hereby amended to read as follows: SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended." In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty. WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan. The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 128833 April 20, 1998 RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners, vs. COURT OF APPEALS and GOYU & SONS, INC., respondents. G.R. No. 128834 April 20, 1998 RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents. G.R. No. 128866 April 20, 1998 MALAYAN INSURANCE INC., petitioners, vs. GOYU & SONS, INC. respondent. MELO, J.: The issue relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU. The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37% interest per annum commending July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorney's fees. GOYU's obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the common facts and issues involved, their individual petitions were consolidated. The undisputed facts may be summarized as follows: GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU's application for approval by RCBC's executive committee. A credit facility in the amount of P30 million was initially granted. Upon GOYU's application and Uy's and Lao's recommendation, RCBC's executive committee increased GOYU's credit facility to P50 million, then to P90 million, and finally to P117 million. As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company approved by RCBC, and subsequently, to endorse and deliver the insurance polices to RCBC. GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the insurance policies were either attached pursuant to writs of attachments/garnishments issued by various courts or that the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU filed a complaint for specific performance and damages which was docketed at the Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866. RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the proceeds of the insurance policies, but said claims were also denied for the same reasons that MICO denied GOYU's claims. In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch 3), confirmed that GOYU's other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten insurance policies be deposited with the said court minus the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC. In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit "22-Malayan"). After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as follows: 1. For defendant Malayan Insurance Co., Inc.: a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of P50,000,000.00 which is deposited with this Court; b. To pay the plaintiff damages by was of interest for the duration of the delay since July 27, 1992 (ninety days after defendant insurer's receipt of the required proof of loss and notice of loss) at the rate of twice the ceiling prescribed by the Monetary Board, on the following amounts: 1) P50,000,000.0 0 from July 27, 1992 up to the time said amount was deposited with this Court on January 7, 1994; 2) P24,040,518.5 8 from July

27, 1992 up to the time when the writs of attachments were received by defendant Malayan; 2. For defendant Corporation: Rizal Commercial Banking

and damages by way of interest commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-seven (37%) percent per annum which is twice the ceiling prescribed by the Monetary Board. 2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION; a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00. 3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO: a) To pay the plaintiff jointly and severally the following amounts: 1. P1,500,000.00 as exemplary damages; 2. P1,500,000.00 attorney's fees. as and for

a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00; 3. For both defendants Malayan and RCBC: a. To pay the plaintiff, jointly and severally, the following amounts: 1) P1,000,000.00 as exemplary damages; 2) P1,000,000.00 as, and for, attorney's fees; 3) Costs suit. of

4. And on RCBC's Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and penalties. The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with all the interests thereon. (Rollo, p. 200.) RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent reversal of the above dispositions of the Court of Appeals. In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of the Court of Appeals' resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBC's right to intervene in the action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of Sebastian. After a careful reviews of the material facts as found by the two courts below in relation to the pertinent and applicable laws, we find merit in the submission of RCBC and MICO. The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted in the petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss. As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance company acceptable to RCBC. Bases on their stipulations in the mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C. FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant Malayan, together with all the interest earned thereon. (Record, pp. 478-479.) From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amount awarded in its favor. MICO and RCBC disputed the trial court's findings of liability on their part. The Court of Appeals party granted GOYU's appeal, but sustained the findings of the trial court with respect to MICO and RCBC's liabilities, thusly: WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows: 1. FOR DEFENDANT MALAYAN INSURANCE CO., INC: a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court

RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU obtained the subject insurance policies, prepared the nine endorsements (see Exh. "1-Malayan" to "9Malayan"; also Exh. "51-RCBC" to "59-RCBC"), copies of which were delivered to GOYU, RCBC, and MICO. However, because these endorsements do not bear the signature of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the endorsements are defective. We do not quite agree. It is settled that a mortgagor and a mortgagee have separated and distinct insurable interests in the same mortgaged property, such that each one of them may insure the same property for his own sole benefit. There is no question that GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, although it appears that GOYU obtained the subject insurance policies naming itself as the sole payee, the intentions of the parties as shown by their contemporaneous acts, must be given due consideration in order to better serve the interest of justice and equity. It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by the insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC, and not just from any other insurance company. Alchester would not have found out that the subject pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYU's intention of obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so directed by GOYU. On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit: The doctrine of estoppel is based upon the grounds of public, policy, fair dealing, good faith and justice, and its purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed to aid the law in the administration of justice where without its aid injustice might result. It has been applied by this Court wherever and whenever special circumstances of a case so demand. (p. 368.) Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYU's nine insurance policies in favor of RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth copies were detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU has not denied having received from Alchester the originals of these documents. RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss insure against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an implied ratification of said endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least estopped from assailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued

to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to recognize RCBC's right to the proceeds of the insurance polices if not for the actual endorsement of the policies, at least on the basis of the equitable principle of estoppel. GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the circumstances obtaining in the instant case presents a justification to take exception to the strict application of said provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party for whose benefit the insurance policies were taken out. Consider thus the following: 1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between RCBC and GOYU in consideration of and for securing GOYU's credit facilities from RCBC. The mortgage contracts contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly covered against any loss by an insurance company acceptable to RCBC. 2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister company of RCBC and definitely an acceptable insurance company to RCBC. 3. Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements. 4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the mortgaged properties. This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to be sufficient compliance with its obligation under the mortgage contracts since RCBC accordingly continued to extend the benefits of its credits facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of the various insurance policies obtained by GOYU. The intention of the parties will have to be given full force and effect particular case. The insurance proceeds may, therefore, be exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or entity for whose benefit the polices were clearly intended. Moreover, the law's evident intention to protect the interests of the mortgage upon the mortgaged property is expressed in Article 2127 of the Civil Code which states: Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to have been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as shown below: INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None Issue Date March 18, 1992 Expiry Date April 5, 1993 Amount P9,646,224.92 b. Policy Number ACIA/F-174-07660 Exhibit "1Malayan" Issue Date January 18, 1992 Expiry Date February 9, 1993 Amount P4,307,217.54 c. Policy Number ACIA/F-114-07661 Exhibit "2Malayan" Issue Date January 18, 1992 Expiry Date February 15, 1993 Amount P6,603,586.43 d. Policy Number ACIA/F-114-07662 Exhibit "3Malayan" Issue Date January 18, 1992 Expiry Date (not legible) Amount P6,603,586.43 e. Policy Number ACIA/F-114-07663 Exhibit "4Malayan" Issue Date January 18, 1992 Expiry Date February 9, 1993 Amount P9,457,972.76 f. Policy Number ACIA/F-114-07623 Exhibit "7Malayan" Issue Date January 13, 1992 Expiry Date January 13, 1993 Amount P24,750,000.00 g. Policy Number ACIA/F-174-07223 Exhibit "6Malayan" Issue Date May 29, 1991 Expiry Date June 27, 1992 Amount P6,000,000.00 h. Policy Number CI/F-128-03341 None Issue Date May 3, 1991 Expiry Date May 3, 1992 Amount P10,000,000.00 i. Policy Number F-114-07402 Exhibit "8-Malayan" Issue Date September 16, 1991 Expiry Date October 19, 1992 Amount P32,252,125.20 j. Policy Number F-114-07525 Exhibit "9-Malayan" Issue Date November 20, 1991 Expiry Date December 5, 1992 Amount P6,603,586.43 (pp. 456-457, Record; Folder of Exhibits for MICO.) Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICO's witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement

documents, Exhibit "5-Malayan", refers to a certain insurance policy number ACIA-F-07066, which is not among the insurance policies involved in the complaint. The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being excessively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYU's other creditors up to the extent of the GOYU's outstanding obligation in RCBC's favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it was made. In this case, to the extent of GOYU's obligation with RCBC, the interest of GOYU in the subject policies had been transferred to RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYU's other creditors. To the extent of GOYU's outstanding obligation with RCBC, all the rest of the other insurance policies above-listed which were endorsed to RCBC, are, therefore, to be released from attachment, garnishment, and levy by the other creditors of GOYU. This brings us to the next issue to be resolved, which is, the extent of GOYU's outstanding obligation with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount of GOYU's liability to RCBC. The Court of Appeals simply echoed the declaration of the trial court finding that GOYU's total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial court's exclusion of Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also because the signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the Court of Appeals speculated thusly: . . . Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in bank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same practice of procedure has always been adopted in its previous dealings with the bank. (Rollo, pp. 181-182.) The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents are spurious, for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument has the burden of proof of showing that he no longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]). Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when he answered the queries of the trial court. ATTY. NATIVIDAD Q: But insofar as the amount stated in Exhibits 1 to 29RCBC, you received all the amounts stated therein? A: Yes, sir, I received the amount. COURT He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC? WITNESS:

Yes, Your Honor, I received all the amounts. COURT Indicated in the Promissory Notes? WITNESS A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor. COURT Q Your mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct? A Yes, Your Honor. (tsn, Jan. 14, 1994, p. 26.) Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as hereinabove quotes, GOYU also offered and admitted to RCBC that is obligation be fixed at P116,301,992.60 as shown in its letter date March 9, 1993, which pertinently reads: We wish to inform you, therefore that we are ready and willing to pay the current past due account of this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other legitimate deductions. We accept and confirm this amount of P116,301,992.60 as stated as true and correct. (Exhibit BB.) The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated after the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus, careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU. The two courts below erred in failing to see that the promissory notes which they ruled should be excluded for bearing dates which are after that of the fire, are mere renewals of previous ones. The proceeds of the loan represented by these promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYU's judicial admission of liability in the amount of P116,301,992.60 full force and effect. It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the mortgage property will, nonetheless, have to be applied as payment against GOYU's obligation. But, contrary to the lower courts' findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments had obviously been duly considered by GOYU, in its aforequoted letter date March 9, 1993, wherein it admitted that its past due account totaled P116,301,992.60 as of January 21, 1993. The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit: Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60 Broken down as follows: Principal 1 Interest

Regular 80,535,946.32 FDU 27,548,025.17 ____________ Total 108,083,971.49 8,218,021.11 2 LESS: 1) Proceeds from Seaboard Eastern Insurance Company 6,095,145.81 2) Proceeds from Equitable Insurance Company 2,756,373.00 3) Payment from foreign department negotiation: 203,584.89 ___________ 9,055,104.70 3 ================ NET AMOUNT as of January 21, 1993 P107,246,887.90 The need for the payment of interest due the principal amount of the obligation, which is the cost of money to RCBC, the primary end and the ultimate reason for RCBC's existence and being, was duly recognized by the trial court when it ruled favorably on RCBC's counterclaim, ordering GOYU "to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p. 479). Inexplicably, the Court of Appeals, without even laying down the factual or legal justification for its ruling, modified the trial court's ruling and ordered GOYU "to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties" (Rollo, p. 200). It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment of additional interest, penalties, and charges, in this manner: Regarding defendant RCBC's commitment not to charge additional interest, penalties and surcharges, the same does not require that it be embodied in a document or some form of writing to be binding and enforceable. The principle is well known that generally a verbal agreement or contract is no less binding and effective than a written one. And the existence of such a verbal agreement has been amply established by the evidence in this case. In any event, regardless of the existence of such verbal agreement, it would still be unjust and inequitable for defendant RCBC to charge the plaintiff with surcharges and penalties considering the latter's pitiful situation . (Emphasis supplied). (Record, p. 476) The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. We fail to find justification for the Court of Appeal's outright deletion of the payment of interest as agreed upon in the respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the actual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date of the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. (pp. 95-97). There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and tabulated by the trial court in its decision (pp. 470 and 471, Record) such agreed interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above. On the issue of payment of surcharges and penalties, we partly agree that GOYU's pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot accept the lower courts' finding that RCBC had thereby ipso facto effectively waived collection of any additional interests, surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional interests, surcharges, and penalties is another. Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: Art. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be applied to the established facts of any given case. Given the circumstance under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYU's offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit "BB"), which RCBC refused, we find it more in keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time onward. Given the factual milieu hereover, we rule that it was error to hold MICO liable in damages for denying or withholding the proceeds of the insurance claim to GOYU. Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the fire. Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies. Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance Corporation vs. CA. 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without reasonable cause as the facts appear to a reasonable and prudent man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the outcome herein, justified MICO in withholding payment to GOYU. In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single cause of action ( Rollo, pp. 195199). The Court of Appeals was too accommodating in giving due consideration to this argument of GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R. CV No. 46247, the case having been elevated by RCBC. In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of discretion. As held in Pea vs. Court of Appeals (245 SCRA 691 [1995]): It should have been enough, nonetheless, for the appellate court to merely set aside the questioned ordered of the trial court for having been issued by the latter with grave abuse of discretion. In likewise enjoining permanently herein petitioner "from entering in and interfering with the use or occupation and enjoyment of petitioner's (now private respondent) residential house and compound," the appellate court in effect, precipitately resolved with finality the case for injunction that was yet to be heard on the merits by the lower court. Elevated to the appellate court, it might be stressed, were mere incidents of the principal case still pending with the trial court. In Municipality of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the

Court of Appeals would have "no jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself which was not on appeal before it. (pp. 701-702.) Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it has been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is rendered moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over the MICO insurance policies. It is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]). WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered: 1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of the Manila Trial Court for lack of merit; 2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of P50,505,594.60 (per O.R. No. 3649285); 3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to Rizal Commercial Banking Corporation; 4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid. The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastian's right as attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance policies as first mortgagee. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

4) P100,000.00 exemplary and nominal damages to vindicate plaintiff's violated rights; 5) Attorney's fees equivalent to 15% of the total award in favor of the plaintiff; 6) Costs of suit (Rollo, p. 78).

G.R. No. 97873 August 12, 1993 PILIPINAS BANK, petitioner, vs. THE HONORABLE COURT OF APPEALS, and LILIA R. ECHAUS, respondents. Gella, Reyes, Danguilan and Associates for the petitioner. Manuel L. Melotindos for the respondents.

On March 22, 1985, petitioner appealed the decision of the trial court to the Court of Appeals, which docketed the appeal as CA-G.R. No. 06017. On the same day, private respondent filed a motion for Immediate Execution Pending Appeal. The trial court granted the motion for execution pending appeal in an Order dated April 3, 1985. Petitioner challenged the Order dated April 3, 1985 before the Court of Appeals in CA-G.R. No. SP No. 05909. On October 30, 1986, the Court of Appeals modified the Order dated April 3, 1985, by limiting the execution pending appeal against petitioner to P5,517.707.00 and deferring the execution of the award for moral, exemplary and nominal damages to await the final judgment of the main case in CA-G.R. No. 06017. On June 17, 1987, the Supreme Court in G.R. No. L-76506 affirmed the Order dated October 30, 1986 of the Court of Appeals. On July 1, 1988, the trial court granted the new motion for execution pending appeal filed by private respondent pursuant to the Resolution of the Supreme Court dated June 17, 1987, upon the filing of the required bond. Petitioner complied with the writ of execution pending appeal by issuing two manager's checks in the total amount of P5,517,707.00 (one for P4,965,936.30 payable to private respondent and another for P551,770.70 payable to the Clerk of Court, RTC, Antipolo, Rizal). The check payable to private respondent was encashed on July 15, 1988. On June 28, 1990, the Court of Appeals rendered a decision in CA-G.R. No. CV-06017, which modified the judgment of the trial court as follows: 1. The defendant-appellant Pilipinas Bank, formerly known as Filipinas Manufacturers Bank is ordered to pay the plaintiff-appellee the following: (a) The sum of Two Million Three Hundred Thousand (2,300,000,00) Pesos, representing the total amount assigned by Greatland to her, with interest at the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and "G"); (b) The sum of One Hundred Thousand (P100,000.00) Pesos in moral damages, to assuage moral sufferings and embarrassment of plaintiffappellee as a consequence of appellant-bank's unwarranted acts; (c) The sum of Twenty Five Thousand (P25,000.00) Pesos, as exemplary damages to serve as an example or correction for the public good; (d) The sum equivalent to ten (10) percent of the principal claim awarded, representing attorney's fees; and 2. Constantino Bautista is absolved of personal liability ( Rollo, pp. 3132).

QUIASON, J.: This is a petition for certiorari under Rule 45 of the Revised Rules of Court to review the Resolution of the Court of Appeals in CA-G.R. CV No. 06017 promulgated on March 14, 1991. The Resolution was rendered in response to private respondent's motion for clarification of the decision of the Court of Appeals in CA-G.R. No. 06017. The matters sought to be clarified arose in the course of the execution of the decision of the Regional Trial Court, Branch 71, Antipolo, Rizal in Civil Case No. 239-A, as modified by the decision of the Court of Appeals in CA-G.R. CV No. 06017. In Civil Case No. 239-A, private respondent filed a complaint against petitioner and its president, Constantino Bautista, for collection of a sum of money. The complaint alleged: (1) that petitioner and Greatland Realty Corporation (Greatland) executed a "Dacion en Pago," wherein Greatland conveyed to petitioner several parcels of land in consideration of the sum of P7,776,335.69; (2) that Greatland assigned P2,300,000.00 out of the total consideration of the Dacion en Pago, in favor of private respondent; and (3) that notwithstanding her demand for payment, petitioner in bad faith, refused and failed to pay the said amount assigned to her. Petitioner, while admitting the execution of the Dacion en Pago, claimed: (1) that its former president had no authority to enter into such agreement; (2) that it never ratified the same; and (3) that assuming arguendo that the agreement was binding, the conditions stipulated therein were never fulfilled. Dismissing petitioner's defense as unmeritorious, the trial court ruled in favor of private respondent. The trial court ordered petitioner and its co-defendant, jointly and severally, to pay private respondent as follows: 1) P2,300,000.00 the total amount assigned by Greatland in her favor out of the P2,300,000.00 liability of defendant Pilipinas to Greatland plus legal interest from the dates of assignments until fully paid; 2) P3,217,707.00 representing the total actual damages suffered by the plaintiff plus legal interest until fully paid; 3) P1,000,000.00 in moral damages to partially assuage the extreme moral sufferings of plaintiff inflicted upon her person considering the bad faith on the part of the defendants and their failure to act with justice, and to give what is lawfully due her and observe honesty and good faith;

Petitioner filed a motion for extension of time to file a Petition for Review on Certiorari with the Supreme Court, which however was withdrawn on July 23,1990. Private respondent, on her part, filed a motion for reconsideration of the decision of the Court of Appeals in CAG.R. No. 06017, which likewise was withdrawn on August 13, 1990. Hence, the decision of the Court of Appeals rendered in CA-G.R. No. 06017 became final and executory. On September 4, 1990, petitioner filed a motion in the trial court praying that private respondent and Standard Insurance Co. (which furnished the bond required in the advance execution of the decision of the trial court) to refund to her the excess payment of P1,898,623.67 with interests at 6% (Rollo, pp. 83-84). It must be recalled that while private respondent was able to collect P5,517,707.00 from petitioner pursuant to the writ of advance execution allowed in CA-G.R. No. SP No. 05909, the final judgment in the main case (CA-G.R. No. 06017) awarded to private respondent damages in the total amount of only P2,655,000.00 (P2,300,000.00 representing the amount assigned by Greatland to private respondent, P100,000.00 as moral damages; P25,000.00 as exemplary damages and attorney's fees equivalent to 10% of the P2,300,000.00), together "with interest on the amount of P2,300,000.00 at the legal rate starting July 24, 1981, date when demand was first made (Exh. "F" and "G")." Private respondent opposed the motion of petitioner with respect to the rate of interest to be charged on the amount of P2,300,000.00. According to private respondent, the legal interest on the principal amount of P2,300,000.00 due her should be 12% per annum pursuant to CB Circular No. 416 and not 6% per annum as computed by petitioner. On October 12, 1990, the trial court, while ordering the refund to petitioner of the excess payment, fixed the interest rate due on the amount of P2,300.000.00 at 12% per annum as proposed by private respondent, instead of 6% per annum as proposed by petitioner. On October 16, 1990, petitioner moved to reconsider the Order dated October 12, 1990 of the trail court, which however could not be acted upon because on October 23, 1990, private respondent filed a Motion for Clarification with the Court of Appeals in CA-G.R. CV No. 06017, regarding the following matters: a) The "legal rate" of interest on the principal award of P2,300,000.00 from July 24, 1981 (as per decision) up to July 14, 1988 (date of actual payment made by defendant-appellant to plaintiff-appellee per execution pending appeal); b) The imposition of such "legal rate" of interest on the accrued interest' from July 24, 1981 up to July 14, 1988; c) The amount of the costs of suit will include premium on surety bond; d) The discharged of the surety bond whether total or partial, depending on the computation of the interest; e) The award of attorney's fees equivalent to 10% of the principal award, whether this should totally go to plaintiff-appellee's former counsel or to be shared on the basis of quantum meruit with the undersigned counsel; and f) Aside from this final award of 10% attorney's fees chargeable against defendant-appellant, whether or not former counsel of plaintiff-appellee can still collect from her the balance of 15% out of the 25% attorney's fees under Exh. "N" (Rollo, p.32). In its Resolution promulgated on March 14, 1991, the Court of Appeals clarified that:

a) The legal rate of interest on the principal award of P2,300,000.00 should be 12% per annum in accordance with Circular No. 416 dated July 29, 1974 of the Central Bank. b) The computation of compounding interest annually has no basis, therefore, not allowed in the instant case; c) The payment of premium on the bond in the sum of P259,813.50 as cost, being without legal and factual basis, is denied; d) The surety bond posted by plaintiff-appellee may be released after satisfaction of the decision; and e) Payment/distribution of attorney's fees may/shall be litigated in a separate proceeding if the parties cannot settle their differences amicably. SO ORDERED (Rollo, p. 35-36). In this appeal, petitioner claims that the Court of Appeals erred: (1) In ruling that the legal rate of interest on the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent is 12% per annum. (2) In not holding that the refund to which petitioner is entitled should earn interest at the rate of 12% per annum. (3) In not holding that the surety bond should only be released after actual refund ( Rollo, p. 18). The Court of Appeals was of the theory that the action in Civil Case No. 239-A filed by private respondent against petitioner "involves forbearance of money, as the principal award to plaintiff-appellee (private respondent) in the amount of P2,300.000.00 was the overdue debt of defendant-appellant to her since July 1981. The case is, in effect, a simple collection of the money due to plaintiff-appellee, as the unpaid creditor from the defendant bank, the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central Bank Circular No. 416, the Court of Appeals held that the applicable rate of interest is 12% per annum. Petitioner argues that the applicable law is Article 2209 of the Civil Code, not the Central Bank Circular No. 416. Said Article 2209 provides: Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. Presidential Decree No. 116 authorized the Monetary Board to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits and amended the Usury Law (Act No. 2655) for that purpose. As amended, the Usury Law now provides: Sec. The rate of interest for the loan or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for that purpose in accordance with the authority hereby granted.

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to charge such rate or rates whenever warranted by prevailing economic and social conditions: Provided, That such changes shall not be made oftener that once every twelve months. In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates for consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although the rates prescribed for these institutions need not necessarily be uniform. Acting on the authority vested on it by the Usury Law, as amended by P.D. No. 116, the Monetary Board of Central Bank issued Central Bank Circular No. 416, which provides: By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) per cent per annum. This Circular shall take effect immediately. (italics supplied) Note that Circular No. 416, fixing the rate of interest at 12% per annum, deals with (1) loans; (2) forbearance of any money, goods or credit; and (3) judgments. In Reformina v. Tomol, Jr., 139 SCRA 260 [1985], the Court held that the judgments spoken of and referred to in Circular No. 416 are "judgments in litigation involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not, within the ambit of the authority granted to the Central Bank." Reformina was affirmed in Philippines Virginia Tobacco Administration v. Tensuan, 188 SCRA 628 [1990], which emphasized that the "judgments" contemplated in Circular No. 417 "are judgments involving said loans or forbearance only and not in judgments in litigation that have nothing to do with loans . . . ." We held that Circular No. 416 does not apply to judgments involving damages (Reformina v. Tomol, Jr., supra; Philippine Virginia Tobacco Administration v. Tensuan, supra) and compensation in expropriation proceedings (National Power Corporation v. Angas, 208 SCRA 542 [1992]). We also held that payment of unliquidated cash advances to an employee by his employer (Villarica v. Court of Appeals, 123 SCRA 259 [1983]) and the return of money paid by a buyer of a leasehold right but which contract was voided due to the fault of the seller (Buisier v. Court of Appeals, 154 SCRA 438 [1987]). What then is the nature of the judgment ordering petitioner to pay private respondent the amount of P2,300,000.00? The said amount was a portion of the P7,776,335.69 which petitioner was obligated to pay Greatland as consideration for the sale of several parcels of land by Greatland to petitioner. The amount of P2,300,000.00 was assigned by Greatland in favor of private respondent. The said obligation therefore arose from a contract of purchase and sale and not from a contract of loan or mutuum. Hence, what is applicable is the rate of 6% per annum as provided in Article 2209 of the Civil Code of the Philippines and not the rate of 12% per annum as provided in Circular No. 416.

Petitioner next contends that, consistent with its thesis that Circular No. 416 applies only to judgments involving the payment of loans or forbearance of money, goods and credit, the Court of Appeals should have ordered private respondent to pay interest at the rate of 12% on the overpayment collected by her pursuant to the advance execution of the judgment. Again, we sustain petitioner's contention as correct. Private respondent was paid in advance the amount of P5,517,707.00 by petitioner to the order for the execution pending appeal of the judgment of the trial court. On appeal, the Court of Appeals reduced the total damages to P3,619,083.33, leaving a balance of P1,898,623.67 to be refunded by private respondent to petitioner. In an execution pending appeal, funds are advanced by the losing party to the prevailing party with the implied obligation of the latter to repay former, in case the appellate court cancels or reduces the monetary award. Under Section 5 of Rule 39 of the Revised Rules of Court where "the judgment executed is reversed totally or partially on appeal, the trial court, on motion, after the case is remanded to it, may issue such orders of restitution, as equity and justice may warrant under the circumstances." It was to guarantee the restitution contemplated by Section 5 of Rule 39 of the Revised Rules of Court that private respondent was required by the trial court to post a bond before the writ of advance execution was issued. In the case before us, the excess amount ordered to refunded by private respondent falls within the ruling in Viloria and Buiser that Circular No. 416 applies to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is subsequently adjudged. Finally, petitioner questions as vague the ruling of the Court of Appeals that the surety bond given to secure the advance execution may be discharged "upon the finality and satisfaction of the decision." We believe that this ruling of the Court of Appeals is clear enough in ordering that the surety bond shall be released only after private respondent has fully refunded the overpayment to petitioner. WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals appealed from is MODIFIED in that (1) the amount of P2,300,000.00 adjudged to be paid by petitioner to private respondent shall earn interest of 6% per annum and (2) the amount of P1,898,623.67 to be refunded by private respondent to petitioner shall earn interest of 12% per annum. Costs against private respondent. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-25704 April 24, 1968

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's favor? To refute the lower court's decision which is based on the doctrine laid down by this Court in Lopez v. El Hogar Filipino, 47 Phil. 249, holding that a contract of loan with usurious interest is valid as to the loan but void as to the usurious interest, appellants argue that in light of the New Civil Code provisions said doctrine no longer applies. In support thereof, they cite the case decided by the Court of Appeals in Sebastian v. Bautista, 58 O.G. No. 15, p. 3146. The Sebastian case was an action for recovery of a parcel of land. The Court of First Instance therein decided in plaintiff's favor, on the ground that the so-called sale with pacto de retro of said land was in fact only an equitable mortgage. In affirming the trial court, the writer of the opinion of the Court of Appeals went further to state the view that the loan secured by said mortgage was usurious in nature, and, thus, totally void. Such reasoning of the writer, however, was not concurred in by the other members of the Court, who concurred in the result and voted for affirmance on the grounds stated by the trial court. Furthermore, the affirmance of the existence of equitable mortgage necessarily implies the existence of a valid contract of loan, because the former is an accessory contract to the latter. Great reliance is made by appellants on Art. 1411 of the New Civil Code which states: Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the contract. So they continue the New Civil Code provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code." (Emphasis ours.) We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the interest.

ANGEL JOSE WAREHOUSING CO., INC., plaintiff-appellee, vs. CHELDA ENTERPRISES and DAVID SYJUECO, defendants-appellants. Luis A. Guerrero for plaintiff-appellee. Burgos and Sarte for defendants-appellants.

BENGZON, J.P., J.: Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the partnership Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of alleged unpaid loans in the total amount of P20,880.00, with legal interest from the filing of the complaint, plus attorney's fees of P5,000.00. Alleging that post dated checks issued by defendants to pay said account were dishonored, that defendants' industrial partner, Chellaram I. Mohinani, had left the country, and that defendants have removed or disposed of their property, or are about to do so, with intent to defraud their creditors, preliminary attachment was also sought. Answering, defendants averred that they obtained four loans from plaintiff in the total amount of P26,500.00, of which P5,620.00 had been paid, leaving a balance of P20,880.00; that plaintiff charged and deducted from the loan usurious interests thereon, at rates of 2% and 2.5% per month, and, consequently, plaintiff has no cause of action against defendants and should not be permitted to recover under the law. A counterclaim for P2,000.00 attorney's fees was interposed. Plaintiff filed on June 25, 1964 an answer to the counterclaim, specifically denying under oath the allegations of usury. After trial, decision was rendered, on November 10, 1965. The court found that there remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 had actually been deducted in advance by plaintiff from the loan; that said amount of P1,048.15 should therefore be 1 deducted from the unpaid principal of P20,287.50, leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its balance of P19,247.35. Accordingly, it stated, in the dispositive portion of the decision, thus: WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorney's fee; and, in case the assets of defendant partnership be insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (1/2) of the unsatisfied portion of this judgment. With costs against the defendants.1wph1.t

True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's nullity proceeds from illegality of the cause or object of said contract. However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; 2 the accessory stipulation is to pay interest thereon. And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force." The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced." In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal. Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment." Article 1413, in speaking of "interest paid in excess of the interest allowed by the usury laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of P20% per annum P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The whole stipulation as to interest is void, since payment of said interest is the cause or object and said interest is illegal. The only change effected, therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered "with interest thereon from the date of payment." The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages

(Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint. As regards, however, the attorney's fees, the court a quo stated no basis for its award, beyond saying that as a result of defendants' refusal to pay the amount of P19,247.35 notwithstanding repeated demands, plaintiff was obliged to retain the services of counsel. The rule as to attorney's fees is that the same are not recoverable, in the absence of stipulation. Several exceptions to this rule are provided (Art. 2208, Civil Code). Unless shown to fall under an exception, the act of plaintiff in engaging counsel's services due to refusal of defendants to pay his demand, does not justify award of attorney's fees (Estate of Buan v. Camaganacan, L-21569, Feb. 28, 1966). Defendants, moreover, had reason to resist the claim, since there was yet no definite ruling of this Court on the point of law involved herein in light of the New Civil Code. Said award should therefore be deleted. WHEREFORE, with the modification that the award of attorney's fees in plaintiff's favor is deleted therefrom, and the correction of the clerical error as to the principal still recoverable, from P19,247.35 to P19,239.35, the appealed judgment is hereby affirmed. No costs. So ordered.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness. On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amout of P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11, 1986. However, only the sum of P275.000.00, was given to them out of the proceeds of the loan. Like the previous loans, Servando and Medel failed to pay the third loan on maturity. On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. They executed a promissory note, reading as follows: Baliwag, Bulacan July 23, 1986 Maturity Date Augsut 23, 1986 P500,000.00 FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag, Bulacan, the sum of PESOS . . . FIVE HUNDRED THOUSAND . . . (P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PER CENT per month plus 2% service charge per annum from date hereof until fully paid according to the amortization schedule contained herein. (Emphasis supplied) Payment will be made in full at the maturity date. Should I/WE fail to pay any amortization or portion hereof when due, all the other installments together with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additional amount equivalent to one per cent (1%) per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT (25%) thereof in full, without deductions as Attorney's Fee whether actually incurred or not, of the total amount due and demandable, exclusive of costs and judicial or extra judicial expenses. (Emphasis supplied). I, WE further agree that in the event the present rate of interest on loan is increased by law or the Central Bank of the Philippines, the holder shall have the option to apply and collect the increased interest charges without notice although the original interest have already been collected wholly or partially unless the contrary is required by law.

G.R. No. 131622 November 27, 1998 LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR. doing lending business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents.

PARDO, J.: The case before the Court is a petition for review on certiorari, under Rule 45 of the 1 Revised Rules of Court, seeking to set aside the decision of the Court of Appeals, 2 and its resolution denying reconsideration, the dispositive portion of which decision reads as follows: WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby-ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23, 1986, until the entire amount is fully paid. The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. SO ORDERED.
3 4

The Court required the respondents to comment on the petition, which was filed on 5 6 April 3, 1998, and the petitioners to reply thereto, which was filed on May 29, 1998. We now resolve to give due course to the petition and decide the case. The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows: On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986. On November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the proceeds of the loan.

It is also a special condition of this contract that the parties herein agree that the amount of peso-obligation under this agreement is based on the present value of the peso, and if there be any change in the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at the time of the complete fulfillment of the obligation. Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this note or extension of payments, reserving rights against each and all indorsers and all parties to this note. IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court. On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory note. On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including interests and other charges. In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness. In their separate answer filed on April 10, 1990, defendants Leticia and Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% of the amount due is unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties and other charges. After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or 7 forbearance of money, goods or credit is 12% per annum." Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows: WHEREFORE, premises considered, judgment is hereby rendered, as follows:

1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as penalty, until the entire amount is paid in full. 2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from November 19, 1985 until the whole amount is fully paid; 3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully paid; 4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees; 5. All counterclaims are hereby dismissed. With costs against the defendants.
8

In due time, both plaintiffs and defendants appealed to the Court of Appeals. In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not when the parties agreed thereon. The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest 9 that may be charged on the loan". The Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid' was allowed by 10 law". Accordingly, on March 21, 1997, the Court of Appeals promulgated its decision reversing that of the Regional Trial Court, disposing as follows: WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid. The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. SO ORDERED.
11

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated November 25, 1997, the Court of Appeals denied the 12 motion. Hence, defendants interposed the present recourse via petition for review on 13 certiorari. We find the petition meritorious. Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684? We agree with petitioners that the stipulated rate of interest at 5.5% per month on the 13 P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has 14 expressly removed the interest ceilings prescribed by the Usury Law and that the 15 Usury Law is now "legally inexistent". In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a 17 Central Bank Circular can not repeal a law. Only a law can repeal another law." In 18 the recent case of Florendo vs. Court of Appeals , the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as 19 lender and borrower may agree upon."
16

Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, 20 contrary to morals ("contra bonos mores"), if not against the law. The stipulation is 21 void. The courts shall reduce equitably liquidated damages, whether intended as an 22 indemnity or a penalty if they are iniquitous or unconscionable. Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more reasonable. WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties. No pronouncement as to costs in this instance. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L). As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.) There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said: Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it. From the evidence the court found the following: The issues are: 1. Whether or losses/damages; not the shipment sustained

G.R. No. 97412 July 12, 1994 EASTERN SHIPPING LINES, INC., petitioner, vs. HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents. Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner. Zapa Law Office for private respondent.

VITUG, J.: The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%). The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced: This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages. On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38. Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff. On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D). On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable); 3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38). As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order. Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre

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

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation. SO ORDERED. (p. 207, Record). Dissatisfied, defendant's recourse to US. The appeal is devoid of merit. After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.) The Court a quo. of Appeals thus affirmed in toto the judgment of the court

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION; II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED. The petition is, in part, granted. In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to. The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 17361738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case. The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum, thus:

A. Ordering defendants to pay plaintiff, jointly and severally: 1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract); 2. P3,000.00 as attorney's fees, and 3. Costs.

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee. We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it. It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark. Let us first see a chronological recitation of the major rulings of this Court: The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods . In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the appellants, this Court ruled: Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial demand as the starting point. But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property ." After trial, the lower court decreed: WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows: Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons: xxx xxx xxx (g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.) On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) should have, instead, been applied. This Court 6 ruled: The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank. xxx xxx xxx Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum. The above rule was reiterated in Philippine Rabbit Bus Lines, Inc ., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid . In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus: WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied) A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained: There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment . It is delay in the

payment of such final judgment, that will cause the imposition of the interest. It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.) The subsequent case of American Express International, Inc ., vs. Intermediate Appellate Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid . (Emphasis supplied) Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held: WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendantappellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid (Emphasis supplied.) The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said: . . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from the time of the filing of the complaint . . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied) The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid. Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial

court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated " with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15 declared: . . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply. Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v . Cruz (1986), Florendo v. Ruiz (1989) and National Power Corporation v . Angas (1992). In the "second group" would be Malayan Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v. Intermediate Appellate Court (1988). In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid. The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 17 depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest. Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v . IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid ." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid. The ostensible discord is not difficult to explain. The factual circumstances may have called for different applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case, on the award of interest. Nonetheless,

it may not be unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for future guidance. I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20 II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof. SO ORDERED.