[G.R. No. L-56047. April 27, 1982.

]
THE OVERSEAS BANK OF MANILA, Petitioner, v. THE HONORABLE
COURT OF APPEALS and JULIAN R. CORDERO, Respondents.
Emmanuel Pelaez, Sr. for Petitioner.
Alberto S. Ortiz for Private Respondent.
SYNOPSIS
Respondent Cordero deposited different sums of money with The
Overseas Bank of Manila. Before said deposits could be withdrawn,
the Central Bank passed Resolutions Nos. 1327 and 1263 providing
among others, the suspension of the operations of the said bank. The
Supreme Court however annulled the aforesaid resolutions in Ramos,
Et. Al. v. Central Bank (40 SCRA 565), for which reason, petitioner
bank is ready to accept its liability for the payment to private
respondent of the balance of the principal amount deposited with it
but submits that it is not liable for the interests thereon during the
period that the bank was closed. The judgment of the trial court as
modified by the Court of Appeals ordered TOBM to pay the aforesaid
amount with interest until fully paid. Hence, this petition.
On review by certiorari, the Supreme Court ruled that respondent is
not entitled to the payment of the interest in question, in line with Its
pronouncements in the following cases: The Overseas Bank of Manila
v. Court of Appeals and Tony D. Tapia, G.R. No. L-49353, June 11,
1981, (105 SCRA 49) and The Overseas Bank of Manila v. Vicente
Cordero, G.R. No. L-33582, March 30, 1982, which are materially
identical to the one at bar.
Decision under review, reversed.
SYLLABUS
COMMERCIAL LAW; BANKS; TIME DEPOSIT; INTEREST; PAYMENT
CEASES UPON SUSPENSION OF BANKING OPERATIONS BY CENTRAL
BANK; CASE AT BAR. Where petitioner bank does not deny and is
ready to accept its liability for the return or payment to herein

private respondent of the balance of Thirty Thousand (P30,000.00)

Pesos of the principal amount deposited by him but submits that it is
not liable for the interests thereon during the period that Central
Banks Resolutions Nos. 1327 and 1263 were in force and effect and
the bank was, consequently, for all practical purposes under a state
of liquidation, while on the other hand, private respondent maintains,
and the Court of Appeals so held, that in view of the decision of this
Court annulling the mentioned Central Bank resolutions, the herein
petitioner bank was "not legally dead hence, "the ordinary laws
governing the relationship of a time deposit (sic) and the bank are
applicable, the issue thus joined by the parties is precisely the very
same one already resolved in the Overseas Bank of Manila v. Court of
Appeals and Tony D. Tapia, G.R. No. L-49353, June 11, 1981, 105
SCRA 49 and The Overseas Bank of Manila v. Vicente Cordero, G.R.
No. L-33582, March 30, 1982 to the effect that" it should be deemed
read into every contract of deposit with a bank that the obligation to
pay interest on the deposit ceases the moment the operation of the
bank is completely suspended by the duly constituted authority, the
Central Bank."
DECISION
BARREDO, J.:
Petition for review of the decision of the Court of Appeals in its CAG.R. No. 51339-R, Julian R. Cordero, plaintiff-appellee v. The Overseas
Bank of Manila, Defendant-Appellant, which modified the judgment
of the trial court but nevertheless sentenced herein petitioner
thus:chanroblesvirtual|awlibrary
"WHEREFORE, the judgment appealed from is hereby modified.
Defendant-appellant The Overseas Bank of Manila is hereby ordered
to pay the sum of P30,000.00 with 6% interest per annum from July
20, 1967 until fully paid. In all other respects, the judgment is
affirmed.
"SO ORDERED." (P. 33, Record.)
The background facts hereof are parallel in all material respects to

those in The Overseas Bank of Manila v. Court of Appeals and Tony D.

Tapia, G.R. No. L-49353, June 11, 1981, 105 SCRA 49, and the more
recent case of The Overseas Bank of Manila v. Vicente Cordero, G.R.
No. L-33582, March 30, 1982.
Briefly stated, in all these three cases Tapia and the Corderos
deposited, on time basis, different sums of money respectively with
the Overseas Bank of Manila. Before they could withdraw said
deposits, "by Resolution No. 1327 confirmed on August 13, 1968
(Exh. 1-TOBM), the Monetary Board decided, among others, . . .To
affirm the decisions of the Board under its Resolution No. 1263 dated
July 30, 1968 prohibiting TOBM from participating in clearing and
Resolution No. 1290 dated August 13, 1968 authorizing the Board of
Directors of TOBM to suspend the operations of the said Bank . . ."
The Board also excluded TOBM from clearing as even with the P10
million special fund loan intended to be made available under
Section 90 of Republic Act No. 265 to TOBM, the extremely
distressed financial condition of said Bank will continue to prevail
and that . . . there seem to be no other alternative except to
liquidate the bank under Section 29 of R.A. 265. In another
resolution (Exh. 2-TOBM) the Monetary Board pursuant to Section 29
of Republic Act No. 265 decided to forbid TOBM to do business in the
Philippines; to instruct the Superintendent of Banks to take such
further action as may be necessary pursuant to Section 29 of
Republic Act 265." (P. 25, Record).
Subsequently, however, on October 24, 1971, this Supreme Court
annulled the Central Bank Resolution No. 1263. As stated by the
Court of Appeals in the decision under review:jgc:chanrobles.com.ph
"The Supreme Court, in Ramos, Et. Al. v. Central Bank of the
Philippines, 1 while recognizing the precarious financial condition of
the defendant-appellant, ruled that a previous commitment of the
Central Bank for the continued operation of, and rehabilitation of,
the OBM (defendant-appellant bank) estopped the Central Bank
through the Monetary Board from liquidating and declaring the bank
insolvent. This commitment is embodied in a Voting Trust Agreement,
executed by the petitioners on November 20, 1967 and prepared by
the attorneys of the Central Bank. Thus the Supreme Court
said:chanrob1es virtual 1aw library
Bearing in mind that the communications Annexes B and G as

well as the voting trust agreement, Annex A, had been prepared by

the CB and the well known rule that ambiguities therein are to be
construed against the party that caused them, the record becomes
clear that, in consideration of the execution of the voting trust
agreement by the petitioner stockholders of OBM, and of the
mortgage or assignment of their personal properties to the CB (Res.
Nos. 2015, 16 October 1967, Annex F Petition), the CB had agreed
to announce its readiness to support the new management, in order
to allay the fear of depositors and creditors. (Annex B), and to
stave off liquidation by providing adequate funds for the
rehabilitation, normalization and stabilization of the OBM, in a
manner similar to what the CB had previously done with the Republic
Bank (Petition, Annex G, ante). While no express terms in the
document refer to the provision of funds by the CB for the purpose,
the same is necessarily implied, for in no other way could it
rehabilitate, normalize and stabilize a distressed bank.
Even in the absence of contract, the record plainly shows that the
CB made express representations to petitioners herein that it would
support the OBM, and avoid its liquidation if the petitioners would
execute (a) the Voting Trust Agreement turning over the
management of OBM to the CB or its nominees, and (b) mortgage or
assign their properties to the Central Bank to cover the overdraft
balance of OBM. The petitioners having complied with these
conditions and parted with value to the profit of the Central Bank
(which thus acquired additional security for its own advances), the
CB may not now renege on its representation and liquidate the OBM,
to the detriment of its stockholders, depositors and other creditors,
under the rule of promissory estoppel (19 Am. Jur., pages 657-658,
28 Am. Jur. 2d, 656-657).
"As a result of these findings, the Supreme Court annulled the
Central Banks Resolution Nos. 1263, 1290 and 1333 (that prohibit
the Overseas Bank of Manila to participate in clearing, direct the
suspension of its operations, and ordering liquidation of said bank)
and directed the Central Bank to comply with its obligations under
the Voting Trust Agreement, and further, to desist from taking action
in violation thereof." (Pp. 29-31, Record.)
Under the foregoing facts, petitioner bank does not deny and is
ready to accept its liability for the return or payment to herein
private respondent Julian R. Cordero of the balance of Thirty

Thousand (P30,000.00) Pesos of the principal amount deposited by

him but submits that it is not liable for the interests thereon during
the period that Central Banks Resolution Nos. 1327 and 1263 were
in force and effect and the bank was, consequently, for all practical
purposes under a state of liquidation. On the other hand, private
respondent maintains, and the Court of Appeals so held, that in view
of the decision of this Supreme Court annulling the mentioned
Central Banks resolutions, the herein petitioner bank was "not
legally dead", hence "the ordinary laws governing the relationship of
a time deposit (sic?) and the bank are applicable."cralaw virtua1aw
library
The issue thus joined by the parties is precisely the very same one
We already resolved in Tapia and Cordero (Vicente) supra. In this
latest
case,
Mr.
Justice
Escolin
held
for
the
Court
thus:jgc:chanrobles.com.ph
"Thus, with the principal claim of respondent having been satisfied,
the only remaining issue to be determined is whether respondent is
entitled to (1) interest on his time deposit during the period that
petitioner was closed and (2) to attorneys fees.
"We find the answer to be in the negative.
"The pronouncement made by this Court, per Justice Barredo, in the
recent case of Overseas Bank of Manila versus Court of Appeals (105
SCRA 49) is explicit and categorical. We quote:chanrob1es virtual
1aw library
It is a matter of common knowledge which we take judicial notice of,
that what enables a bank to pay stipulated interest on money
deposited with it is that thru the other aspects of its operation, it is
able to generate funds to cover the payment of such interest. Unless
a bank can lend money, engage in international transactions, acquire
foreclosed mortgaged properties or their proceeds and generally
engage in other banking and financing activities, from which it can
derive income, it is inconceivable how it can carry on as a depository
obligated to pay stipulated interest. . . . Consequently, it should be
deemed read into every contract of deposit with a bank that the
obligation to pay interest on the deposit ceases the moment the
operation of the bank is completely suspended by the duly
constituted authority, the Central Bank.

We consider it of trivial consequence that the stoppage of the banks

operations by the Central Bank has been subsequently declared
illegal by the Supreme Court, for before the Courts order, the bank
had no alternative under the law than to obey the orders of the
Central Bank. Whatever be the juridical significance of the
subsequent action of the Supreme Court, the stubborn fact remained
that the petitioner was totally crippled from then on from earning the
income needed to meet its obligations to its depositors. If such a
situation cannot, strictly speaking be legally denominated as force
majeure as maintained by private respondent, We hold it is a matter
of simple equity that it be treated as such.
"And concluding, this Court stated:chanrob1es virtual 1aw library
Parenthetically, We may add for the guidance of those who might be
concerned and so that the unnecessary litigations may be avoided
from further clogging the dockets of the courts that in the light of the
consideration expounded in the above opinion, the same formula
that exempts petitioner from the payment of interest to its
depositors during the whole period of factual stoppage of its
operations by orders of the Central Bank, modified in effect by the
decision as well as the approval of a formula-of rehabilitation by this
Court, should be, as a matter of consistency, applicable or followed
in respect to all other obligations of petitioner which could not be
paid during the period of its actual complete closure.
"Neither can respondent Cordero recover attorneys fees. The trial
court found that herein petitioners refusal to pay was not due to a
willful and dishonest refusal to comply with its obligation but to
restrictions imposed by the Central Bank (Record on Appeal [CA] p.
49). Since respondent did not appeal from this decision, he is now
barred from contesting the same."cralaw virtua1aw library
We cannot perceive any justifiable ground or reason to depart from
the considerations and judgments in those earlier cases materially
identical to the one at bar. Private respondent has not adduced any
cogent argument which could persuade Us otherwise.chanrobles
lawlibrary : rednad
WHEREFORE, the decision under review is hereby reversed and
petitioner is declared not liable for the interest on private

respondents time deposit in question in accordance with the

previous rulings of this Court above referred to. No costs.
De Castro, Ericta and Escolin, JJ., concur.
Concepcion Jr., and Abad Santos, JJ., are on leave.

G.R. No. L-29119

February 28, 1983

CO CHIN LENG, petitioner-appellee,

vs.
CO CHIN TONG, MACARIO CO LING and ONG HAI TONG, respondentsappellants.
Jose V. Santos for petitioner-appellee.
Eriberto D. Ignacio for respondent Ong Hai Tong.
Manuel P. Dumatol for respondents Macario Co Ling, et al.

TEEHANKEE, J.:
This is an appeal frm an order of the Court of First Instance of
Manila, Branch IV, directing respondent-appellant Ong Hai Tong or
anyone of the other respondents-appellants in possession of the
owner's duplicate of Transfer Certificate of Title No. 58759 to
surrender the same to the Register of Deeds of Manila within five (5)
days from receipt thereof and authorizing the Register of Deeds to
cancel said owner's duplicate certificate and issue a new one, in case
it is not presented to the court within the time specified in the order.
Petitioner-appellee is a co-owner of one-tenth (1/10) share of a
property covered by Transfer Certificate of Title No. 587519 of the
Register of Deeds of Manila, with an area of 1,084.20 square meters.
He mortgaged his share to the China Banking Corporation but the
Register of Deeds of Manila refused to register the mortgage
because he could -not present the owner's duplicate copy. Petitionerappellee filed a petition with the Court of First Instance of Manila
alleging that the owner's duplicate certificate of title is in the
possession of one of the co-owners, Co Chin Tong, and that in spite
of several demands made of him, he refused without justifiable
reasons to surrender said duplicate copy. Even the letter of the
Register of Deeds of Manila, requesting for the surrender of the
owner's duplicate of title, was ignored for unknown reasons. Co Chin
Leng prayed "that after due notice and hearing and upon failure of
respondents to surrender the Owner's Duplicate Certificate of Title
No. 58759, within five (5) days from receipt hereof or within a

reasonable time thereafter this Honorable Court may grant, to

declare null and void said title and direct the Register of Deeds of
Manila to issue a new one in lieu thereof, after payment of the fees
prescribed by law. "
In the course of the hearing of the petition, Co Chin Tong's counsel
manifested that the questioned document was not in the possession
of his client but in the possession of Ong Hai Tong, a co-owner. For
this reason, Ong Hai Tong was made a co-respondent, together with
Macario Co Ling, the only other remaining co-owner.
Respondents-appellants Macario Co Ling and Co Chin Tong filed an
opposition alleging that they were not in possession of the owner's
duplicate copy of Transfer Certificate of Title No. 58759. In asking for
the denial of the petition, they further alleged that the lower court,
sitting as a land registration court, had no jurisdiction over the
petition because it partakes of the nature of a civil case, which
should be litigated in a proper civil action; that there is no provision
of law, rule or regulation, authorizing the lower court, sitting as a
land registration court, to declare null and void a valid title and issue
a new one in lieu thereof; that the petition did not state a cause of
action; and that the remedy prayed for is not the proper remedy
under the circumstances, assuming, without admitting, that the facts
alleged were true.
On the other hand, respondent-appellant Ong Hai Tong filed a
separate opposition on grounds that (1) the lower court, as a court of
land registration, has no jurisdiction; (2) the petition and the reliefs
prayed for state no cause of action.
After petitioner-appellee had filed his reply to respondents'
oppositions, the lower court, issued the following order: "Ong Hai
Tong or anyone of the respondents in possession of the owner's
duplicate of Transfer Certificate of Title No. 58759 is hereby directed
to surrender to the Register of Deeds of Manila, within five (5) days
from receipt hereof, said owner's duplicate certificate. Should
respondents fail or refuse to comply with the terms of this Order
within the time specified, the Register of Deeds is authorized to
cancel said owner's copy and issue a new one in lieu thereof. "
A motion for reconsideration of the order was filed, but the court
below issued an order denying the motion.

The Court finds no error of law in the granting of the petition by the
lower court based on its findings "that the deed of mortgage
executed by petitioner over his one-tenth share of the property
described in Transfer Certificate of Title No. 58759 could not be given
due course in registration inasmuch as possession of the owner's
duplicate of said title is being withheld by one of the herein
respondents and cannot be produced before the Register of Deeds as
required by Section 55 and 61 of Act No. 496; that the subject matter
of the mortgage contract is limited to the share of petitioner in the
property described in the title and does not in any way affect the
interest and participation of the other co-owners as evidenced by a
copy of the deed of mortgage, Annex 'S-1' that the instant
proceeding may be considered as one filed under the provisions of
Section 72 of Act No. 496 by force and authority of the doctrine laid
down in the case of Director of Lands vs. Heirs of Abadezco, G.R. No.
L-36155, promulgated May 8,1934, where the Supreme Court ruled
that in the registration of a mortgage if the owner's duplicate
certificate is being withheld or otherwise could not be presented at
the time of registration, the procedure outlined in Section 72 may be
availed of by the interested party to the end that registration of the
deed of mortgage may be accomplished; that it is indubitable that
this Court, acting as a land registration court, has the authority and
jurisdiction to pass upon all issues raised under the provisions of
Section 72 of Act No. 496 and to enforce its order by suitable process
by force and effect of the provisions of the second paragraph of
Section 112 of the same Act which requires that all petitions and
motions after original registration shall be filed and entitled in the
original case in which the decree of registration was entered; and
considering finally that insofar as the merits of the issue involved in
this case are concerned respondent Ong Tai Tong has not advanced
any valid or justifiable reason to support her refusal to surrender the
owner's duplicate of Transfer Certificate of Title No. 58759 but has
limited herself to a discussion of the technical or procedural aspects
of the remedy sought by the petitioner and has, furthermore,
impliedly admitted being in possession of said owner's duplicate
certificate by her failure to deny the allegation in the amended
petition to that effect. "
The cited case of Director of Lands vs. Heirs of Pablo Abadezco et al.,
properly relied upon by the lower court in its questioned order duly
outlined the procedure a party may take in order that the registration

of any instrument or deed affecting registered land may be recorded,

in case the owner neglects or refuses to surrender his duplicate
certificate of title, as follows:
The provisions of the Land Registration Act relating to disposition of
land after registration, are found in its sections 50, to 99,110 and
111. Section 50 provides that no deed, mortgage, lease or other
voluntary disposition of registered land shall take effect as a
conveyance or bind the land, but shall operate only as a contract
between the parties as evidence of authority to the register of deeds
to effect the registration. The registration of such voluntary
disposition is the operative act which conveys and binds the land.
Under Section 52, such registration shall be effected by filing with
the register of deeds the instrument creating or transferring or
claiming such interest and by a brief memorandum thereof made by
the register of deeds upon the certificate of title; but, under Section
55, no such memorandum shall be made unless the owner's
duplicate certificate is presented to the register of deeds.
It is evident, therefore, that, in order that the registration of any
instrument or deed affecting registered land may be made, the
owner's duplicate certificate must be presented to the register of
deeds. What should then be the legal process in case the owner
neglects or refuses to surrender his duplicate certificate? In case of
an absolute sale or transfer of title in fee simple, the party claiming
to be entitled to the registration Of such sale or transfer, may, under
Section 111, file a petition to the court, and after hearing, the court
may order the holder of such certificate to surrender the same, and
direct the entry of a new certificate upon such surrender. In case of
an attachment or other lien or adverse claim of any description, the
register of deeds shall, under section 72 and within twenty-four
hours after the registration of such attachment, lien or adverse
claim, send notice by mail to the registered owner requesting him to
send or produce his certificate; but if the owner neglects or refuses
to comply within a reasonable time, the register of deeds shall
suggest the fact to the court, and the court, after notice, shall enter
an order requiring the owner to produce his certificate at a time and
place to be named in the order, and may enforce the order by
suitable process. In case of a judgment or decree rendered in an
action to recover the possession of title to real estate or an interest
therein, the court, on application and after due notice, shall enter an
order requiring the owner to produce his certificate, and may also

enforce the order by suitable process. (Sections 82 and 83).

The Court further expressly declared therein that as in the case at
bar, "in order to give full effect to the purposes of Sections 50, 52
and 55 of the Land Registration Act, in relation to Sections 60 to 63
thereof, the provisions of Section 72 are also applicable to the
registration of a mortgage deed affecting registered land."
The other point, raised by respondents-appellants questioning
petitioner- appellee's right to constitute a mortgage on his individual
one-tenth share in co-ownership with them on the ground that they
had an agreement requiring the unanimous consent thereto of all coowners before the actual partition of the property was likewise
correctly rejected by the lower court, with its ruling in its order
denying reconsideration that "the order sought to be reconsidered
was limited to the issue of whether or not respondents may be
compelled to surrender the owner's duplicate certificate in order that
the deed of mortgage executed by petitioner may be given due
course in registration and that the law and the evidence presented
adequately support the issuance thereof; that in a proceeding for the
surrender of the owner's duplicate in order that a mortgage may be
annotated thereon the court does not pass upon questions relative to
the validity or effect of the mortgage which can be determined only
in an ordinary case before the courts, (and) does not have the
jurisdiction to pass upon the alleged effect or invalidity ...
ACCORDINGLY, the appealed orders are hereby affirmed, with costs
jointly and severally against respondents-appellants.
Melencio-Herrera Plana, Vasquez, Relova and Gutierrez, Jr., JJ.,
concur.

G.R. No. 150886

February 16, 2007

RURAL BANK OF SAN MIGUEL, INC. and HILARIO P. SORIANO, in his

capacity as majority stockholder in the Rural Bankof San Miguel, Inc.,
Petitioners,
vs.
MONETARY BOARD, BANGKO SENTRAL NG PILIPINAS and PHILIPPINE
DEPOSIT INSURANCE CORPORATION, Respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 and
resolution3 of the Court of Appeals (CA) dated March 28, 2000 and
November 13, 2001, respectively, in CA-G.R. SP No. 57112.
Petitioner Rural Bank of San Miguel, Inc. (RBSM) was a domestic
corporation engaged in banking. It started operations in 1962 and by
year 2000 had 15 branches in Bulacan.4 Petitioner Hilario P. Soriano
claims to be the majority stockholder of its outstanding shares of
stock.5
On January 21, 2000, respondent Monetary Board (MB), the
governing board of respondent Bangko Sentral ng Pilipinas (BSP),
issued Resolution No. 105 prohibiting RBSM from doing business in
the Philippines, placing it under receivership and designating
respondent Philippine Deposit Insurance Corporation (PDIC) as
receiver:
On the basis of the comptrollership/monitoring report as of October
31, 1999 as reported by Mr. Wilfredo B. Domo-ong, Director,
Department of Rural Banks, in his memorandum dated January 20,
2000, which report showed that [RBSM] (a) is unable to pay its
liabilities as they become due in the ordinary course of business; (b)
cannot continue in business without involving probable losses to its
depositors and creditors; that the management of the bank had been
accordingly informed of the need to infuse additional capital to place
the bank in a solvent financial condition and was given adequate
time within which to make the required infusion and that no infusion
of adequate fresh capital was made, the Board decided as follows:

1. To prohibit the bank from doing business in the Philippines and to

place its assets and affairs under receivership in accordance with
Section 30 of [RA 7653];
2. To designate the [PDIC] as receiver of the bank;
xxx xxx xxx6
On January 31, 2000, petitioners filed a petition for certiorari and
prohibition in the Regional Trial Court (RTC) of Malolos, Branch 22 to
nullify and set aside Resolution No. 105.7 However, on February 7,
2000, petitioners filed a notice of withdrawal in the RTC and, on the
same day, filed a special civil action for certiorari and prohibition in
the CA. On February 8, 2000, the RTC dismissed the case pursuant to
Section 1, Rule 17 of the Rules of Court.8
The CAs findings of facts were as follows.
To assist its impaired liquidity and operations, the RBSM was granted
emergency loans on different occasions in the aggregate amount of
P375 [million].
As early as November 18, 1998, Land Bank of the Philippines (LBP)
advised RBSM that it will terminate the clearing of RBSMs checks in
view of the latters frequent clearing losses and continuing failure to
replenish its Special Clearing Demand Deposit with LBP. The BSP
interceded with LBP not to terminate the clearing arrangement of
RBSM to protect the interests of RBSMs depositors and creditors.
After a year, or on November 29, 1999, the LBP informed the BSP of
the termination of the clearing facility of RBSM to take effect on
December 29, 1999, in view of the clearing problems of RBSM.
On December 28, 1999, the MB approved the release of P26.189
[million] which is the last tranche of the P375 million emergency loan
for the sole purpose of servicing and meeting the withdrawals of its
depositors. Of the P26.180 million, xxx P12.6 million xxx was not
used to service withdrawals [and] remains unaccounted for as
admitted by [RBSMs Treasury Officer and Officer-in-Charge of
Treasury]. Instead of servicing withdrawals of depositors, RBSM paid
Forcecollect Professional Solution, Inc. and Surecollect Professional,
Inc., entities which are owned and controlled by Hilario P. Soriano

and other RBSM officers.

On January 4, 2000, RBSM declared a bank holiday. RBSM and all of
its 15 branches were closed from doing business.
Alarmed and disturbed by the unilateral declaration of bank holiday,
[BSP] wanted to examine the books and records of RBSM but
encountered problems.
Meanwhile, on November 10, 1999, RBSMs designated comptroller,
Ms. Zenaida Cabais of the BSP, submitted to the Department of Rural
Banks, BSP, a Comptrollership Report on her findings on the financial
condition and operations of the bank as of October 31, 1999. Another
set of findings was submitted by said comptroller [and] this second
report reflected the financial status of RBSM as of December 31,
1999.
The findings of the comptroller on the financial state of RBSM as of
October 31, 1999 in comparison with the financial condition as of
December 31, 1999 is summed up pertinently as follows:

As of Oct. 31, 1999

As of Dec. 31, 1999
Total obligations/
Liabilities
P1,076,863,000.00
1,009,898,000.00
Realizable Assets
898,588,000.00796,930,000.00
Deficit 178,275,000.00212,968,000.00
Cash on Hand 101,441.547.008,266,450.00
Required Capital Infusion P252,120,000.00

Hence this petition.

It is well-settled that the closure of a bank may be considered as an
exercise of police power.15 The action of the MB on this matter is
final and executory.16 Such exercise may nonetheless be subject to
judicial inquiry and can be set aside if found to be in excess of
jurisdiction or with such grave abuse of discretion as to amount to
lack or excess of jurisdiction.17

Capital Infusion P5,000,000.00

(On Dec. 20, 1999)
Actual Breakdown of Total Obligations:
1) Deposits of 20,000 depositors P578,201,000.00
2) Borrowings from BSP P320,907,000.00
withholding

and

gross

receipt

In their petition12 before the CA, petitioners claimed that

respondents MB and BSP committed grave abuse of discretion in
issuing Resolution No. 105. The petition was dismissed by the CA on
March 28, 2000. It held, among others, that the decision of the MB to
issue Resolution No. 105 was based on the findings and
recommendations of the Department of Rural Banks Supervision and
Examination Sector, the comptroller reports as of October 31, 1999
and December 31, 1999 and the declaration of a bank holiday. Such
could be considered as substantial evidence.13
Pertinently, on June 9, 2000, on the basis of reports prepared by PDIC
stating that RBSM could not resume business with sufficient
assurance of protecting the interest of its depositors, creditors and
the general public, the MB passed Resolution No. 966 directing PDIC
to proceed with the liquidation of RBSM under Section 30 of RA
7653.14

FINANCIAL CONDITION OF RBSM

3)
Unremitted
P57,403,000.00.9

Based on these comptrollership reports, the director of the

Department of Rural Banks Supervision and Examination Sector,
Wilfredo B. Domo-ong, made a report to the MB dated January 20,
2000.10 The MB, after evaluating and deliberating on the findings
and recommendation of the Department of Rural Banks Supervision
and Examination Sector, issued Resolution No. 105 on January 21,
2000.11 Thereafter, PDIC implemented the closure order and took
over the management of RBSMs assets and affairs.

taxes

Petitioners argue that Resolution No. 105 was bereft of any basis
considering that no complete examination had been conducted
before it was issued. This case essentially boils down to one core
issue: whether Section 30 of RA 7653 (also known as the New
Central Bank Act) and applicable jurisprudence require a current and
complete examination of the bank before it can be closed and placed

under receivership.
Section 30 of RA 7653 provides:
SECTION 30. Proceedings in Receivership and Liquidation.
Whenever, upon report of the head of the supervising or examining
department, the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary
course of business: Provided, That this shall not include inability to
pay caused by extraordinary demands induced by financial panic in
the banking community;
(b) has insufficient realizable assets, as determined by the [BSP] to
meet its liabilities; or
(c) cannot continue in business without involving probable losses to
its depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37
that has become final, involving acts or transactions which amount
to fraud or a dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily and without need for prior
hearing forbid the institution from doing business in the Philippines
and designate the Philippine Deposit Insurance Corporation as
receiver of the banking institution.
xxx xxx xxx
The actions of the Monetary Board taken under this section or under
Section 29 of this Act shall be final and executory, and may not be
restrained or set aside by the court except on petition for certiorari
on the ground that the action taken was in excess of jurisdiction or
with such grave abuse of discretion as to amount to lack or excess of
jurisdiction. The petition for certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship. (Emphasis supplied)
xxx xxx xxx

Petitioners contend that there must be a current, thorough and

complete examination before a bank can be closed under Section 30
of RA 7653. They argue that this section should be harmonized with
Sections 25 and 28 of the same law:
SECTION 25. Supervision and Examination. The [BSP] shall have
supervision over, and conduct periodic or special examinations of,
banking institutions and quasi-banks, including their subsidiaries and
affiliates engaged in allied activities.
xxx xxx xxx
SECTION 28. Examination and Fees. The supervising and
examining department head, personally or by deputy, shall examine
the books of every banking institution once in every twelve (12)
months, and at such other time as the Monetary Board by an
affirmative vote of five (5) members may deem expedient and to
make a report on the same to the Monetary Board: Provided that
there shall be an interval of at least twelve (12) months between
annual examinations. (Emphasis supplied)
xxx xxx xxx
According to the petitioners, it is clear from these provisions that the
"report of the supervising or examining department" required under
Section 30 refers to the report on the examination of the bank which,
under Section 28, must be made to the MB after the supervising or
examining head conducts an examination mandated by Sections 25
and 28.18 They cite Banco Filipino Savings & Mortgage Bank v.
Monetary Board, Central Bank of the Philippines19 wherein the Court
ruled:
There is no question that under Section 29 of the Central Bank Act,
the following are the mandatory requirements to be complied with
before a bank found to be insolvent is ordered closed and forbidden
to do business in the Philippines: Firstly, an examination shall be
conducted by the head of the appropriate supervising or examining
department or his examiners or agents into the condition of the
bank; secondly, it shall be disclosed in the examination that the
condition of the bank is one of insolvency, or that its continuance in
business would involve probable loss to its depositors or creditors;
thirdly, the department head concerned shall inform the Monetary

Board in writing, of the facts; and lastly, the Monetary Board shall
find the statements of the department head to be true.20 (Emphasis
supplied)
Petitioners assert that an examination is necessary and not a mere
report, otherwise the decision to close a bank would be arbitrary.
Respondents counter that RA 7653 merely requires a report of the
head of the supervising or examining department. They maintain
that the term "report" under Section 30 and the word "examination"
used in Section 29 of the old law are not synonymous. "Examination"
connotes in-depth analysis, evaluation, inquiry or investigation while
"report" connotes a simple disclosure or narration of facts for
informative purposes.21
Petitioners contention has no merit. Banco Filipino and other cases
petitioners cited22 were decided using Section 29 of the old law (RA
265):
SECTION 29. Proceedings upon insolvency. Whenever, upon
examination by the head of the appropriate supervising or examining
department or his examiners or agents into the condition of any
bank or non-bank financial intermediary performing quasi-banking
functions, it shall be disclosed that the condition of the same is one
of insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors, it shall be the duty of the
department head concerned forthwith, in writing, to inform the
Monetary Board of the facts. The Board may, upon finding the
statements of the department head to be true, forbid the institution
to do business in the Philippines and designate an official of the
Central Bank or a person of recognized competence in banking or
finance, as receiver to immediately take charge of its assets and
liabilities, as expeditiously as possible collect and gather all the
assets and administer the same for the benefits of its creditors, and
represent the bank personally or through counsel as he may retain in
all actions or proceedings for or against the institution, exercising all
the powers necessary for these purposes including, but not limited
to, bringing and foreclosing mortgages in the name of the bank or
non-bank financial intermediary performing quasi-banking functions.
(Emphasis supplied)
xxx xxx xxx

Thus in Banco Filipino, we ruled that an "examination [conducted] by

the head of the appropriate supervising or examining department or
his examiners or agents into the condition of the bank"23 is
necessary before the MB can order its closure.
However, RA 265, including Section 29 thereof, was expressly
repealed by RA 7653 which took effect in 1993. Resolution No. 105
was issued on January 21, 2000. Hence, petitioners reliance on
Banco Filipino which was decided under RA 265 was misplaced.
In RA 7653, only a "report of the head of the supervising or
examining department" is necessary. It is an established rule in
statutory construction that where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation:24
This plain meaning rule or verba legis derived from the maxim index
animi sermo est (speech is the index of intention) rests on the valid
presumption that the words employed by the legislature in a statute
correctly express its intention or will and preclude the court from
construing it differently. The legislature is presumed to know the
meaning of the words, to have used words advisedly, and to have
expressed its intent by use of such words as are found in the statute.
Verba legis non est recedendum, or from the words of a statute there
should be no departure.25
The word "report" has a definite and unambiguous meaning which is
clearly different from "examination." A report, as a noun, may be
defined as "something that gives information" or "a usually detailed
account or statement."26 On the other hand, an examination is "a
search, investigation or scrutiny."27
This Court cannot look for or impose another meaning on the term
"report" or to construe it as synonymous with "examination." From
the words used in Section 30, it is clear that RA 7653 no longer
requires that an examination be made before the MB can issue a
closure order. We cannot make it a requirement in the absence of
legal basis.
Indeed, the court may consider the spirit and reason of the statute,
where a literal meaning would lead to absurdity, contradiction,

injustice, or would defeat the clear purpose of the lawmakers.28

However, these problems are not present here. Using the literal
meaning of "report" does not lead to absurdity, contradiction or
injustice. Neither does it defeat the intent of the legislators. The
purpose of the law is to make the closure of a bank summary and
expeditious in order to protect public interest. This is also why prior
notice and hearing are no longer required before a bank can be
closed.29

revealing the multitude of problems which faced RBSM and the

recommendations based on those findings.

Laying down the requisites for the closure of a bank under the law is
the prerogative of the legislature and what its wisdom dictates. The
lawmakers could have easily retained the word "examination" (and in
the process also preserved the jurisprudence attached to it) but they
did not and instead opted to use the word "report." The insistence on
an examination is not sanctioned by RA 7653 and we would be guilty
of judicial legislation were we to make it a requirement when such is
not supported by the language of the law.

Having dispensed with the issue decisive of this case, it becomes

unnecessary to resolve the other minor issues raised.31

What is being raised here as grave abuse of discretion on the part of

the respondents was the lack of an examination and not the
supposed arbitrariness with which the conclusions of the director of
the Department of Rural Banks Supervision and Examination Sector
had been reached in the report which became the basis of Resolution
No. 105.1awphi1.net
The absence of an examination before the closure of RBSM did not
mean that there was no basis for the closure order. Needless to say,
the decision of the MB and BSP, like any other administrative body,
must have something to support itself and its findings of fact must
be supported by substantial evidence. But it is clear under RA 7653
that the basis need not arise from an examination as required in the
old law.
We thus rule that the MB had sufficient basis to arrive at a sound
conclusion that there were grounds that would justify RBSMs
closure. It relied on the report of Mr. Domo-ong, the head of the
supervising or examining department, with the findings that: (1)
RBSM was unable to pay its liabilities as they became due in the
ordinary course of business and (2) that it could not continue in
business without incurring probable losses to its depositors and
creditors.30 The report was a 50-page memorandum detailing the
facts supporting those grounds, an extensive chronology of events

In short, MB and BSP complied with all the requirements of RA 7653.

By relying on a report before placing a bank under receivership, the
MB and BSP did not only follow the letter of the law, they were also
faithful to its spirit, which was to act expeditiously. Accordingly, the
issuance of Resolution No. 105 was untainted with arbitrariness.

WHEREFORE, the petition is hereby DENIED. The March 28, 2000

decision and November 13, 2001 resolution of the Court of Appeals
in CA-G.R. SP No. 57112 are AFFIRMED.

G.R. No. 115849

January 24, 1996

FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of

the Philippines) and MERCURIO RIVERA, petitioners,
vs.
COURT OF APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO
DEMETRIA, and JOSE JANOLO, respondents.
DECISION
PANGANIBAN, J.:
In the absence of a formal deed of sale, may commitments given by
bank officers in an exchange of letters and/or in a meeting with the
buyers constitute a perfected and enforceable contract of sale over
101 hectares of land in Sta. Rosa, Laguna? Does the doctrine of
"apparent authority" apply in this case? If so, may the Central Bankappointed conservator of Producers Bank (now First Philippine
International Bank) repudiate such "apparent authority" after said
contract has been deemed perfected? During the pendency of a suit
for specific performance, does the filing of a "derivative suit" by the
majority shareholders and directors of the distressed bank to prevent
the enforcement or implementation of the sale violate the ban
against forum-shopping?
Simply stated, these are the major questions brought before this
Court in the instant Petition for review on certiorari under Rule 45 of
the Rules of Court, to set aside the Decision promulgated January 14,
1994 of the respondent Court of Appeals1 in CA-G.R CV No. 35756
and the Resolution promulgated June 14, 1994 denying the motion
for reconsideration. The dispositive portion of the said Decision
reads:
WHEREFORE, the decision of the lower court is MODIFIED by the
elimination of the damages awarded under paragraphs 3, 4 and 6 of
its dispositive portion and the reduction of the award in paragraph 5
thereof to P75,000.00, to be assessed against defendant bank. In all
other aspects, said decision is hereby AFFIRMED.
All references to the original plaintiffs in the decision and its
dispositive portion are deemed, herein and hereafter, to legally refer
to the plaintiff-appellee Carlos C. Ejercito.

Costs against appellant bank.

The dispositive portion of the trial court's2 decision dated July 10,
1991, on the other hand, is as follows:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiffs and against the defendants as follows:
1.
Declaring the existence of a perfected contract to buy and
sell over the six (6) parcels of land situated at Don Jose, Sta. Rosa,
Laguna with an area of 101 hectares, more or less, covered by and
embraced in Transfer Certificates of Title Nos. T-106932 to T-106937,
inclusive, of the Land Records of Laguna, between the plaintiffs as
buyers and the defendant Producers Bank for an agreed price of Five
and One Half Million (P5,500,000.00) Pesos;
2.
Ordering defendant Producers Bank of the Philippines, upon
finality of this decision and receipt from the plaintiffs the amount of
P5.5 Million, to execute in favor of said plaintiffs a deed of absolute
sale over the aforementioned six (6) parcels of land, and to
immediately deliver to the plaintiffs the owner's copies of T.C.T. Nos.
T-106932 to T- 106937, inclusive, for purposes of registration of the
same deed and transfer of the six (6) titles in the names of the
plaintiffs;
3.
Ordering the defendants, jointly and severally, to pay
plaintiffs Jose A. Janolo and Demetrio Demetria the sums of
P200,000.00 each in moral damages;
4.
Ordering the defendants, jointly and severally, to pay
plaintiffs the sum of P100,000.00 as exemplary damages ;
5.
Ordering the defendants, jointly and severally, to pay the
plaintiffs the amount of P400,000.00 for and by way of attorney's
fees;
6.
Ordering the defendants to pay the plaintiffs, jointly and
severally, actual and moderate damages in the amount of
P20,000.00;
With costs against the defendants.

After the parties filed their comment, reply, rejoinder, sur-rejoinder

and reply to sur-rejoinder, the petition was given due course in a
Resolution dated January 18, 1995. Thence, the parties filed their
respective memoranda and reply memoranda. The First Division
transferred this case to the Third Division per resolution dated
October 23, 1995. After carefully deliberating on the aforesaid
submissions, the Court assigned the case to the undersigned
ponente for the writing of this Decision.
The Parties
Petitioner First Philippine International Bank (formerly Producers
Bank of the Philippines; petitioner Bank, for brevity) is a banking
institution organized and existing under the laws of the Republic of
the Philippines. Petitioner Mercurio Rivera (petitioner Rivera, for
brevity) is of legal age and was, at all times material to this case,
Head-Manager of the Property Management Department of the
petitioner Bank.
Respondent Carlos Ejercito (respondent Ejercito, for brevity) is of
legal age and is the assignee of original plaintiffs-appellees Demetrio
Demetria and Jose Janolo.

(2)
In the early part of August 1987 said plaintiffs, upon the
suggestion of BYME investment's legal counsel, Jose Fajardo, met
with defendant Mercurio Rivera, Manager of the Property
Management Department of the defendant bank. The meeting was
held pursuant to plaintiffs' plan to buy the property (TSN of Jan. 16,
1990, pp. 7-10). After the meeting, plaintiff Janolo, following the
advice of defendant Rivera, made a formal purchase offer to the
bank through a letter dated August 30, 1987 (Exh. "B"), as follows:
August 30, 1987
The Producers Bank of the Philippines
Makati, Metro Manila
Attn.
Mr. Mercurio Q. Rivera
Manager, Property Management Dept.
Gentleman:
I have the honor to submit my formal offer to purchase your
properties covered by titles listed hereunder located at Sta. Rosa,
Laguna, with a total area of 101 hectares, more or less.
TCT NO.

Respondent Court of Appeals is the court which issued the Decision

and Resolution sought to be set aside through this petition.

AREA

The Facts

T-106932

The facts of this case are summarized in the respondent Court's

Decision3 as follows:

113,580 sq. m.

(1)
In the course of its banking operations, the defendant
Producer Bank of the Philippines acquired six parcels of land with a
total area of 101 hectares located at Don Jose, Sta. Rose, Laguna,
and covered by Transfer Certificates of Title Nos. T-106932 to T106937. The property used to be owned by BYME Investment and
Development Corporation which had them mortgaged with the bank
as collateral for a loan. The original plaintiffs, Demetrio Demetria and
Jose O. Janolo, wanted to purchase the property and thus initiated
negotiations for that purpose.

T-106933
70,899 sq. m.
T-106934
52,246 sq. m.
T-106935
96,768 sq. m.

T-106936

Paseo de Roxas
Makati, Metro Manila

187,114 sq. m.

Attention:

T-106937

Gentlemen:

481,481 sq. m.
My offer is for PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00) PESOS, in cash.

In reply to your letter regarding my proposal to purchase your 101hectare lot located at Sta. Rosa, Laguna, I would like to amend my
previous offer and I now propose to buy the said lot at P4.250 million
in CASH..

Kindly contact me at Telephone Number 921-1344.

Hoping that this proposal meets your satisfaction.

(3) On September 1, 1987, defendant Rivera made on behalf of the

bank a formal reply by letter which is hereunder quoted (Exh. "C"):

(5)
There was no reply to Janolo's foregoing letter of September
17, 1987. What took place was a meeting on September 28, 1987
between the plaintiffs and Luis Co, the Senior Vice-President of
defendant bank. Rivera as well as Fajardo, the BYME lawyer,
attended the meeting. Two days later, or on September 30, 1987,
plaintiff Janolo sent to the bank, through Rivera, the following letter
(Exh. "E"):

September 1, 1987
JP M-P GUTIERREZ ENTERPRISES
142 Charisma St., Doa Andres II
Rosario, Pasig, Metro Manila
Attention: JOSE O. JANOLO
Dear Sir:
Thank you for your letter-offer to buy our six (6) parcels of acquired
lots at Sta. Rosa, Laguna (formerly owned by Byme Industrial Corp.).
Please be informed however that the bank's counter-offer is at P5.5
million for more than 101 hectares on lot basis.
We shall be very glad to hear your position on the on the matter.

Mr. Mercurio Rivera

The Producers Bank of the Philippines

Paseo de Roxas, Makati
Metro Manila
Attention: Mr. Mercurio Rivera
Re: 101 Hectares of Land
in Sta. Rosa, Laguna
Gentlemen:

(4)
On September 17, 1987, plaintiff Janolo, responding to
Rivera's aforequoted reply, wrote (Exh. "D"):

Pursuant to our discussion last 28 September 1987, we are pleased

to inform you that we are accepting your offer for us to purchase the
property at Sta. Rosa, Laguna, formerly owned by Byme Investment,
for a total price of PESOS: FIVE MILLION FIVE HUNDRED THOUSAND
(P5,500,000.00).

September 17, 1987

Thank you.

Producers Bank

(6)

Best regards.

On October 12, 1987, the conservator of the bank (which has

been placed under conservatorship by the Central Bank since 1984)

was replaced by an Acting Conservator in the person of defendant
Leonida T. Encarnacion. On November 4, 1987, defendant Rivera
wrote plaintiff Demetria the following letter (Exh. "F"):
Attention:

Atty. Demetrio Demetria

Dear Sir:
Your proposal to buy the properties the bank foreclosed from Byme
investment Corp. located at Sta. Rosa, Laguna is under study yet as
of this time by the newly created committee for submission to the
newly designated Acting Conservator of the bank.
For your information.
(7)
What thereafter transpired was a series of demands by the
plaintiffs for compliance by the bank with what plaintiff considered as
a perfected contract of sale, which demands were in one form or
another refused by the bank. As detailed by the trial court in its
decision, on November 17, 1987, plaintiffs through a letter to
defendant Rivera (Exhibit "G") tendered payment of the amount of
P5.5 million "pursuant to (our) perfected sale agreement."
Defendants refused to receive both the payment and the letter.
Instead, the parcels of land involved in the transaction were
advertised by the bank for sale to any interested buyer (Exh, "H" and
"H-1"). Plaintiffs demanded the execution by the bank of the
documents on what was considered as a "perfected agreement."
Thus:
Mr. Mercurio Rivera
Manager, Producers Bank
Paseo de Roxas, Makati
Metro Manila
Dear Mr. Rivera:
This is in connection with the offer of our client, Mr. Jose O. Janolo, to
purchase your 101-hectare lot located in Sta. Rosa, Laguna, and
which are covered by TCT No. T-106932 to 106937.
From the documents at hand, it appears that your counter-offer

dated September 1, 1987 of this same lot in the amount of P5.5

million was accepted by our client thru a letter dated September 30,
1987 and was received by you on October 5, 1987.
In view of the above circumstances, we believe that an agreement
has been perfected. We were also informed that despite repeated
follow-up to consummate the purchase, you now refuse to honor
your commitment. Instead, you have advertised for sale the same lot
to others.
In behalf of our client, therefore, we are making this formal demand
upon you
to
consummate and execute the
necessary
actions/documentation within three (3) days from your receipt
hereof. We are ready to remit the agreed amount of P5.5 million at
your advice. Otherwise, we shall be constrained to file the necessary
court action to protect the interest of our client.
We trust that you will be guided accordingly.
(8)
Defendant bank, through defendant Rivera, acknowledged
receipt of the foregoing letter and stated, in its communication of
December 2, 1987 (Exh. "I"), that said letter has been "referred . . .
to the office of our Conservator for proper disposition" However, no
response came from the Acting Conservator. On December 14, 1987,
the plaintiffs made a second tender of payment (Exh. "L" and "L-1"),
this time through the Acting Conservator, defendant Encarnacion.
Plaintiffs' letter reads:
PRODUCERS BANK OF
THE PHILIPPINES
Paseo de Roxas,
Makati, Metro Manila
Attn.: Atty. NIDA ENCARNACION
Central Bank Conservator
We are sending you herewith, in - behalf of our client, Mr. JOSE O.
JANOLO, MBTC Check No. 258387 in the amount of P5.5 million as
our agreed purchase price of the 101-hectare lot covered by TCT
Nos. 106932, 106933, 106934, 106935, 106936 and 106937 and
registered under Producers Bank.

This is in connection with the perfected agreement consequent from

your offer of P5.5 Million as the purchase price of the said lots.
Please inform us of the date of documentation of the sale
immediately.
Kindly acknowledge receipt of our payment.
(9)
The foregoing letter drew no response for more than four
months. Then, on May 3, 1988, plaintiff, through counsel, made a
final demand for compliance by the bank with its obligations under
the considered perfected contract of sale (Exhibit "N"). As recounted
by the trial court (Original Record, p. 656), in a reply letter dated May
12, 1988 (Annex "4" of defendant's answer to amended complaint),
the defendants through Acting Conservator Encarnacion repudiated
the authority of defendant Rivera and claimed that his dealings with
the plaintiffs, particularly his counter-offer of P5.5 Million are
unauthorized or illegal. On that basis, the defendants justified the
refusal of the tenders of payment and the non-compliance with the
obligations under what the plaintiffs considered to be a perfected
contract of sale.
(10)
On May 16, 1988, plaintiffs filed a suit for specific
performance with damages against the bank, its Manager Rivers and
Acting Conservator Encarnacion. The basis of the suit was that the
transaction had with the bank resulted in a perfected contract of
sale, The defendants took the position that there was no such
perfected sale because the defendant Rivera is not authorized to sell
the property, and that there was no meeting of the minds as to the
price.
On March 14, 1991, Henry L. Co (the brother of Luis Co), through
counsel Sycip Salazar Hernandez and Gatmaitan, filed a motion to
intervene in the trial court, alleging that as owner of 80% of the
Bank's outstanding shares of stock, he had a substantial interest in
resisting the complaint. On July 8, 1991, the trial court issued an
order denying the motion to intervene on the ground that it was filed
after trial had already been concluded. It also denied a motion for
reconsideration filed thereafter. From the trial court's decision, the
Bank, petitioner Rivera and conservator Encarnacion appealed to the
Court of Appeals which subsequently affirmed with modification the
said judgment. Henry Co did not appeal the denial of his motion for
intervention.

In the course of the proceedings in the respondent Court, Carlos

Ejercito was substituted in place of Demetria and Janolo, in view of
the assignment of the latters' rights in the matter in litigation to said
private respondent.
On July 11, 1992, during the pendency of the proceedings in the
Court of Appeals, Henry Co and several other stockholders of the
Bank, through counsel Angara Abello Concepcion Regala and Cruz,
filed an action (hereafter, the "Second Case") purportedly a
"derivative suit" with the Regional Trial Court of Makati, Branch
134, docketed as Civil Case No. 92-1606, against Encarnacion,
Demetria and Janolo "to declare any perfected sale of the property
as unenforceable and to stop Ejercito from enforcing or
implementing the sale"4 In his answer, Janolo argued that the
Second Case was barred by litis pendentia by virtue of the case then
pending in the Court of Appeals. During the pre-trial conference in
the Second Case, plaintiffs filed a Motion for Leave of Court to
Dismiss the Case Without Prejudice. "Private respondent opposed
this motion on the ground, among others, that plaintiff's act of forum
shopping justifies the dismissal of both cases, with prejudice."5
Private respondent, in his memorandum, averred that this motion is
still pending in the Makati RTC.
In their Petition6 and Memorandum7, petitioners summarized their
position as follows:
I.
The Court of Appeals erred in declaring that a contract of sale was
perfected between Ejercito (in substitution of Demetria and Janolo)
and the bank.
II.
The Court of Appeals erred in declaring the existence of an
enforceable contract of sale between the parties.
III.
The Court of Appeals erred in declaring that the conservator does not
have the power to overrule or revoke acts of previous management.

IV.
The findings and conclusions of the Court of Appeals do not conform
to the evidence on record.
On the other hand, petitioners prayed for dismissal of the instant suit
on the ground8 that:

4)
Did the bank conservator have the unilateral power to
repudiate the authority of the bank officers and/or to revoke the said
contract?
5)
Did the respondent Court commit any reversible error in its
findings of facts?
The First Issue: Was There Forum-Shopping?

I.
Petitioners have engaged in forum shopping.
II.
The factual findings and conclusions of the Court of Appeals are
supported by the evidence on record and may no longer be
questioned in this case.
III.
The Court of Appeals correctly held that there was a perfected
contract between Demetria and Janolo (substituted by; respondent
Ejercito) and the bank.
IV.
The Court of Appeals has correctly held that the conservator, apart
from being estopped from repudiating the agency and the contract,
has no authority to revoke the contract of sale.
The Issues
From the foregoing positions of the parties, the issues in this case
may be summed up as follows:
1)

Was there forum-shopping on the part of petitioner Bank?

2)

Was there a perfected contract of sale between the parties?

3)
Assuming there was, was the said contract enforceable
under the statute of frauds?

In order to prevent the vexations of multiple petitions and actions,

the Supreme Court promulgated Revised Circular No. 28-91 requiring
that a party "must certify under oath . . . [that] (a) he has not
(t)heretofore commenced any other action or proceeding involving
the same issues in the Supreme Court, the Court of Appeals, or any
other tribunal or agency; (b) to the best of his knowledge, no such
action or proceeding is pending" in said courts or agencies. A
violation of the said circular entails sanctions that include the
summary dismissal of the multiple petitions or complaints. To be
sure, petitioners have included a VERIFICATION/CERTIFICATION in
their Petition stating "for the record(,) the pendency of Civil Case No.
92-1606 before the Regional Trial Court of Makati, Branch 134,
involving a derivative suit filed by stockholders of petitioner Bank
against the conservator and other defendants but which is the
subject of a pending Motion to Dismiss Without Prejudice.9
Private respondent Ejercito vigorously argues that in spite of this
verification, petitioners are guilty of actual forum shopping because
the instant petition pending before this Court involves "identical
parties or interests represented, rights asserted and reliefs sought
(as that) currently pending before the Regional Trial Court, Makati
Branch 134 in the Second Case. In fact, the issues in the two cases
are so interwined that a judgement or resolution in either case will
constitute res judicata in the other." 10
On the other hand, petitioners explain 11 that there is no forumshopping because:
1)
In the earlier or "First Case" from which this proceeding
arose, the Bank was impleaded as a defendant, whereas in the
"Second Case" (assuming the Bank is the real party in interest in a
derivative suit), it was plaintiff;

2)
"The derivative suit is not properly a suit for and in behalf of
the corporation under the circumstances";
3)
Although the CERTIFICATION/VERIFICATION (supra) signed by
the Bank president and attached to the Petition identifies the action
as a "derivative suit," it "does not mean that it is one" and "(t)hat is
a legal question for the courts to decide";
4)
Petitioners did not hide the Second Case at they mentioned it
in the said VERIFICATION/CERTIFICATION.
We rule for private respondent.
To begin with, forum-shopping originated as a concept in private
international law.12, where non-resident litigants are given the
option to choose the forum or place wherein to bring their suit for
various reasons or excuses, including to secure procedural
advantages, to annoy and harass the defendant, to avoid
overcrowded dockets, or to select a more friendly venue. To combat
these less than honorable excuses, the principle of forum non
conveniens was developed whereby a court, in conflicts of law cases,
may refuse impositions on its jurisdiction where it is not the most
"convenient" or available forum and the parties are not precluded
from seeking remedies elsewhere.
In this light, Black's Law Dictionary 13 says that forum shopping
"occurs when a party attempts to have his action tried in a particular
court or jurisdiction where he feels he will receive the most favorable
judgment or verdict." Hence, according to Words and Phrases14, "a
litigant is open to the charge of "forum shopping" whenever he
chooses a forum with slight connection to factual circumstances
surrounding his suit, and litigants should be encouraged to attempt
to settle their differences without imposing undue expenses and
vexatious situations on the courts".
In the Philippines, forum shopping has acquired a connotation
encompassing not only a choice of venues, as it was originally
understood in conflicts of laws, but also to a choice of remedies. As
to the first (choice of venues), the Rules of Court, for example, allow
a plaintiff to commence personal actions "where the defendant or
any of the defendants resides or may be found, or where the plaintiff

or any of the plaintiffs resides, at the election of the plaintiff" (Rule 4,

Sec, 2 [b]). As to remedies, aggrieved parties, for example, are given
a choice of pursuing civil liabilities independently of the criminal,
arising from the same set of facts. A passenger of a public utility
vehicle involved in a vehicular accident may sue on culpa
contractual, culpa aquiliana or culpa criminal each remedy being
available independently of the others although he cannot recover
more than once.
In either of these situations (choice of venue or choice of remedy),
the litigant actually shops for a forum of his action, This was the
original concept of the term forum shopping.
Eventually, however, instead of actually making a choice of the
forum of their actions, litigants, through the encouragement of their
lawyers, file their actions in all available courts, or invoke all relevant
remedies simultaneously. This practice had not only resulted to (sic)
conflicting adjudications among different courts and consequent
confusion enimical (sic) to an orderly administration of justice. It had
created extreme inconvenience to some of the parties to the action.
Thus, "forum shopping" had acquired a different concept which is
unethical professional legal practice. And this necessitated or had
given rise to the formulation of rules and canons discouraging or
altogether prohibiting the practice. 15
What therefore originally started both in conflicts of laws and in our
domestic law as a legitimate device for solving problems has been
abused and mis-used to assure scheming litigants of dubious reliefs.
To avoid or minimize this unethical practice of subverting justice, the
Supreme Court, as already mentioned, promulgated Circular 28-91.
And even before that, the Court had prescribed it in the Interim Rules
and Guidelines issued on January 11, 1983 and had struck down in
several cases 16 the inveterate use of this insidious malpractice.
Forum shopping as "the filing of repetitious suits in different courts"
has been condemned by Justice Andres R. Narvasa (now Chief
Justice) in Minister of Natural Resources, et al., vs. Heirs of Orval
Hughes, et al., "as a reprehensible manipulation of court processes
and proceedings . . ." 17 when does forum shopping take place?
There is forum-shopping whenever, as a result of an adverse opinion

in one forum, a party seeks a favorable opinion (other than by

appeal or certiorari) in another. The principle applies not only with
respect to suits filed in the courts but also in connection with
litigations commenced in the courts while an administrative
proceeding is pending, as in this case, in order to defeat
administrative processes and in anticipation of an unfavorable
administrative ruling and a favorable court ruling. This is specially so,
as in this case, where the court in which the second suit was
brought, has no jurisdiction.18

or actions for the alleged violation of the same right and the
enforcement of the same relief is/are still pending, the defense of
litis pendencia in one case is bar to the others; and, a final judgment
in one would constitute res judicata and thus would cause the
dismissal of the rest. In either case, forum shopping could be cited
by the other party as a ground to ask for summary dismissal of the
two 20 (or more) complaints or petitions, and for imposition of the
other sanctions, which are direct contempt of court, criminal
prosecution, and disciplinary action against the erring lawyer.

The test for determining whether a party violated the rule against
forum shopping has been laid dawn in the 1986 case of Buan vs.
Lopez 19, also by Chief Justice Narvasa, and that is, forum shopping
exists where the elements of litis pendentia are present or where a
final judgment in one case will amount to res judicata in the other, as
follows:

Applying the foregoing principles in the case before us and

comparing it with the Second Case, it is obvious that there exist
identity of parties or interests represented, identity of rights or
causes and identity of reliefs sought.

There thus exists between the action before this Court and RTC Case
No. 86-36563 identity of parties, or at least such parties as represent
the same interests in both actions, as well as identity of rights
asserted and relief prayed for, the relief being founded on the same
facts, and the identity on the two preceding particulars is such that
any judgment rendered in the other action, will, regardless of which
party is successful, amount to res adjudicata in the action under
consideration: all the requisites, in fine, of auter action pendant.
xxx

xxx

xxx

As already observed, there is between the action at bar and RTC

Case No. 86-36563, an identity as regards parties, or interests
represented, rights asserted and relief sought, as well as basis
thereof, to a degree sufficient to give rise to the ground for dismissal
known as auter action pendant or lis pendens. That same identity
puts into operation the sanction of twin dismissals just mentioned.
The application of this sanction will prevent any further delay in the
settlement of the controversy which might ensue from attempts to
seek reconsideration of or to appeal from the Order of the Regional
Trial Court in Civil Case No. 86-36563 promulgated on July 15, 1986,
which dismissed the petition upon grounds which appear persuasive.
Consequently, where a litigant (or one representing the same
interest or person) sues the same party against whom another action

Very simply stated, the original complaint in the court a quo which
gave rise to the instant petition was filed by the buyer (herein
private respondent and his predecessors-in-interest) against the
seller (herein petitioners) to enforce the alleged perfected sale of
real estate. On the other hand, the complaint 21 in the Second Case
seeks to declare such purported sale involving the same real
property "as unenforceable as against the Bank", which is the
petitioner herein. In other words, in the Second Case, the majority
stockholders, in representation of the Bank, are seeking to
accomplish what the Bank itself failed to do in the original case in
the trial court. In brief, the objective or the relief being sought,
though worded differently, is the same, namely, to enable the
petitioner Bank to escape from the obligation to sell the property to
respondent. In Danville Maritime, Inc. vs. Commission on Audit. 22,
this Court ruled that the filing by a party of two apparently different
actions, but with the same objective, constituted forum shopping:
In the attempt to make the two actions appear to be different,
petitioner impleaded different respondents therein PNOC in the
case before the lower court and the COA in the case before this Court
and sought what seems to be different reliefs. Petitioner asks this
Court to set aside the questioned letter-directive of the COA dated
October 10, 1988 and to direct said body to approve the
Memorandum of Agreement entered into by and between the PNOC
and petitioner, while in the complaint before the lower court
petitioner seeks to enjoin the PNOC from conducting a rebidding and
from selling to other parties the vessel "T/T Andres Bonifacio", and

for an extension of time for it to comply with the paragraph 1 of the

memorandum of agreement and damages. One can see that
although the relief prayed for in the two (2) actions are ostensibly
different, the ultimate objective in both actions is the same, that is,
approval of the sale of vessel in favor of petitioner and to overturn
the letter-directive of the COA of October 10, 1988 disapproving the
sale. (emphasis supplied).

because:

In an earlier case 23 but with the same logic and vigor, we held:

Secondly, the allegations of the complaint in the Second Case show

that the stockholders are bringing a "derivative suit". In the caption
itself, petitioners claim to have brought suit "for and in behalf of the
Producers Bank of the Philippines" 24. Indeed, this is the very
essence of a derivative suit:

In other words, the filing by the petitioners of the instant special civil
action for certiorari and prohibition in this Court despite the
pendency of their action in the Makati Regional Trial Court, is a
species of forum-shopping. Both actions unquestionably involve the
same transactions, the same essential facts and circumstances. The
petitioners' claim of absence of identity simply because the PCGG
had not been impleaded in the RTC suit, and the suit did not involve
certain acts which transpired after its commencement, is specious. In
the RTC action, as in the action before this Court, the validity of the
contract to purchase and sell of September 1, 1986, i.e., whether or
not it had been efficaciously rescinded, and the propriety of
implementing the same (by paying the pledgee banks the amount of
their loans, obtaining the release of the pledged shares, etc.) were
the basic issues. So, too, the relief was the same: the prevention of
such implementation and/or the restoration of the status quo ante.
When the acts sought to be restrained took place anyway despite
the issuance by the Trial Court of a temporary restraining order, the
RTC suit did not become functus oficio. It remained an effective
vehicle for obtention of relief; and petitioners' remedy in the
premises was plain and patent: the filing of an amended and
supplemental pleading in the RTC suit, so as to include the PCGG as
defendant and seek nullification of the acts sought to be enjoined
but nonetheless done. The remedy was certainly not the institution
of another action in another forum based on essentially the same
facts, The adoption of this latter recourse renders the petitioners
amenable to disciplinary action and both their actions, in this Court
as well as in the Court a quo, dismissible.
In the instant case before us, there is also identity of parties, or at
least, of interests represented. Although the plaintiffs in the Second
Case (Henry L. Co. et al.) are not name parties in the First Case, they
represent the same interest and entity, namely, petitioner Bank,

Firstly, they are not suing in their personal capacities, for they have
no direct personal interest in the matter in controversy. They are not
principally or even subsidiarily liable; much less are they direct
parties in the assailed contract of sale; and

An individual stockholder is permitted to institute a derivative suit on

behalf of the corporation wherein he holdsstock in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.
(Gamboa v. Victoriano, 90 SCRA 40, 47 [1979]; emphasis supplied).
In the face of the damaging admissions taken from the complaint in
the Second Case, petitioners, quite strangely, sought to deny that
the Second Case was a derivative suit, reasoning that it was brought,
not by the minority shareholders, but by Henry Co et al., who not
only own, hold or control over 80% of the outstanding capital stock,
but also constitute the majority in the Board of Directors of petitioner
Bank. That being so, then they really represent the Bank. So,
whether they sued "derivatively" or directly, there is undeniably an
identity of interests/entity represented.
Petitioner also tried to seek refuge in the corporate fiction that the
personality Of the Bank is separate and distinct from its
shareholders. But the rulings of this Court are consistent: "When the
fiction is urged as a means of perpetrating a fraud or an illegal act or
as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil
with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals." 25

In addition to the many cases 26 where the corporate fiction has

been disregarded, we now add the instant case, and declare
herewith that the corporate veil cannot be used to shield an
otherwise blatant violation of the prohibition against forum-shopping.
Shareholders, whether suing as the majority in direct actions or as
the minority in a derivative suit, cannot be allowed to trifle with court
processes, particularly where, as in this case, the corporation itself
has not been remiss in vigorously prosecuting or defending corporate
causes and in using and applying remedies available to it. To rule
otherwise would be to encourage corporate litigants to use their
shareholders as fronts to circumvent the stringent rules against
forum shopping.
Finally, petitioner Bank argued that there cannot be any forum
shopping, even assuming arguendo that there is identity of parties,
causes of action and reliefs sought, "because it (the Bank) was the
defendant in the (first) case while it was the plaintiff in the other
(Second Case)",citing as authority Victronics Computers, Inc., vs.
Regional Trial Court, Branch 63, Makati, etc. et al., 27 where Court
held:
The rule has not been extended to a defendant who, for reasons
known only to him, commences a new action against the plaintiff
instead of filing a responsive pleading in the other case setting
forth therein, as causes of action, specific denials, special and
affirmative defenses or even counterclaims, Thus, Velhagen's and
King's motion to dismiss Civil Case No. 91-2069 by no means
negates the charge of forum-shopping as such did not exist in the
first place. (emphasis supplied)
Petitioner pointed out that since it was merely the defendant in the
original case, it could not have chosen the forum in said case.
Respondent, on the other hand, replied that there is a difference in
factual setting between Victronics and the present suit. In the
former, as underscored in the above-quoted Court ruling, the
defendants did not file any responsive pleading in the first case. In
other words, they did not make any denial or raise any defense or
counter-claim therein In the case before us however, petitioners filed
a responsive pleading to the complaint as a result of which, the
issues were joined.

Indeed, by praying for affirmative reliefs and interposing counter

claims in their responsive pleadings, the petitioners became plaintiffs
themselves in the original case, giving unto themselves the very
remedies they repeated in the Second Case.
Ultimately, what is truly important to consider in determining
whether forum-shopping exists or not is the vexation caused the
courts and parties-litigant by a party who asks different courts and/or
administrative agencies to rule on the same or related causes and/or
to grant the same or substantially the same reliefs, in the process
creating the possibility of conflicting decisions being rendered by the
different fora upon the same issue. In this case, this is exactly the
problem: a decision recognizing the perfection and directing the
enforcement of the contract of sale will directly conflict with a
possible decision in the Second Case barring the parties front
enforcing or implementing the said sale. Indeed, a final decision in
one would constitute res judicata in the other 28.
The foregoing conclusion finding the existence of forum-shopping
notwithstanding, the only sanction possible now is the dismissal of
both cases with prejudice, as the other sanctions cannot be imposed
because petitioners' present counsel entered their appearance only
during the proceedings in this Court, and the Petition's
VERIFICATION/CERTIFICATION contained sufficient allegations as to
the pendency of the Second Case to show good faith in observing
Circular 28-91. The Lawyers who filed the Second Case are not
before us; thus the rudiments of due process prevent us from motu
propio imposing disciplinary measures against them in this Decision.
However, petitioners themselves (and particularly Henry Co, et al.)
as litigants are admonished to strictly follow the rules against forumshopping and not to trifle with court proceedings and processes They
are warned that a repetition of the same will be dealt with more
severely.
Having said that, let it be emphasized that this petition should be
dismissed not merely because of forum-shopping but also because of
the substantive issues raised, as will be discussed shortly.
The Second Issue: Was The Contract Perfected?
The respondent Court correctly treated the question of whether or

not there was, on the basis of the facts established, a perfected

contract of sale as the ultimate issue. Holding that a valid contract
has been established, respondent Court stated:
There is no dispute that the object of the transaction is that property
owned by the defendant bank as acquired assets consisting of six (6)
parcels of land specifically identified under Transfer Certificates of
Title Nos. T-106932 to T-106937. It is likewise beyond cavil that the
bank intended to sell the property. As testified to by the Bank's
Deputy Conservator, Jose Entereso, the bank was looking for buyers
of the property. It is definite that the plaintiffs wanted to purchase
the property and it was precisely for this purpose that they met with
defendant Rivera, Manager of the Property Management Department
of the defendant bank, in early August 1987. The procedure in the
sale of acquired assets as well as the nature and scope of the
authority of Rivera on the matter is clearly delineated in the
testimony of Rivera himself, which testimony was relied upon by
both the bank and by Rivera in their appeal briefs. Thus (TSN of July
30, 1990. pp. 19-20):
A:
The procedure runs this way: Acquired assets was turned
over to me and then I published it in the form of an inter-office
memorandum distributed to all branches that these are acquired
assets for sale. I was instructed to advertise acquired assets for sale
so on that basis, I have to entertain offer; to accept offer, formal
offer and upon having been offered, I present it to the Committee. I
provide the Committee with necessary information about the
property such as original loan of the borrower, bid price during the
foreclosure, total claim of the bank, the appraised value at the time
the property is being offered for sale and then the information which
are relative to the evaluation of the bank to buy which the
Committee considers and it is the Committee that evaluate as
against the exposure of the bank and it is also the Committee that
submit to the Conservator for final approval and once approved, we
have to execute the deed of sale and it is the Conservator that sign
the deed of sale, sir.
The plaintiffs, therefore, at that meeting of August 1987 regarding
their purpose of buying the property, dealt with and talked to the
right person. Necessarily, the agenda was the price of the property,
and plaintiffs were dealing with the bank official authorized to
entertain offers, to accept offers and to present the offer to the

Committee before which the said official is authorized to discuss

information relative to price determination. Necessarily, too, it being
inherent in his authority, Rivera is the officer from whom official
information regarding the price, as determined by the Committee
and approved by the Conservator, can be had. And Rivera confirmed
his authority when he talked with the plaintiff in August 1987. The
testimony of plaintiff Demetria is clear on this point (TSN of May
31,1990, pp. 27-28):
Q:
When you went to the Producers Bank and talked with Mr.
Mercurio Rivera, did you ask him point-blank his authority to sell any
property?
A:
No, sir. Not point blank although it came from him, (W)hen I
asked him how long it would take because he was saying that the
matter of pricing will be passed upon by the committee. And when I
asked him how long it will take for the committee to decide and he
said the committee meets every week. If I am not mistaken
Wednesday and in about two week's (sic) time, in effect what he was
saying he was not the one who was to decide. But he would refer it
to the committee and he would relay the decision of the committee
to me.
Q Please answer the question.
A He did not say that he had the authority (.) But he said he would
refer the matter to the committee and he would relay the decision to
me and he did just like that.
"Parenthetically, the Committee referred to was the Past Due
Committee of which Luis Co was the Head, with Jose Entereso as one
of the members.
What transpired after the meeting of early August 1987 are
consistent with the authority and the duties of Rivera and the bank's
internal procedure in the matter of the sale of bank's assets. As
advised by Rivera, the plaintiffs made a formal offer by a letter dated
August 20, 1987 stating that they would buy at the price of P3.5
Million in cash. The letter was for the attention of Mercurio Rivera
who was tasked to convey and accept such offers. Considering an
aspect of the official duty of Rivera as some sort of intermediary
between the plaintiffs-buyers with their proposed buying price on

one hand, and the bank Committee, the Conservator and ultimately
the bank itself with the set price on the other, and considering
further the discussion of price at the meeting of August resulting in a
formal offer of P3.5 Million in cash, there can be no other logical
conclusion than that when, on September 1, 1987, Rivera informed
plaintiffs by letter that "the bank's counter-offer is at P5.5 Million for
more than 101 hectares on lot basis," such counter-offer price had
been determined by the Past Due Committee and approved by the
Conservator after Rivera had duly presented plaintiffs' offer for
discussion by the Committee of such matters as original loan of
borrower, bid price during foreclosure, total claim of the bank, and
market value. Tersely put, under the established facts, the price of
P5.5 Million was, as clearly worded in Rivera's letter (Exh. "E"), the
official and definitive price at which the bank was selling the
property.

dealt with the corporation through such agent, he estopped from

denying his authority (Francisco v. GSIS, 7 SCRA 577, 583-584; PNB
v. Court of Appeals, 94 SCRA 357, 369-370; Prudential Bank v. Court
of Appeals, G.R. No. 103957, June 14, 1993). 29

There were averments by defendants below, as well as before this

Court, that the P5.5 Million price was not discussed by the
Committee and that price. As correctly characterized by the trial
court, this is not credible. The testimonies of Luis Co and Jose
Entereso on this point are at best equivocal and considering the
gratuitous and self-serving character of these declarations, the
bank's submission on this point does not inspire belief. Both Co ad
Entereso, as members of the Past Due Committee of the bank, claim
that the offer of the plaintiff was never discussed by the Committee.
In the same vein, both Co and Entereso openly admit that they
seldom attend the meetings of the Committee. It is important to note
that negotiations on the price had started in early August and the
plaintiffs had already offered an amount as purchase price, having
been made to understand by Rivera, the official in charge of the
negotiation, that the price will be submitted for approval by the bank
and that the bank's decision will be relayed to plaintiffs. From the
facts, the official bank price. At any rate, the bank placed its official,
Rivera, in a position of authority to accept offers to buy and
negotiate the sale by having the offer officially acted upon by the
bank. The bank cannot turn around and later say, as it now does,
that what Rivera states as the bank's action on the matter is not in
fact so. It is a familiar doctrine, the doctrine of ostensible authority,
that if a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority,
and thus holds him out to the public as possessing power to do those
acts, the corporation will, as against any one who has in good faith

Petitioners allege that "there is no counter-offer made by the Bank,

and any supposed counter-offer which Rivera (or Co) may have made
is unauthorized. Since there was no counter-offer by the Bank, there
was nothing for Ejercito (in substitution of Demetria and Janolo) to
accept." 30 They disputed the factual basis of the respondent Court's
findings that there was an offer made by Janolo for P3.5 million, to
which the Bank counter-offered P5.5 million. We have perused the
evidence but cannot find fault with the said Court's findings of fact.
Verily, in a petition under Rule 45 such as this, errors of fact if
there be any - are, as a rule, not reviewable. The mere fact that
respondent Court (and the trial court as well) chose to believe the
evidence presented by respondent more than that presented by
petitioners is not by itself a reversible error. In fact, such findings
merit serious consideration by this Court, particularly where, as in
this case, said courts carefully and meticulously discussed their
findings. This is basic.

Article 1318 of the Civil Code enumerates the requisites of a valid

and perfected contract as follows: "(1) Consent of the contracting
parties; (2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established."
There is no dispute on requisite no. 2. The object of the questioned
contract consists of the six (6) parcels of land in Sta. Rosa, Laguna
with an aggregate area of about 101 hectares, more or less, and
covered by Transfer Certificates of Title Nos. T-106932 to T-106937.
There is, however, a dispute on the first and third requisites.

Be that as it may, and in addition to the foregoing disquisitions by

the Court of Appeals, let us review the question of Rivera's authority
to act and petitioner's allegations that the P5.5 million counter-offer
was extinguished by the P4.25 million revised offer of Janolo. Here,
there are questions of law which could be drawn from the factual
findings of the respondent Court. They also delve into the
contractual elements of consent and cause.
The authority of a corporate officer in dealing with third persons may

be actual or apparent. The doctrine of "apparent authority", with

special reference to banks, was laid out in Prudential Bank vs. Court
of Appeals31, where it was held that:

Department of the Bank". By his own admission, Rivera was already

the person in charge of the Bank's acquired assets (TSN, August 6,
1990, pp. 8-9);

Conformably, we have declared in countless decisions that the

principal is liable for obligations contracted by the agent. The agent's
apparent representation yields to the principal's true representation
and the contract is considered as entered into between the principal
and the third person (citing National Food Authority vs. Intermediate
Appellate Court, 184 SCRA 166).

(b)
As observed by respondent Court, the land was definitely
being sold by the Bank. And during the initial meeting between the
buyers and Rivera, the latter suggested that the buyers' offer should
be no less than P3.3 million (TSN, April 26, 1990, pp. 16-17);

A bank is liable for wrongful acts of its officers done in the interests
of the bank or in the course of dealings of the officers in their
representative capacity but not for acts outside the scape of their
authority (9 C.J.S., p. 417). A bank holding out its officers and agents
as worthy of confidence will not be permitted to profit by the frauds
they may thus be enabled to perpetrate in the apparent scope of
their employment; nor will it be permitted to shirk its responsibility
for such frauds even though no benefit may accrue to the bank
therefrom (10 Am Jur 2d, p. 114). Accordingly, a banking corporation
is liable to innocent third persons where the representation is made
in the course of its business by an agent acting within the general
scope of his authority even though, in the particular case, the agent
is secretly abusing his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate benefit
(McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR
1021).
Application of these principles is especially necessary because banks
have a fiduciary relationship with the public and their stability
depends on the confidence of the people in their honesty and
efficiency. Such faith will be eroded where banks do not exercise
strict care in the selection and supervision of its employees, resulting
in prejudice to their depositors.
From the evidence found by respondent Court, it is obvious that
petitioner Rivera has apparent or implied authority to act for the
Bank in the matter of selling its acquired assets. This evidence
includes the following:
(a)
The petition itself in par. II-i (p. 3) states that Rivera was "at
all times material to this case, Manager of the Property Management

(c)
Rivera received the buyers' letter dated August 30, 1987
offering P3.5 million (TSN, 30 July 1990, p.11);
(d)
Rivera signed the letter dated September 1, 1987 offering to
sell the property for P5.5 million (TSN, July 30, p. 11);
(e)
Rivera received the letter dated September 17, 1987
containing the buyers' proposal to buy the property for P4.25 million
(TSN, July 30, 1990, p. 12);
(f)
Rivera, in a telephone conversation, confirmed that the P5.5
million was the final price of the Bank (TSN, January 16, 1990, p. 18);
(g)
Rivera arranged the meeting between the buyers and Luis Co
on September 28, 1994, during which the Bank's offer of P5.5 million
was confirmed by Rivera (TSN, April 26, 1990, pp. 34-35). At said
meeting, Co, a major shareholder and officer of the Bank, confirmed
Rivera's statement as to the finality of the Bank's counter-offer of
P5.5 million (TSN, January 16, 1990, p. 21; TSN, April 26, 1990, p.
35);
(h)
In its newspaper advertisements and announcements, the
Bank referred to Rivera as the officer acting for the Bank in relation
to parties interested in buying assets owned/acquired by the Bank. In
fact, Rivera was the officer mentioned in the Bank's advertisements
offering for sale the property in question (cf. Exhs. "S" and "S-1").
In the very recent case of Limketkai Sons Milling, Inc. vs. Court of
Appeals, et. al.32, the Court, through Justice Jose A. R. Melo, affirmed
the doctrine of apparent authority as it held that the apparent
authority of the officer of the Bank of P.I. in charge of acquired assets
is borne out by similar circumstances surrounding his dealings with
buyers.

To be sure, petitioners attempted to repudiate Rivera's apparent

authority through documents and testimony which seek to establish
Rivera's actual authority. These pieces of evidence, however, are
inherently weak as they consist of Rivera's self-serving testimony
and various inter-office memoranda that purport to show his limited
actual authority, of which private respondent cannot be charged with
knowledge. In any event, since the issue is apparent authority, the
existence of which is borne out by the respondent Court's findings,
the evidence of actual authority is immaterial insofar as the liability
of a corporation is concerned 33.
Petitioners also argued that since Demetria and Janolo were
experienced lawyers and their "law firm" had once acted for the
Bank in three criminal cases, they should be charged with actual
knowledge of Rivera's limited authority. But the Court of Appeals in
its Decision (p. 12) had already made a factual finding that the
buyers had no notice of Rivera's actual authority prior to the sale. In
fact, the Bank has not shown that they acted as its counsel in
respect to any acquired assets; on the other hand, respondent has
proven that Demetria and Janolo merely associated with a loose
aggrupation of lawyers (not a professional partnership), one of
whose members (Atty. Susana Parker) acted in said criminal cases.
Petitioners also alleged that Demetria's and Janolo's P4.25 million
counter-offer in the letter dated September 17, 1987 extinguished
the Bank's offer of P5.5 million 34 .They disputed the respondent
Court's finding that "there was a meeting of minds when on 30
September 1987 Demetria and Janolo through Annex "L" (letter
dated September 30, 1987) "accepted" Rivera's counter offer of P5.5
million under Annex "J" (letter dated September 17, 1987)", citing
the late Justice Paras35, Art. 1319 of the Civil Code 36 and related
Supreme Court rulings starting with Beaumont vs. Prieto 37.
However, the above-cited authorities and precedents cannot apply in
the instant case because, as found by the respondent Court which
reviewed the testimonies on this point, what was "accepted" by
Janolo in his letter dated September 30, 1987 was the Bank's offer of
P5.5 million as confirmed and reiterated to Demetria and Atty. Jose
Fajardo by Rivera and Co during their meeting on September 28,
1987. Note that the said letter of September 30, 1987 begins
with"(p)ursuant to our discussion last 28 September 1987 . . .

Petitioners insist that the respondent Court should have believed the
testimonies of Rivera and Co that the September 28, 1987 meeting
"was meant to have the offerors improve on their position of P5.5.
million."38 However, both the trial court and the Court of Appeals
found petitioners' testimonial evidence "not credible", and we find no
basis for changing this finding of fact.
Indeed, we see no reason to disturb the lower courts' (both the RTC
and the CA) common finding that private respondents' evidence is
more in keeping with truth and logic that during the meeting on
September 28, 1987, Luis Co and Rivera "confirmed that the P5.5
million price has been passed upon by the Committee and could no
longer be lowered (TSN of April 27, 1990, pp. 34-35)"39. Hence,
assuming arguendo that the counter-offer of P4.25 million
extinguished the offer of P5.5 million, Luis Co's reiteration of the said
P5.5 million price during the September 28, 1987 meeting revived
the said offer. And by virtue of the September 30, 1987 letter
accepting this revived offer, there was a meeting of the minds, as
the acceptance in said letter was absolute and unqualified.
We note that the Bank's repudiation, through Conservator
Encarnacion, of Rivera's authority and action, particularly the latter's
counter-offer of P5.5 million, as being "unauthorized and illegal"
came only on May 12, 1988 or more than seven (7) months after
Janolo' acceptance. Such delay, and the absence of any
circumstance which might have justifiably prevented the Bank from
acting earlier, clearly characterizes the repudiation as nothing more
than a last-minute attempt on the Bank's part to get out of a binding
contractual obligation.
Taken together, the factual findings of the respondent Court point to
an implied admission on the part of the petitioners that the written
offer made on September 1, 1987 was carried through during the
meeting of September 28, 1987. This is the conclusion consistent
with human experience, truth and good faith.
It also bears noting that this issue of extinguishment of the Bank's
offer of P5.5 million was raised for the first time on appeal and
should thus be disregarded.
This Court in several decisions has repeatedly adhered to the

principle that points of law, theories, issues of fact and arguments

not adequately brought to the attention of the trial court need not
be, and ordinarily will not be, considered by a reviewing court, as
they cannot be raised for the first time on appeal (Santos vs. IAC, No.
74243, November 14, 1986, 145 SCRA 592).40
. . . It is settled jurisprudence that an issue which was neither
averred in the complaint nor raised during the trial in the court below
cannot be raised for the first time on appeal as it would be offensive
to the basic rules of fair play, justice and due process (Dihiansan vs.
CA, 153 SCRA 713 [1987]; Anchuelo vs. IAC, 147 SCRA 434 [1987];
Dulos Realty & Development Corp. vs. CA, 157 SCRA 425 [1988];
Ramos vs. IAC, 175 SCRA 70 [1989]; Gevero vs. IAC, G.R. 77029,
August 30, 1990).41
Since the issue was not raised in the pleadings as an affirmative
defense, private respondent was not given an opportunity in the trial
court to controvert the same through opposing evidence. Indeed, this
is a matter of due process. But we passed upon the issue anyway, if
only to avoid deciding the case on purely procedural grounds, and
we repeat that, on the basis of the evidence already in the record
and as appreciated by the lower courts, the inevitable conclusion is
simply that there was a perfected contract of sale.
The Third Issue: Is the Contract Enforceable?
The petition alleged42:
Even assuming that Luis Co or Rivera did relay a verbal offer to sell
at P5.5 million during the meeting of 28 September 1987, and it was
this verbal offer that Demetria and Janolo accepted with their letter
of 30 September 1987, the contract produced thereby would be
unenforceable by action there being no note, memorandum or
writing subscribed by the Bank to evidence such contract. (Please
see article 1403[2], Civil Code.)
Upon the other hand, the respondent Court in its Decision (p, 14)
stated:
. . . Of course, the bank's letter of September 1, 1987 on the official
price and the plaintiffs' acceptance of the price on September 30,
1987, are not, in themselves, formal contracts of sale. They are

however clear embodiments of the fact that a contract of sale was

perfected between the parties, such contract being binding in
whatever form it may have been entered into (case citations
omitted). Stated simply, the banks' letter of September 1, 1987,
taken together with plaintiffs' letter dated September 30, 1987,
constitute in law a sufficient memorandum of a perfected contract of
sale.
The respondent Court could have added that the written
communications commenced not only from September 1, 1987 but
from Janolo's August 20, 1987 letter. We agree that, taken together,
these letters constitute sufficient memoranda since they include
the names of the parties, the terms and conditions of the contract,
the price and a description of the property as the object of the
contract.
But let it be assumed arguendo that the counter-offer during the
meeting on September 28, 1987 did constitute a "new" offer which
was accepted by Janolo on September 30, 1987. Still, the statute of
frauds will not apply by reason of the failure of petitioners to object
to oral testimony proving petitioner Bank's counter-offer of P5.5
million. Hence, petitioners by such utter failure to object are
deemed to have waived any defects of the contract under the
statute of frauds, pursuant to Article 1405 of the Civil Code:
Art. 1405.
Contracts infringing the Statute of Frauds, referred to
in No. 2 of article 1403, are ratified by the failure to object to the
presentation of oral evidence to prove the same, or by the
acceptance of benefits under them.
As private respondent pointed out in his Memorandum, oral
testimony on the reaffirmation of the counter-offer of P5.5 million is a
plenty and the silence of petitioners all throughout the
presentation makes the evidence binding on them thus;
A
Yes, sir, I think it was September 28, 1987 and I was again
present because Atty. Demetria told me to accompany him we were
able to meet Luis Co at the Bank.
xxx

xxx

xxx

Now, what transpired during this meeting with Luis Co of the

Producers Bank?

was with us at the time at his office.

A
Atty. Demetria asked Mr. Luis Co whether the price could be
reduced, sir.

Q
For the record, your Honor please, will you tell this Court who
was with Mr. Co in his Office in Producers Bank Building during this
meeting?

What price?

A
The 5.5 million pesos and Mr. Luis Co said that the amount
cited by Mr. Mercurio Rivera is the final price and that is the price
they intends (sic) to have, sir.
Q

What do you mean?.

That is the amount they want, sir.

Mr. Co himself, Mr. Rivera, Atty. Fajardo and I.

By Mr. Co you are referring to?

Mr. Luis Co.

Q
After this meeting with Mr. Luis Co, did you and your partner
accede on (sic) the counter offer by the bank?

Q
What is the reaction of the plaintiff Demetria to Luis Co's
statement (sic) that the defendant Rivera's counter-offer of 5.5
million was the defendant's bank (sic) final offer?

A
Yes, sir, we did.? Two days thereafter we sent our acceptance
to the bank which offer we accepted, the offer of the bank which is
P5.5 million.

He said in a day or two, he will make final acceptance, sir.

What is the response of Mr. Luis Co?.

[Direct testimony of Atty. Demetria, TSN, 26 April 1990, at pp. 3436.]

He said he will wait for the position of Atty. Demetria, sir.

[Direct testimony of Atty. Jose Fajardo, TSN, January 16, 1990, at pp.
18-21.]
Q
What transpired during that meeting between you and Mr.
Luis Co of the defendant Bank?
A
We went straight to the point because he being a busy
person, I told him if the amount of P5.5 million could still be reduced
and he said that was already passed upon by the committee. What
the bank expects which was contrary to what Mr. Rivera stated. And
he told me that is the final offer of the bank P5.5 million and we
should indicate our position as soon as possible.
Q

What was your response to the answer of Mr. Luis Co?

A
I said that we are going to give him our answer in a few days
and he said that was it. Atty. Fajardo and I and Mr. Mercurio [Rivera]

Q
According to Atty. Demetrio Demetria, the amount of P5.5
million was reached by the Committee and it is not within his power
to reduce this amount. What can you say to that statement that the
amount of P5.5 million was reached by the Committee?
A
It was not discussed by the Committee but it was discussed
initially by Luis Co and the group of Atty. Demetrio Demetria and
Atty. Pajardo (sic) in that September 28, 1987 meeting, sir.
[Direct testimony of Mercurio Rivera, TSN, 30 July 1990, pp. 14-15.]
The Fourth Issue: May the Conservator Revoke
the Perfected and Enforceable Contract.
It is not disputed that the petitioner Bank was under a conservator
placed by the Central Bank of the Philippines during the time that
the negotiation and perfection of the contract of sale took place.
Petitioners energetically contended that the conservator has the
power to revoke or overrule actions of the management or the board
of directors of a bank, under Section 28-A of Republic Act No. 265

(otherwise known as the Central Bank Act) as follows:

Whenever, on the basis of a report submitted by the appropriate
supervising or examining department, the Monetary Board finds that
a bank or a non-bank financial intermediary performing quasibanking functions is in a state of continuing inability or unwillingness
to maintain a state of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary Board may appoint
a conservator to take charge of the assets, liabilities, and the
management of that institution, collect all monies and debts due said
institution and exercise all powers necessary to preserve the assets
of the institution, reorganize the management thereof, and restore
its viability. He shall have the power to overrule or revoke the actions
of the previous management and board of directors of the bank or
non-bank financial intermediary performing quasi-banking functions,
any provision of law to the contrary notwithstanding, and such other
powers as the Monetary Board shall deem necessary.
In the first place, this issue of the Conservator's alleged authority to
revoke or repudiate the perfected contract of sale was raised for the
first time in this Petition as this was not litigated in the trial court
or Court of Appeals. As already stated earlier, issues not raised
and/or ventilated in the trial court, let alone in the Court of Appeals,
"cannot be raised for the first time on appeal as it would be offensive
to the basic rules of fair play, justice and due process."43
In the second place, there is absolutely no evidence that the
Conservator, at the time the contract was perfected, actually
repudiated or overruled said contract of sale. The Bank's acting
conservator at the time, Rodolfo Romey, never objected to the sale
of the property to Demetria and Janolo. What petitioners are really
referring to is the letter of Conservator Encarnacion, who took over
from Romey after the sale was perfected on September 30, 1987
(Annex V, petition) which unilaterally repudiated not the contract
but the authority of Rivera to make a binding offer and which
unarguably came months after the perfection of the contract. Said
letter dated May 12, 1988 is reproduced hereunder:

Suite 323 Rufino Building

Ayala Avenue, Makati, Metro-Manila
Dear Atty. Zarate:
This pertains to your letter dated May 5, 1988 on behalf of Attys.
Janolo and Demetria regarding the six (6) parcels of land located at
Sta. Rosa, Laguna.
We deny that Producers Bank has ever made a legal counter-offer to
any of your clients nor perfected a "contract to sell and buy" with
any of them for the following reasons.
In the "Inter-Office Memorandum" dated April 25, 1986 addressed to
and approved by former Acting Conservator Mr. Andres I. Rustia,
Producers Bank Senior Manager Perfecto M. Pascua detailed the
functions of Property Management Department (PMD) staff and
officers (Annex A.), you will immediately read that Manager Mr.
Mercurio Rivera or any of his subordinates has no authority, power or
right to make any alleged counter-offer. In short, your lawyer-clients
did not deal with the authorized officers of the bank.
Moreover, under Sec. 23 and 36 of the Corporation Code of the
Philippines (Bates Pambansa Blg. 68.) and Sec. 28-A of the Central
Bank Act (Rep. Act No. 265, as amended), only the Board of
Directors/Conservator may authorize the sale of any property of the
corportion/bank..
Our records do not show that Mr. Rivera was authorized by the old
board or by any of the bank conservators (starting January, 1984) to
sell the aforesaid property to any of your clients. Apparently, what
took place were just preliminary discussions/consultations between
him and your clients, which everyone knows cannot bind the Bank's
Board or Conservator.

May 12, 1988

We are, therefore, constrained to refuse any tender of payment by

your clients, as the same is patently violative of corporate and
banking laws. We believe that this is more than sufficient legal
justification for refusing said alleged tender.

Atty. Noe C. Zarate

Zarate Carandang Perlas & Ass.

Rest assured that we have nothing personal against your clients. All
our acts are official, legal and in accordance with law. We also have

no personal interest in any of the properties of the Bank.

Please be advised accordingly.
Very truly yours,
(Sgd.) Leonida T. Encarnacion
LEONIDA T. EDCARNACION
Acting Conservator
In the third place, while admittedly, the Central Bank law gives vast
and far-reaching powers to the conservator of a bank, it must be
pointed out that such powers must be related to the "(preservation
of) the assets of the bank, (the reorganization of) the management
thereof and (the restoration of) its viability." Such powers, enormous
and extensive as they are, cannot extend to the post-facto
repudiation of perfected transactions, otherwise they would infringe
against the non-impairment clause of the Constitution 44. If the
legislature itself cannot revoke an existing valid contract, how can it
delegate such non-existent powers to the conservator under Section
28-A of said law?
Obviously, therefore, Section 28-A merely gives the conservator
power to revoke contracts that are, under existing law, deemed to be
defective i.e., void, voidable, unenforceable or rescissible. Hence,
the conservator merely takes the place of a bank's board of
directors. What the said board cannot do such as repudiating a
contract validly entered into under the doctrine of implied authority
the conservator cannot do either. Ineluctably, his power is not
unilateral and he cannot simply repudiate valid obligations of the
Bank. His authority would be only to bring court actions to assail
such contracts as he has already done so in the instant case. A
contrary understanding of the law would simply not be permitted by
the Constitution. Neither by common sense. To rule otherwise would
be to enable a failing bank to become solvent, at the expense of
third parties, by simply getting the conservator to unilaterally revoke
all previous dealings which had one way or another or come to be
considered unfavorable to the Bank, yielding nothing to perfected
contractual rights nor vested interests of the third parties who had
dealt with the Bank.
The Fifth Issue: Were There Reversible Errors of Facts?

Basic is the doctrine that in petitions for review under Rule 45 of the
Rules of Court, findings of fact by the Court of Appeals are not
reviewable by the Supreme Court. In Andres vs. Manufacturers
Hanover & Trust Corporation, 45, we held:
. . . The rule regarding questions of fact being raised with this Court
in a petition for certiorari under Rule 45 of the Revised Rules of Court
has been stated in Remalante vs. Tibe, G.R. No. 59514, February 25,
1988, 158 SCRA 138, thus:
The rule in this jurisdiction is that only questions of law may be
raised in a petition for certiorari under Rule 45 of the Revised Rules
of Court. "The jurisdiction of the Supreme Court in cases brought to it
from the Court of Appeals is limited to reviewing and revising the
errors of law imputed to it, its findings of the fact being conclusive "
[Chan vs. Court of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA
737, reiterating a long line of decisions]. This Court has emphatically
declared that "it is not the function of the Supreme Court to analyze
or weigh such evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by the lower
court" (Tiongco v. De la Merced, G. R. No. L-24426, July 25, 1974, 58
SCRA 89; Corona vs. Court of Appeals, G.R. No. L-62482, April 28,
1983, 121 SCRA 865; Baniqued vs. Court of Appeals, G. R. No. L47531, February 20, 1984, 127 SCRA 596). "Barring, therefore, a
showing that the findings complained of are totally devoid of support
in the record, or that they are so glaringly erroneous as to constitute
serious abuse of discretion, such findings must stand, for this Court
is not expected or required to examine or contrast the oral and
documentary evidence submitted by the parties" [Santa Ana, Jr. vs.
Hernandez, G. R. No. L-16394, December 17, 1966, 18 SCRA 973] [at
pp. 144-145.]
Likewise, in Bernardo vs. Court of Appeals 46, we held:
The resolution of this petition invites us to closely scrutinize the facts
of the case, relating to the sufficiency of evidence and the credibility
of witnesses presented. This Court so held that it is not the function
of the Supreme Court to analyze or weigh such evidence all over
again. The Supreme Court's jurisdiction is limited to reviewing errors
of law that may have been committed by the lower court. The
Supreme Court is not a trier of facts. . . .

As held in the recent case of Chua Tiong Tay vs. Court of Appeals and
Goldrock Construction and Development Corp. 47:
The Court has consistently held that the factual findings of the trial
court, as well as the Court of Appeals, are final and conclusive and
may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower
courts is allowed are when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; when the inference
made is manifestly absurd, mistaken or impossible; when there is
grave abuse of discretion in the appreciation of facts; when the
judgment is premised on a misapprehension of facts; when the
findings went beyond the issues of the case and the same are
contrary to the admissions of both appellant and appellee. After a
careful study of the case at bench, we find none of the above
grounds present to justify the re-evaluation of the findings of fact
made by the courts below.
In the same vein, the ruling of this Court in the recent case of South
Sea Surety and Insurance Company Inc. vs. Hon. Court of Appeals, et
al. 48 is equally applicable to the present case:
We see no valid reason to discard the factual conclusions of the
appellate court, . . . (I)t is not the function of this Court to assess and
evaluate all over again the evidence, testimonial and documentary,
adduced by the parties, particularly where, such as here, the findings
of both the trial court and the appellate court on the matter coincide.
(emphasis supplied)
Petitioners, however, assailed the respondent Court's Decision as
"fraught with findings and conclusions which were not only contrary
to the evidence on record but have no bases at all," specifically the
findings that (1) the "Bank's counter-offer price of P5.5 million had
been determined by the past due committee and approved by
conservator Romey, after Rivera presented the same for discussion"
and (2) "the meeting with Co was not to scale down the price and
start negotiations anew, but a meeting on the already determined
price of P5.5 million" Hence, citing Philippine National Bank vs. Court
of Appeals 49, petitioners are asking us to review and reverse such
factual findings.

The first point was clearly passed upon by the Court of Appeals 50,
thus:
There can be no other logical conclusion than that when, on
September 1, 1987, Rivera informed plaintiffs by letter that "the
bank's counter-offer is at P5.5 Million for more than 101 hectares on
lot basis, "such counter-offer price had been determined by the Past
Due Committee and approved by the Conservator after Rivera had
duly presented plaintiffs' offer for discussion by the Committee . . .
Tersely put, under the established fact, the price of P5.5 Million was,
as clearly worded in Rivera's letter (Exh. "E"), the official and
definitive price at which the bank was selling the property. (p. 11, CA
Decision)
xxx

xxx

xxx

. . . The argument deserves scant consideration. As pointed out by

plaintiff, during the meeting of September 28, 1987 between the
plaintiffs, Rivera and Luis Co, the senior vice-president of the bank,
where the topic was the possible lowering of the price, the bank
official refused it and confirmed that the P5.5 Million price had been
passed upon by the Committee and could no longer be lowered (TSN
of April 27, 1990, pp. 34-35) (p. 15, CA Decision).
The respondent Court did not believe the evidence of the petitioners
on this point, characterizing it as "not credible" and "at best
equivocal and considering the gratuitous and self-serving character
of these declarations, the bank's submissions on this point do not
inspire belief."
To become credible and unequivocal, petitioners should have
presented then Conservator Rodolfo Romey to testify on their behalf,
as he would have been in the best position to establish their thesis.
Under the rules on evidence 51, such suppression gives rise to the
presumption that his testimony would have been adverse, if
produced.
The second point was squarely raised in the Court of Appeals, but
petitioners' evidence was deemed insufficient by both the trial court
and the respondent Court, and instead, it was respondent's
submissions that were believed and became bases of the conclusions
arrived at.

In fine, it is quite evident that the legal conclusions arrived at from

the findings of fact by the lower courts are valid and correct. But the
petitioners are now asking this Court to disturb these findings to fit
the conclusion they are espousing, This we cannot do.
To be sure, there are settled exceptions where the Supreme Court
may disregard findings of fact by the Court of Appeals 52. We have
studied both the records and the CA Decision and we find no such
exceptions in this case. On the contrary, the findings of the said
Court are supported by a preponderance of competent and credible
evidence. The inferences and conclusions are seasonably based on
evidence duly identified in the Decision. Indeed, the appellate court
patiently traversed and dissected the issues presented before it,
lending credibility and dependability to its findings. The best that can
be said in favor of petitioners on this point is that the factual findings
of respondent Court did not correspond to petitioners' claims, but
were closer to the evidence as presented in the trial court by private
respondent. But this alone is no reason to reverse or ignore such
factual findings, particularly where, as in this case, the trial court and
the appellate court were in common agreement thereon. Indeed,
conclusions of fact of a trial judge as affirmed by the Court of
Appeals are conclusive upon this Court, absent any serious abuse
or evident lack of basis or capriciousness of any kind, because the
trial court is in a better position to observe the demeanor of the
witnesses and their courtroom manner as well as to examine the real
evidence presented.
Epilogue.
In summary, there are two procedural issues involved forumshopping and the raising of issues for the first time on appeal [viz.,
the extinguishment of the Bank's offer of P5.5 million and the
conservator's powers to repudiate contracts entered into by the
Bank's officers] which per se could justify the dismissal of the
present case. We did not limit ourselves thereto, but delved as well
into the substantive issues the perfection of the contract of sale
and its enforceability, which required the determination of questions
of fact. While the Supreme Court is not a trier of facts and as a rule
we are not required to look into the factual bases of respondent
Court's decisions and resolutions, we did so just the same, if only to
find out whether there is reason to disturb any of its factual findings,

for we are only too aware of the depth, magnitude and vigor by
which the parties through their respective eloquent counsel, argued
their positions before this Court.
We are not unmindful of the tenacious plea that the petitioner Bank
is operating abnormally under a government-appointed conservator
and "there is need to rehabilitate the Bank in order to get it back on
its feet . . . as many people depend on (it) for investments, deposits
and well as employment. As of June 1987, the Bank's overdraft with
the Central Bank had already reached P1.023 billion . . . and there
were (other) offers to buy the subject properties for a substantial
amount of money." 53
While we do not deny our sympathy for this distressed bank, at the
same time, the Court cannot emotionally close its eyes to overriding
considerations of substantive and procedural law, like respect for
perfected contracts, non-impairment of obligations and sanctions
against forum-shopping, which must be upheld under the rule of law
and blind justice.
This Court cannot just gloss over private respondent's submission
that, while the subject properties may currently command a much
higher price, it is equally true that at the time of the transaction in
1987, the price agreed upon of P5.5 million was reasonable,
considering that the Bank acquired these properties at a foreclosure
sale for no more than P3.5 million 54. That the Bank procrastinated
and refused to honor its commitment to sell cannot now be used by
it to promote its own advantage, to enable it to escape its binding
obligation and to reap the benefits of the increase in land values. To
rule in favor of the Bank simply because the property in question has
algebraically accelerated in price during the long period of litigation
is to reward lawlessness and delays in the fulfillment of binding
contracts. Certainly, the Court cannot stamp its imprimatur on such
outrageous proposition.
WHEREFORE, finding no reversible error in the questioned Decision
and Resolution, the Court hereby DENIES the petition. The assailed
Decision is AFFIRMED. Moreover, petitioner Bank is REPRIMANDED
for engaging in forum-shopping and WARNED that a repetition of the
same or similar acts will be dealt with more severely. Costs against
petitioners.

SO ORDERED.

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND
TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another
party in a contract of rent of a safety deposit box with respect to its
contents placed by the latter one of bailor and bailee or one of lessor
and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and
the spouses Ramon and Paula Pugao entered into an agreement
whereby the former purchased from the latter two (2) parcels of land
for a consideration of P350,625.00. Of this amount, P75,725.00 was
paid as downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the agreement
embodied in a Memorandum of True and Actual Agreement of Sale of
Land were that the titles to the lots shall be transferred to the
petitioner upon full payment of the purchase price and that the
owner's copies of the certificates of titles thereto, Transfer
Certificates of Title (TCT) Nos. 284655 and 292434, shall be
deposited in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a representative of the
petitioner and the Pugaos upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety
Deposit Box No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter referred to as
the respondent Bank. For this purpose, both signed a contract of
lease (Exhibit "2") which contains, inter alia, the following conditions:

13.
The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14.
The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith. 1
After the execution of the contract, two (2) renter's keys were given
to the renters one to Aguirre (for the petitioner) and the other to
the Pugaos. A guard key remained in the possession of the
respondent Bank. The safety deposit box has two (2) keyholes, one
for the guard key and the other for the renter's key, and can be
opened only with the use of both keys. Petitioner claims that the
certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the
petitioner the two (2) lots at a price of P225.00 per square meter
which, as petitioner alleged in its complaint, translates to a profit of
P100.00 per square meter or a total of P280,500.00 for the entire
property. Mrs. Ramos demanded the execution of a deed of sale
which necessarily entailed the production of the certificates of title.
In view thereof, Aguirre, accompanied by the Pugaos, then
proceeded to the respondent Bank on 4 October 1979 to open the
safety deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box yielded
no such certificates. Because of the delay in the reconstitution of the
title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, the petitioner allegedly failed to realize the
expected profit of P280,500.00. Hence, the latter filed on 1
September 1980 a complaint 2 for damages against the respondent
Bank with the Court of First Instance (now Regional Trial Court) of
Pasig, Metro Manila which docketed the same as Civil Case No.
38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the
petitioner has no cause of action because of paragraphs 13 and 14 of
the contract of lease (Exhibit "2"); corollarily, loss of any of the items
or articles contained in the box could not give rise to an action
against it. It then interposed a counterclaim for exemplary damages
as well as attorney's fees in the amount of P20,000.00. Petitioner
subsequently filed an answer to the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the
Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision
5 adverse to the petitioner on 8 December 1986, the dispositive
portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering
plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00)
PESOS as attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that
under paragraphs 13 and 14 of the contract of lease, the Bank has
no liability for the loss of the certificates of title. The court declared
that the said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner
appealed from the adverse decision to the respondent Court of
Appeals which docketed the appeal as CA-G.R. CV No. 15150.
Petitioner urged the respondent Court to reverse the challenged
decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void,
for being contrary to law, public order and public policy, the
provisions in the contract for lease of the safety deposit box
absolving the Bank from any liability for loss, (c) not concluding that
in this jurisdiction, as well as under American jurisprudence, the
liability of the Bank is settled and (d) awarding attorney's fees to the
Bank and denying the petitioner's prayer for nominal and exemplary
damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court
affirmed the appealed decision principally on the theory that the
contract (Exhibit "2") executed by the petitioner and respondent
Bank is in the nature of a contract of lease by virtue of which the
petitioner and its co-renter were given control over the safety
deposit box and its contents while the Bank retained no right to open
the said box because it had neither the possession nor control over it
and its contents. As such, the contract is governed by Article 1643 of
the Civil Code 10 which provides:

Art. 1643.
In the lease of things, one of the parties binds
himself to give to another the enjoyment or use of a thing for a price
certain, and for a period which may be definite or indefinite.
However, no lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of
the property loses his control over the property leased during the
period of the contract and Article 1975 of the Civil Code which
provides:
Art. 1975.
The depositary holding certificates, bonds, securities
or instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary in
order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety
deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not
under any duty to maintain the contents of the box. The stipulation
absolving the defendant-appellee from liability is in accordance with
the nature of the contract of lease and cannot be regarded as
contrary to law, public order and public policy." 12 The appellate
court was quick to add, however, that under the contract of lease of
the safety deposit box, respondent Bank is not completely free from
liability as it may still be made answerable in case unauthorized
persons enter into the vault area or when the rented box is forced
open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:
8.
The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this, the
Bank will not be responsible for the contents of any safe rented from
it. 13
Its motion for reconsideration 14 having been denied in the
respondent Court's Resolution of 28 August 1989, 15 petitioner took
this recourse under Rule 45 of the Rules of Court and urges Us to
review and set aside the respondent Court's ruling. Petitioner avers
that both the respondent Court and the trial court (a) did not

properly and legally apply the correct law in this case, (b) acted with
grave abuse of discretion or in excess of jurisdiction amounting to
lack thereof and (c) set a precedent that is contrary to, or is a
departure from precedents adhered to and affirmed by decisions of
this Court and precepts in American jurisprudence adopted in the
Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the
respondent Court and the motion to reconsider the latter's decision.
In a nutshell, petitioner maintains that regardless of nomenclature,
the contract for the rent of the safety deposit box (Exhibit "2") is
actually a contract of deposit governed by Title XII, Book IV of the
Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is
liable for the loss of the certificates of title pursuant to Article 1972
of the said Code which provides:

lessor) does not operate to alter the foregoing rule. The argument
that there is not, in such a case, a delivery of exclusive possession
and control to the deposit company, and that therefore the situation
is entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in the
former, since the company is, by the nature of the contract, given
absolute control of access to the property, and the depositor cannot
gain access thereto without the consent and active participation of
the company. . . . (citations omitted).

Art. 1972.
The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the
loss of the thing, shall be governed by the provisions of Title I of this
Book.

Petitioner further argues that conditions 13 and 14 of the questioned

contract are contrary to law and public policy and should be declared
null and void. In support thereof, it cites Article 1306 of the Civil
Code which provides that parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.

If the deposit is gratuitous, this fact shall be taken into account in

determining the degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17
which is supposed to expound on the prevailing rule in the United
States, to wit:
The prevailing rule appears to be that where a safe-deposit company
leases a safe-deposit box or safe and the lessee takes possession of
the box or safe and places therein his securities or other valuables,
the relation of bailee and bail or is created between the parties to
the transaction as to such securities or other valuables; the fact that
the
safe-deposit company does not know, and that it is not expected that
it shall know, the character or description of the property which is
deposited in such safe-deposit box or safe does not change that
relation. That access to the contents of the safe-deposit box can be
had only by the use of a key retained by the lessee ( whether it is the
sole key or one to be used in connection with one retained by the

and a segment from Words and Phrases 18 which states that a

contract for the rental of a bank safety deposit box in consideration
of a fixed amount at stated periods is a bailment for hire.

After the respondent Bank filed its comment, this Court gave due
course to the petition and required the parties to simultaneously
submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the
rent of the safety deposit box is not an ordinary contract of lease as
defined in Article 1643 of the Civil Code. However, We do not fully
subscribe to its view that the same is a contract of deposit that is to
be strictly governed by the provisions in the Civil Code on deposit; 19
the contract in the case at bar is a special kind of deposit. It cannot
be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety
deposit box was not given to the joint renters the petitioner and
the Pugaos. The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the box. On
the other hand, the respondent Bank could not likewise open the box

without the renter's key. In this case, the said key had a duplicate
which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point
do not apply. Neither could Article 1975, also relied upon by the
respondent Court, be invoked as an argument against the deposit
theory. Obviously, the first paragraph of such provision cannot apply
to a depositary of certificates, bonds, securities or instruments which
earn interest if such documents are kept in a rented safety deposit
box. It is clear that the depositary cannot open the box without the
renter being present.
We observe, however, that the deposit theory itself does not
altogether find unanimous support even in American jurisprudence.
We agree with the petitioner that under the latter, the prevailing rule
is that the relation between a bank renting out safe-deposit boxes
and its customer with respect to the contents of the box is that of a
bail or and bailee, the bailment being for hire and mutual benefit. 21
This is just the prevailing view because:
There is, however, some support for the view that the relationship in
question might be more properly characterized as that of landlord
and tenant, or lessor and lessee. It has also been suggested that it
should be characterized as that of licensor and licensee. The relation
between a bank, safe-deposit company, or storage company, and the
renter of a safe-deposit box therein, is often described as
contractual, express or implied, oral or written, in whole or in part.
But there is apparently no jurisdiction in which any rule other than
that applicable to bailments governs questions of the liability and
rights of the parties in respect of loss of the contents of safe-deposit
boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent
out safety deposit boxes, it is clear that in this jurisdiction, the
prevailing rule in the United States has been adopted. Section 72 of
the General Banking Act 23 pertinently provides:
Sec. 72.
In addition to the operations specifically authorized
elsewhere in this Act, banking institutions other than building and
loan associations may perform the following services:
(a)

Receive in custody funds, documents, and valuable objects,

and rent safety deposit boxes for the safeguarding of such effects.
xxx

xxx

xxx

The banks shall perform the services permitted under subsections

(a), (b) and (c) of this section as depositories or as agents. . . . 24
(emphasis supplied)
Note that the primary function is still found within the parameters of
a contract of deposit, i.e., the receiving in custody of funds,
documents and other valuable objects for safekeeping. The renting
out of the safety deposit boxes is not independent from, but related
to or in conjunction with, this principal function. A contract of deposit
may be entered into orally or in writing 25 and, pursuant to Article
1306 of the Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. The depositary's responsibility
for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the
agreement. 26 In the absence of any stipulation prescribing the
degree of diligence required, that of a good father of a family is to be
observed. 27 Hence, any stipulation exempting the depositary from
any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law
and public policy. In the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease of the
safety deposit box, which read:
13.
The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14.
The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith. 28
are void as they are contrary to law and public policy. We find
Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's responsibility
as a depositary under Section 72(a) of the General Banking Act. Both

exempt the latter from any liability except as contemplated in

condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented
safe, to wit:
8.
The Bank shall use due diligence that no unauthorized
person shall be admitted to any rented safe and beyond this, the
Bank will not be responsible for the contents of any safe rented from
it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary
to the actual practice of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of the contents of the
box since in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover, the respondent
Bank keeps the guard key to the said box. As stated earlier, renters
cannot open their respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then, to the extent
above stated, the foregoing conditions in the contract in question are
void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the relation is
a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied
by law from the relationship of the parties; liability of the deposit
company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the
contents by its own fraud or negligence or that of its agents or
servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although
it has been held that the lessor of a safe-deposit box cannot limit its
liability for loss of the contents thereof through its own negligence,
the view has been taken that such a lessor may limits its liability to
some extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals
arrived at, that is, that the petition should be dismissed, but on

grounds quite different from those relied upon by the Court of

Appeals. In the instant case, the respondent Bank's exoneration
cannot, contrary to the holding of the Court of Appeals, be based on
or proceed from a characterization of the impugned contract as a
contract of lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect that
the certificates of title were withdrawable from the safety deposit
box only upon both parties' joint signatures, and that no evidence
was submitted to reveal that the loss of the certificates of title was
due to the fraud or negligence of the respondent Bank. This in turn
flows from this Court's determination that the contract involved was
one of deposit. Since both the petitioner and the Pugaos agreed that
each should have one (1) renter's key, it was obvious that either of
them could ask the Bank for access to the safety deposit box and,
with the use of such key and the Bank's own guard key, could open
the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the
complaint and no bad faith on its part had been established, the trial
court erred in condemning the petitioner to pay the respondent Bank
attorney's fees. To this extent, the Decision (dispositive portion) of
public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by
deleting the award for attorney's fees from the 4 July 1989 Decision
of the respondent Court of Appeals in CA-G.R. CV No. 15150. As
modified, and subject to the pronouncement We made above on the
nature of the relationship between the parties in a contract of lease
of safety deposit boxes, the dispositive portion of the said Decision is
hereby AFFIRMED and the instant Petition for Review is otherwise
DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.

UNITED COCONUT PLANTERS BANK,

Petitioner,

- versus -

2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals

Decision and Resolution affirmed in turn the Decision[3] dated 23
March 2000 and Order[4] dated 8 May 2000 of the Regional Trial
Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314,
declaring void the interest rate provided in the promissory notes
executed by the respondents Spouses Samuel and Odette Beluso
(spouses Beluso) in favor of petitioner United Coconut Planters Bank
(UCPB).
The procedural and factual antecedents of this case are as follows:

SPOUSES SAMUEL and ODETTE BELUSO,

Respondents.
G.R. No. 159912
Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
Promulgated:
August 17, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court, which seeks to annul the Court of Appeals Decision[1]
dated 21 January 2003 and its Resolution[2] dated 9 September

On 16 April 1996, UCPB granted the spouses Beluso a Promissory

Notes Line under a Credit Agreement whereby the latter could avail
from the former credit of up to a maximum amount of P1.2 Million
pesos for a term ending on 30 April 1997. The spouses Beluso
constituted, other than their promissory notes, a real estate
mortgage over parcels of land in Roxas City, covered by Transfer
Certificates of Title No. T-31539 and T-27828, as additional security
for the obligation.
The Credit Agreement was subsequently
amended to increase the amount of the Promissory Notes Line to a
maximum of P2.35 Million pesos and to extend the term thereof to
28 February 1998.
The spouses Beluso availed themselves of the credit line under the
following Promissory Notes:
PN #
Date of PN
Maturity Date
Amount Secured
8314-96-00083-3
29 April 1996
27 August 1996
P 700,000
8314-96-00085-0
2 May 1996
30 August 1996
P 500,000
8314-96-000292-2
20 November 1996
20 March 1997
P 800,000

The three promissory notes were renewed several times. On 30 April

1997, the payment of the principal and interest of the latter two
promissory notes were debited from the spouses Belusos account
with UCPB; yet, a consolidated loan for P1.3 Million was again
released to the spouses Beluso under one promissory note with a
due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line
extended to them by UCPB, the spouses Beluso executed two more
promissory notes for a total of P350,000.00:
PN #
Date of PN
Maturity Date
Amount Secured
97-00363-1
11 December 1997
28 February 1998
P 200,000
98-00002-4
2 January 1998
28 February 1998
P 150,000
However, the spouses Beluso alleged that the amounts covered by
these last two promissory notes were never released or credited to
their account and, thus, claimed that the principal indebtedness was
only P2 Million.
In any case, UCPB applied interest rates on the different promissory
notes ranging from 18% to 34%. From 1996 to February 1998 the
spouses Beluso were able to pay the total sum of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge
interest and penalty on the obligations of the spouses Beluso, as
follows:
PN #
Amount Secured

Interest
Penalty
Total
97-00363-1
P 200,000
31%
36%
P 225,313.24
97-00366-6
P 700,000
30.17%
(7 days)
32.786% (102 days)
P 795,294.72
97-00368-2
P 1,300,000
28%
(2 days)
30.41% (102 days)
P 1,462,124.54
98-00002-4
P 150,000
33%
(102 days)
36%
P 170,034.71
The spouses Beluso, however, failed to make any payment of the
foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay
their total obligation of P2,932,543.00 plus 25% attorneys fees, but
the spouses Beluso failed to comply therewith. On 28 December
1998, UCPB foreclosed the properties mortgaged by the spouses
Beluso to secure their credit line, which, by that time, already
ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for
Annulment, Accounting and Damages against UCPB with the RTC of
Makati City.

On 23 March 2000, the RTC ruled in favor of the spouses Beluso,

disposing of the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the
interest rate used by [UCPB] void and the foreclosure and Sheriffs
Certificate of Sale void. [UCPB] is hereby ordered to return to [the
spouses Beluso] the properties subject of the foreclosure; to pay [the
spouses Beluso] the amount of P50,000.00 by way of attorneys fees;
and to pay the costs of suit. [The spouses Beluso] are hereby
ordered to pay [UCPB] the sum of P1,560,308.00.[5]

THOUSAND THREE HUNDRED EIGHT PESOS (P1,560,308.00)

III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY
PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED
INCORRECT COMPUTATION OF RESPONDENTS INDEBTEDNESS
IV

On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,

[6] prompting UCPB to appeal the RTC Decision with the Court of
Appeals. The Court of Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23,
2000 of the Regional Trial Court, Branch 65, Makati City in Civil Case
No. 99-314 is hereby AFFIRMED subject to the modification that
defendant-appellant UCPB is not liable for attorneys fees or the
costs of suit.[7]
On 9 September 2003, the Court of Appeals denied UCPBs Motion
for Reconsideration for lack of merit. UCPB thus filed the present
petition, submitting the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON
INTEREST RATE AGREED UPON BETWEEN PETITIONER AND
RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE
COMPUTATION BY THE
TRIAL COURT OF RESPONDENTS
INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER
THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED

SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR
VIOLATION OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY
OF FORUM SHOPPING[8]
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the
following provision found in the promissory notes of the spouses
Beluso is void, as the interest rates and the bases therefor were
determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS.
SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or
order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum
of ______________ PESOS, (P_____), Philippine Currency, with interest
thereon at the rate indicative of DBD retail rate or as determined by
the Branch Head.[9]
UCPB asserts that this is a reversible error, and claims that while the

interest rate was not numerically quantified in the face of the

promissory notes, it was nonetheless categorically fixed, at the time
of execution thereof, at the rate indicative of the DBD retail rate.
UCPB contends that said provision must be read with another
stipulation in the promissory notes subjecting to review the interest
rate as fixed:
The interest rate shall be subject to review and may be increased or
decreased by the LENDER considering among others the prevailing
financial and monetary conditions; or the rate of interest and
charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or the resulting profitability
to the LENDER after due consideration of all dealings with the
BORROWER.[10]
In this regard, UCPB avers that these are valid reference rates akin to
a prevailing rate or prime rate allowed by this Court in Polotan v.
Court of Appeals.[11] Furthermore, UCPB argues that even if the
proviso as determined by the branch head is considered void, such
a declaration would not ipso facto render the connecting clause
indicative of DBD retail rate void in view of the separability clause
of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the
provisions contained in this AGREEMENT, or documents executed in
connection herewith shall be declared invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability
of the remaining provisions hereof shall not in any way be affected or
impaired.[12]
According to UCPB, the imposition of the questioned interest rates
did not infringe on the principle of mutuality of contracts, because
the spouses Beluso had the liberty to choose whether or not to
renew their credit line at the new interest rates pegged by petitioner.
[13] UCPB also claims that assuming there was any defect in the
mutuality of the contract at the time of its inception, such defect was
cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998
without airing any protest with respect to the interest rates imposed
by UCPB. According to UCPB, therefore, the spouses Beluso are in
estoppel.[14]

We agree with the Court of Appeals, and find no merit in the

contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of
Appeals,[15] where we held:
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 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.
The provision stating that the interest shall be at the rate indicative
of DBD retail rate or as determined by the Branch Head is indeed
dependent solely on the will of petitioner UCPB.
Under such
provision, petitioner UCPB has two choices on what the interest rate
shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head. As UCPB is given this choice, the
rate should be categorically determinable in both choices. If either
of these two choices presents an opportunity for UCPB to fix the rate
at will, the bank can easily choose such an option, thus making the
entire interest rate provision violative of the principle of mutuality of
contracts.

Not just one, but rather both, of these choices are dependent solely
on the will of UCPB. Clearly, a rate as determined by the Branch
Head gives the latter unfettered discretion on what the rate may be.
The Branch Head may choose any rate he or she desires. As regards
the rate indicative of the DBD retail rate, the same cannot be
considered as valid for being akin to a prevailing rate or prime
rate allowed by this Court in Polotan. The interest rate in Polotan
reads:

LENDER (UCPB) after due consideration of all dealings with the

BORROWER (the spouses Beluso). Again, as in the case of the
interest rate provision, there is no fixed margin above or below these
considerations.

The Cardholder agrees to pay interest per annum at 3% plus the

prime rate of Security Bank and Trust Company. x x x.[16]

UCPB likewise failed to convince us that the spouses Beluso were in

estoppel.

In this provision in Polotan, there is a fixed margin over the reference

rate: 3%. Thus, the parties can easily determine the interest rate by
applying simple arithmetic. On the other hand, the provision in the
case at bar does not specify any margin above or below the DBD
retail rate. UCPB can peg the interest at any percentage above or
below the DBD retail rate, again giving it unfettered discretion in
determining the interest rate.

Estoppel cannot be predicated on an illegal act. As between the

parties to a contract, validity cannot be given to it by estoppel if it is
prohibited by law or is against public policy.[18]

The stipulation in the promissory notes subjecting the interest

rate to review does not render the imposition by UCPB of interest
rates on the obligations of the spouses Beluso valid. According to
said stipulation:
The interest rate shall be subject to review and may be increased or
decreased by the LENDER considering among others the prevailing
financial and monetary conditions; or the rate of interest and
charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or the resulting profitability
to the LENDER after due consideration of all dealings with the
BORROWER.[17]
It should be pointed out that the authority to review the interest rate
was given UCPB alone as the lender. Moreover, UCPB may apply the
considerations enumerated in this provision as it wishes. As worded
in the above provision, UCPB may give as much weight as it desires
to each of the following considerations: (1) the prevailing financial
and monetary condition; (2) the rate of interest and charges which
other banks or financial institutions charge or offer to charge for
similar accommodations; and/or (3) the resulting profitability to the

In view of the foregoing, the Separability Clause cannot save either

of the two options of UCPB as to the interest to be imposed, as both
options violate the principle of mutuality of contracts.

The interest rate provisions in the case at bar are illegal not only
because of the provisions of the Civil Code on mutuality of contracts,
but also, as shall be discussed later, because they violate the Truth in
Lending Act. Not disclosing the true finance charges in connection
with the extensions of credit is, furthermore, a form of deception
which we cannot countenance. It is against the policy of the State as
stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of
the State to protect its citizens from a lack of awareness of the true
cost of credit to the user by assuring a full disclosure of such cost
with a view of preventing the uninformed use of credit to the
detriment of the national economy.[19]
Moreover, while the spouses Beluso indeed agreed to renew the
credit line, the offending provisions are found in the promissory
notes themselves, not in the credit line. In fixing the interest rates in
the promissory notes to cover the renewed credit line, UCPB still
reserved to itself the same two options (1) a rate indicative of the
DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals
voided the interest rates imposed by UCPB, both failed to include in

their computation of the outstanding obligation of the spouses

Beluso the legal rate of interest of 12% per annum. Furthermore, the
penalty charges were also deleted in the decisions of the RTC and
the Court of Appeals. Section 2.04, Article II on Interest and other
Bank Charges of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided
for in Section 2.01 of this ARTICLE, any principal obligation of the
CLIENT hereunder which is not paid when due shall be subject to a
penalty charge of one percent (1%) of the amount of such obligation
per month computed from due date until the obligation is paid in full.
If the bank accelerates teh (sic) payment of availments hereunder
pursuant to ARTICLE VIII hereof, the penalty charge shall be used on
the total principal amount outstanding and unpaid computed from
the date of acceleration until the obligation is paid in full.[20]
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity,
I/We, jointly and severally, agree to pay an additional sum equivalent
to twenty-five percent (25%) of the total due on the Note as
attorneys fee, aside from the expenses and costs of collection
whether actually incurred or not, and a penalty charge of one
percent (1%) per month on the total amount due and unpaid from
date of default until fully paid.[21]
Petitioner further claims that it is likewise entitled to attorneys fees,
pursuant to Section 9.06 of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement
of its rights under this AGREEMENT, the Note(s), the collaterals and
other related documents, the BANK shall be entitled to recover
attorneys fees equivalent to not less than twenty-five percent (25%)
of the total amounts due and outstanding exclusive of costs and
other expenses.[22]
Another alleged computational error pointed out by UCPB is the
negation of the Compounding Interest agreed upon by the parties
under Section 2.02 of the Credit Agreement:

Section 2.02 Compounding Interest. Interest not paid when due

shall form part of the principal and shall be subject to the same
interest rate as herein stipulated.[23]
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the
principal and shall likewise bear interest at the same rate.[24]
UCPB lastly avers that the application of the spouses Belusos
payments in the disputed computation does not reflect the parties
agreement. The RTC deducted the payment made by the spouses
Beluso amounting to P763,693.00 from the principal of
P2,350,000.00. This was allegedly inconsistent with the Credit
Agreement, as well as with the agreement of the parties as to the
facts of the case.
In paragraph 7 of the spouses Belusos
Manifestation and Motion on Proposed Stipulation of Facts and Issues
vis--vis UCPBs Manifestation, the parties agreed that the amount of
P763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on Order
of the Application of Payments, which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT
shall be applied in accordance with the following order of preference:
1.
Accounts receivable and other out-of-pocket expenses
2.
Front-end Fee, Origination Fee, Attorneys Fee and other
expenses of collection;
3.
Penalty charges;
4.
Past due interest;
5.
Principal amortization/Payment in arrears;
6.
Advance interest;
7.
Outstanding balance; and
8.
All other obligations of CLIENT to the BANK, if any.[25]
Thus, according to UCPB, the interest charges, penalty charges, and
attorneys fees had been erroneously excluded by the RTC and the
Court of Appeals from the computation of the total amount due and
demandable from spouses Beluso.

The spouses Belusos defense as to all these issues is that the

demand made by UCPB is for a considerably bigger amount and,
therefore, the demand should be considered void. There being no
valid demand, according to the spouses Beluso, there would be no
default, and therefore the interests and penalties would not
commence to run. As it was likewise improper to foreclose the
mortgaged properties or file a case against the spouses Beluso,
attorneys fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial
or extrajudicial demand.[26] The excess amount in such a demand
does not nullify the demand itself, which is valid with respect to the
proper amount. A contrary ruling would put commercial transactions
in disarray, as validity of demands would be dependent on the
exactness of the computations thereof, which are too often
contested.
There being a valid demand on the part of UCPB, albeit excessive,
the spouses Beluso are considered in default with respect to the
proper amount and, therefore, the interests and the penalties began
to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the
RTC actually recognized that said legal interest should be imposed,
thus: There being no valid stipulation as to interest, the legal rate of
interest shall be charged.[27] It seems that the RTC inadvertently
overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose
this legal rate of interest in both the body and the prayer of its
petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole
will of the respondent Bank is null and void, only the legal rate of
interest which is 12% per annum can be legally charged and
imposed by the bank, which would amount to only about
P599,000.00 since 1996 up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment

or order:
xxxx
2. By way of example for the public good against the Banks taking
unfair advantage of the weaker party to their contract, declaring the
legal rate of 12% per annum, as the imposable rate of interest up to
February 28, 1999 on the loan of 2.350 million.[28]
All these show that the spouses Beluso had acknowledged before the
RTC their obligation to pay a 12% legal interest on their loans. When
the RTC failed to include the 12% legal interest in its computation,
however, the spouses Beluso merely defended in the appellate
courts this non-inclusion, as the same was beneficial to them. We
see, however, sufficient basis to impose a 12% legal interest in favor
of petitioner in the case at bar, as what we have voided is merely the
stipulated rate of interest and not the stipulation that the loan shall
earn interest.
We must likewise uphold the contract stipulation providing the
compounding of interest. The provisions in the Credit Agreement
and in the promissory notes providing for the compounding of
interest were neither nullified by the RTC or the Court of Appeals, nor
assailed by the spouses Beluso in their petition with the RTC. The
compounding of interests has furthermore been declared by this
Court to be legal. We have held in Tan v. Court of Appeals,[29] that:
Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may
by stipulation capitalize the interest due and unpaid, which as added
principal, shall earn new interest.
As regards the imposition of penalties, however, although we are
likewise upholding the imposition thereof in the contract, we find the
rate iniquitous. Like in the case of grossly excessive interests, the
penalty stipulated in the contract may also be reduced by the courts
if it is iniquitous or unconscionable.[30]
We find the penalty imposed by UCPB, ranging from 30.41% to 36%,
to be iniquitous considering the fact that this penalty is already over

and above the compounded interest likewise imposed in the

contract.
If a 36% interest in itself has been declared
unconscionable by this Court,[31] what more a 30.41% to 36%
penalty, over and above the payment of compounded interest?
UCPB itself must have realized this, as it gave us a sample
computation of the spouses Belusos obligation if both the interest
and the penalty charge are reduced to 12%.

annulment of the foreclosure proceedings and the certificates of sale

were mooted by the subsequent issuance of new certificates of title
in the name of said bank. UCPB claims that the spouses Belusos
action for annulment of foreclosure constitutes a collateral attack on
its certificates of title, an act proscribed by Section 48 of Presidential
Decree No. 1529, otherwise known as the Property Registration
Decree, which provides:

As regards the attorneys fees, the spouses Beluso can actually be

liable therefor even if there had been no demand. Filing a case in
court is the judicial demand referred to in Article 1169[32] of the
Civil Code, which would put the obligor in delay.

Section 48. Certificate not subject to collateral attack. A certificate

of title shall not be subject to collateral attack. It cannot be altered,
modified or cancelled except in a direct proceeding in accordance
with law.

The RTC, however, also held UCPB liable for attorneys fees in this
case, as the spouses Beluso were forced to litigate the issue on the
illegality of the interest rate provision of the promissory notes. The
award of attorneys fees, it must be recalled, falls under the sound
discretion of the court.[33] Since both parties were forced to litigate
to protect their respective rights, and both are entitled to the award
of attorneys fees from the other, practical reasons dictate that we
set off or compensate both parties liabilities for attorneys fees.
Therefore, instead of awarding attorneys fees in favor of petitioner,
we shall merely affirm the deletion of the award of attorneys fees to
the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a
compounded legal interest of 12% per annum and a penalty charge
of 12% per annum. We also hold that, instead of awarding attorneys
fees in favor of petitioner, we shall merely affirm the deletion of the
award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had
already been consolidated on 19 February 2001 and 20 March 2001
in the name of UCPB, as the spouses Beluso failed to exercise their
right of redemption which expired on 25 March 2000. The RTC,
however, annulled the foreclosure of mortgage based on an alleged
incorrect computation of the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a
foreclosure sale are present in the case at bar. Furthermore, the

The spouses Beluso retort that since they had the right to refuse
payment of an excessive demand on their account, they cannot be
said to be in default for refusing to pay the same. Consequently,
according to the spouses Beluso, the enforcement of such illegal
and overcharged demand through foreclosure of mortgage should
be voided.
We agree with UCPB and affirm the validity of the foreclosure
proceedings. Since we already found that a valid demand was made
by UCPB upon the spouses Beluso, despite being excessive, the
spouses Beluso are considered in default with respect to the proper
amount of their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be applied to
the extent of the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a
foreclosure sale are present in this case. The grounds for the proper
annulment of the foreclosure sale are the following: (1) that there
was fraud, collusion, accident, mutual mistake, breach of trust or
misconduct by the purchaser; (2) that the sale had not been fairly
and regularly conducted; or (3) that the price was inadequate and
the inadequacy was so great as to shock the conscience of the court.
[34]

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of

P26,000.00 for UCPBs alleged violation of Republic Act No. 3765,
otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a)
of the Truth in Lending Act which mandates the filing of an action to
recover such penalty must be made under the following
circumstances:
Section 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal to
twice the finance charge required by such creditor in connection with
such transaction, whichever is greater, except that such liability shall
not exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the
date of the occurrence of the violation, in any court of competent
jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that
[a]dmittedly the original complaint did not explicitly allege a
violation of the Truth in Lending Act and no action to formally admit
the amended petition [which expressly alleges violation of the Truth
in Lending Act] was made either by [respondents] spouses Beluso
and the lower court. x x x.[35]
UCPB further claims that the action to recover the penalty for the
violation of the Truth in Lending Act had been barred by the one-year
prescriptive period provided for in the Act. UCPB asserts that per the
records of the case, the latest of the subject promissory notes had
been executed on 2 January 1998, but the original petition of the
spouses Beluso was filed before the RTC on 9 February 1999, which
was after the expiration of the period to file the same on 2 January
1999.
On the matter of allegation of the violation of the Truth in Lending
Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly allege a
violation of the Truth in Lending Act and no action to formally admit

the amended petition was made either by [respondents] spouses

Beluso and the lower court. In such transactions, the debtor and the
lending institutions do not deal on an equal footing and this law was
intended to protect the public from hidden or undisclosed charges on
their loan obligations, requiring a full disclosure thereof by the
lender. We find that its infringement may be inferred or implied from
allegations that when [respondents] spouses Beluso executed the
promissory notes, the interest rate chargeable thereon were left
blank. Thus, [petitioner] UCPB failed to discharge its duty to disclose
in full to [respondents] Spouses Beluso the charges applicable on
their loans.[36]
We agree with the Court of Appeals.
The allegations in the
complaint, much more than the title thereof, are controlling. Other
than that stated by the Court of Appeals, we find that the allegation
of violation of the Truth in Lending Act can also be inferred from the
same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic)
respondent bank has relied on the provision of their promissory note
granting respondent bank the power to unilaterally fix the interest
rates, which rate was not determined in the promissory note but was
left solely to the will of the Branch Head of the respondent Bank, x x
x.[37]
The allegation that the promissory notes grant UCPB the power to
unilaterally fix the interest rates certainly also means that the
promissory notes do not contain a clear statement in writing of (6)
the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.[38] Furthermore, the spouses
Belusos prayer for such other reliefs just and equitable in the
premises should be deemed to include the civil penalty provided for
in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the
violation of the Truth in Lending Act has already prescribed is
likewise without merit. The penalty for the violation of the act is
P100 or an amount equal to twice the finance charge required by

such creditor in connection with such transaction, whichever is

greater, except that such liability shall not exceed P2,000.00 on any
credit transaction.[39] As this penalty depends on the finance
charge required of the borrower, the borrowers cause of action
would only accrue when such finance charge is required. In the case
at bar, the date of the demand for payment of the finance charge is
2 September 1998, while the foreclosure was made on 28 December
1998. The filing of the case on 9 February 1999 is therefore within
the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a
criminal offense, cannot be inferred nor implied from the allegations
made in the complaint.[40] Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction
fails to disclose to any person any information in violation of this Act
or any regulation issued thereunder shall be liable to such person in
the amount of P100 or in an amount equal to twice the finance
charge required by such creditor in connection with such transaction,
whichever is the greater, except that such liability shall not exceed
P2,000 on any credit transaction. Action to recover such penalty
may be brought by such person within one year from the date of the
occurrence of the violation, in any court of competent jurisdiction. In
any action under this subsection in which any person is entitled to a
recovery, the creditor shall be liable for reasonable attorneys fees
and court costs as determined by the court.
xxxx
(c)
Any person who willfully violates any provision of this
Act or any regulation issued thereunder shall be fined by not less
than P1,000 or more than P5,000 or imprisonment for not less than 6
months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending
Act, the violation of the said Act gives rise to both criminal and civil
liabilities.
Section 6(c) considers a criminal offense the willful
violation of the Act, imposing the penalty therefor of fine,
imprisonment or both.
Section 6(a), on the other hand, clearly
provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of

the Act. The penalty therefor is an amount of P100 or in an amount

equal to twice the finance charge required by the creditor in
connection with such transaction, whichever is greater, except that
the liability shall not exceed P2,000.00 on any credit transaction.
The action to recover such penalty may be instituted by the
aggrieved private person separately and independently from the
criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty
under Section 6(a) of the Truth in Lending Act had been jointly
instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure
void. This joinder is allowed under Rule 2, Section 5 of the Rules of
Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading
assert, in the alternative or otherwise, as many causes of action as
he may have against an opposing party, subject to the following
conditions:
(a)
The party joining the causes of action shall comply with the
rules on joinder of parties;
(b)
The joinder shall not include special civil actions or actions
governed by special rules;
(c)
Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be
allowed in the Regional Trial Court provided one of the causes of
action falls within the jurisdiction of said court and the venue lies
therein; and
(d)
Where the claims in all the causes of action are principally
for recovery of money, the aggregate amount claimed shall be the
test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in
Lending Act since the same was not alleged in the complaint, UCPB
is actually asserting a violation of due process. Indeed, due process
mandates that a defendant should be sufficiently apprised of the
matters he or she would be defending himself or herself against.

However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso
before the RTC, the claim for civil sanctions for violation of the Truth
in Lending Act was expressly alleged, thus:

action falls within the jurisdiction of said court and the venue lies
therein.

Moreover, since from the start, respondent bank violated the Truth in
Lending Act in not informing the borrower in writing before the
execution of the Promissory Notes of the interest rate expressed as a
percentage of the total loan, the respondent bank instead is liable to
pay petitioners double the amount the bank is charging petitioners
by way of sanction for its violation.[41]

Furthermore, opening a credit line does not create a credit

transaction of loan or mutuum, since the former is merely a
preparatory contract to the contract of loan or mutuum. Under such
credit line, the bank is merely obliged, for the considerations
specified therefor, to lend to the other party amounts not exceeding
the limit provided. The credit transaction thus occurred not when
the credit line was opened, but rather when the credit line was
availed of. In the case at bar, the violation of the Truth in Lending
Act allegedly occurred not when the parties executed the Credit
Agreement, where no interest rate was mentioned, but when the
parties executed the promissory notes, where the allegedly offending
interest rate was stipulated.

In the same pre-trial brief, the spouses Beluso also expressly raised
the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with
the Truth in Lending Act provision to express the interest rate as a
simple annual percentage of the loan?[42]
These assertions are so clear and unequivocal that any attempt of
UCPB to feign ignorance of the assertion of this issue in this case as
to prevent it from putting up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which
has jurisdiction to try and adjudicate the alleged violation of the
Truth in Lending Act, considering that the present action allegedly
involved a single credit transaction as there was only one Promissory
Note Line.
We disagree. We have already ruled that the action to recover the
penalty under Section 6(a) of the Truth in Lending Act had been
jointly instituted with (1) the action to declare the interests in the
promissory notes void, and (2) the action to declare the foreclosure
void. There had been no question that the above actions belong to
the jurisdiction of the RTC. Subsection (c) of the above-quoted
Section 5 of the Rules of Court on Joinder of Causes of Action
provides:
(c) Where the causes of action are between the same parties but
pertain to different venues or jurisdictions, the joinder may be
allowed in the Regional Trial Court provided one of the causes of

UCPB further argues that since the spouses Beluso were duly given
copies of the subject promissory notes after their execution, then
they were duly notified of the terms thereof, in substantial
compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act
clearly provides that the disclosure statement must be furnished
prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the property or service to be
acquired;
(2)
the amounts, if any, to be credited as down payment and/or
trade-in;
(3) the difference between the amounts set forth under clauses (1)
and (2)
(4)

the charges, individually itemized, which are paid or to be paid

by such person in connection with the transaction but which are not
incident to the extension of credit;
(5)
(6)
and

the total amount to be financed;

the finance charge expressed in terms of pesos and centavos;

(7) the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
The rationale of this provision is to protect users of credit from a lack
of awareness of the true cost thereof, proceeding from the
experience that banks are able to conceal such true cost by hidden
charges, uncertainty of interest rates, deduction of interests from the
loaned amount, and the like. The law thereby seeks to protect
debtors by permitting them to fully appreciate the true cost of their
loan, to enable them to give full consent to the contract, and to
properly evaluate their options in arriving at business decisions.
Upholding UCPBs claim of substantial compliance would defeat
these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill
effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were
presented to the spouses Beluso after execution, are not sufficient
notification from UCPB.
As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said promissory
notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No.
99-314 in RTC, Makati City) on the ground that the spouses Beluso
instituted another case (Civil Case No. V-7227) before the RTC of
Roxas City, involving the same parties and issues. UCPB claims that
while Civil Case No. V-7227 initially appears to be a different action,
as it prayed for the issuance of a temporary restraining order and/or
injunction to stop foreclosure of spouses Belusos properties, it poses

issues which are similar to those of the present case.[43] To prove

its point, UCPB cited the spouses Belusos Amended Petition in Civil
Case No. V-7227, which contains similar allegations as those in the
present case. The RTC of Makati denied UCPBs Motion to Dismiss
Case No. 99-314 for lack of merit. Petitioner UCPB raised the same
issue with the Court of Appeals, and is raising the same issue with us
now.
The spouses Beluso claim that the issue in Civil Case No. V-7227
before the RTC of Roxas City, a Petition for Injunction Against
Foreclosure, is the propriety of the foreclosure before the true
account of spouses Beluso is determined. On the other hand, the
issue in Case No. 99-314 before the RTC of Makati City is the validity
of the interest rate provision. The spouses Beluso claim that Civil
Case No. V-7227 has become moot because, before the RTC of Roxas
City could act on the restraining order, UCPB proceeded with the
foreclosure and auction sale. As the act sought to be restrained by
Civil Case No. V-7227 has already been accomplished, the spouses
Beluso had to file a different action, that of Annulment of the
Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one
cause of action is involved in the two civil actions, namely, the
violation of the right of the spouses Beluso not to have their property
foreclosed for an amount they do not owe, the Rules of Court
nevertheless allows the filing of the second action. Civil Case No. V7227 was dismissed by the RTC of Roxas City before the filing of
Case No. 99-314 with the RTC of Makati City, since the venue of
litigation as provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed
only in the following instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order
granting a motion to dismiss based on paragraphs (f), (h) and (i) of
section 1 hereof shall bar the refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in
paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the

answer to the complaint or pleading asserting a claim, a motion to

dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the
defending party;
(b) That the court has no jurisdiction over the subject matter of the
claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties
for the same cause;
(f) That the cause of action is barred by a prior judgment or by the
statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has
been paid, waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable
under the provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been
complied with.[44] (Emphases supplied.)
When an action is dismissed on the motion of the other party, it is
only when the ground for the dismissal of an action is found in
paragraphs (f), (h) and (i) that the action cannot be refiled. As
regards all the other grounds, the complainant is allowed to file same
action, but should take care that, this time, it is filed with the proper
court or after the accomplishment of the erstwhile absent condition
precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for
Reconsideration filed by the spouses Beluso on 15 January 1999 with

the RTC of Roxas City, which Motion had not yet been ruled upon
when the spouses Beluso filed Civil Case No. 99-314 with the RTC of
Makati. Hence, there were allegedly two pending actions between
the same parties on the same issue at the time of the filing of Civil
Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will
still not change our findings. It is indeed the general rule that in
cases where there are two pending actions between the same
parties on the same issue, it should be the later case that should be
dismissed. However, this rule is not absolute. According to this
Court in Allied Banking Corporation v. Court of Appeals[45]:
In these cases, it is evident that the first action was filed in
anticipation of the filing of the later action and the purpose is to
preempt the later suit or provide a basis for seeking the dismissal of
the second action.
Even if this is not the purpose for the filing of the first action, it may
nevertheless be dismissed if the later action is the more appropriate
vehicle for the ventilation of the issues between the parties. Thus, in
Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case
should yield to the earlier case. What is required merely is that there
be another pending action, not a prior pending action. Considering
the broader scope of inquiry involved in Civil Case No. 4102 and the
location of the property involved, no error was committed by the
lower court in deferring to the Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the
relevant considerations in determining which action should be
dismissed: (1) the date of filing, with preference generally given to
the first action filed to be retained; (2) whether the action sought to
be dismissed was filed merely to preempt the later action or to
anticipate its filing and lay the basis for its dismissal; and (3)
whether the action is the appropriate vehicle for litigating the issues
between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City
was an action for injunction against a foreclosure sale that has
already been held, while Civil Case No. 99-314 before the RTC of
Makati City includes an action for the annulment of said foreclosure,

an action certainly more proper in view of the execution of the

foreclosure sale. The former case was improperly filed in Roxas City,
while the latter was filed in Makati City, the proper venue of the
action as mandated by the Credit Agreement.
It is evident,
therefore, that Civil Case No. 99-314 is the more appropriate vehicle
for litigating the issues between the parties, as compared to Civil
Case No. V-7227. Thus, we rule that the RTC of Makati City was not
in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby
AFFIRMED with the following MODIFICATIONS:
1.
In addition to the sum of P2,350,000.00 as determined
by the courts a quo, respondent spouses Samuel and Odette Beluso
are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due[46] from the date
of demand; and
b. Compounded legal interest of 12% per annum on the amount
due[47] from date of demand;
2.
The following amounts shall be deducted from the
liability of the spouses Samuel and Odette Beluso:
a.
Payments made by the spouses in the amount of P763,692.00.
These payments shall be applied to the date of actual payment of
the following in the order that they are listed, to wit:
i.
penalty charges
due and demandable as of the time of payment;
ii.
interest due and
demandable as of the time of payment;
iii.
principal
amortization/payment in arrears as of the time of payment;
iv.
outstanding
balance.
b.
Penalty under Republic Act No. 3765 in the amount of
P26,000.00. This amount shall be deducted from the liability of the
spouses Samuel and Odette Beluso on 9 February 1999 to the
following in the order that they are listed, to wit:
i.
penalty charges
due and demandable as of time of payment;
ii.
interest due and
demandable as of the time of payment;
iii.
principal
amortization/payment in arrears as of the time of payment;

iv.
outstanding
balance.
3.
The foreclosure of mortgage is hereby declared VALID.
Consequently, the amounts which the Regional Trial Court and the
Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure
sale.
SO ORDERED.

G.R. No. 91494 July 14, 1995

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK),
petitioner,
vs.
THE HONORABLE COURT OF APPEALS, GEORGE AND GEORGE TRADE,
INC., GEORGE KING TIM PUA and PUA KE SENG, respondents.

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised
Rules of Court of the Decision of the Court of Appeals in CA-G.R. CV
No. 00922.
I
The factual antecedents, as found by the trial court and adopted by
the Court of Appeals, are as follows:
On April 22, 1977, defendant George King Tim Pua, in his personal
capacity, applied for, and was granted, by plaintiff bank a loan for
the sum of P500,000.00 for which he executed a promissory note
(Exhibit 1) for the same amount, payable on August 22, 1977.
On April 29, 1977, defendant George King Tim Pua, in his personal
capacity applied for, and was granted, by the plaintiff bank a loan for
the sum of P400,000.00, for which he executed a promissory note
(Exhibit 1-A) for the same amount, payable on August 29, 1979.
On May 6, 1977, defendant George King Tim Pua, in his personal
capacity, gain secured a loan from the plaintiff for the sum of
P400,000.00, for which he executed a promissory note (Exhibit 1-B)
for the same amount, payable on September 5, 1977.
On February 21, 1977, defendant George King Tim Pua, in his
personal capacity, applied for, and was granted, by the plaintiff bank
three (3) separate loans in the amounts of P220,000.00, P450,000.00
and P65,000.00, for which he executed three separate promissory
notes (Exhibits 1-C to 1-E), payable on May 23, 1977.

On January 23, 1979, defendant George and George Trade Inc.,

through defendant George King Tim Pua, obtained a loan of
P300,000.00 from the plaintiff, for which defendant George King Tim
Pua executed a promissory note (Exhibit A) on behalf of defendant
corporation, with defendants George King Tim Pua and Pua Ke Seng
as co-makers, which loan bears an interest of 13.23% per annum and
is payable on June 22, 1979.
On April 19, 1979, defendant George and George Trade Inc., through
defendant George King Tim Pua, applied for, and was granted,
another loan of P200,000.00 from the plaintiff bank, for which
defendant George King Tim Pua executed a promissory note (Exhibit
B) on behalf of defendant corporation, with defendants George King
Tim Pua and Pua Ke Seng as co-makers, which loan bears an interest
of 14% per annum and is payable on May 21, 1979.
On August 2, 1979, defendant George and George Trade Inc.,
through defendant George King Tim Pua, once more secured a loan
for P150,000.00, for which defendant George King Tim Pua executed
a promissory note (Exhibit C) on behalf of defendant corporation,
with defendants George King Tim Pua and Pua Ke Seng as co-makers,
which loan bears an interest of 14% per annum and is payable on
September 17, 1979.
The three promissory notes (Exhibits A, B and C) covering loans in
the corporate account of defendant George and George Trade Inc.
provides (sic) also that in case of default of payment, the defendants
agree to pay interest at an increased rate of 14% per annum on the
amount due, compounded monthly, until fully paid, as well as an
additional sum equivalent to 10% of the total amount due as and for
attorney's fees in addition to expenses and costs of suit, such
amount to bear interest at the rate of 1% per month until paid.
Under the two promissory notes (Exhibits B and C), the defendants
further bound themselves to pay a penalty at the rate of 3% per
annum on the amount due until fully paid.
In order to secure the payment of defendant George King Tim Pua's
obligation with the plaintiff, he assigned unto the latter the proceeds
of a fire insurance policy issued by the Kerr Insurance Company in
the amount of P2,908,485.00

The proceeds of the insurance policy were subsequently paid to the

plaintiff which applied the same to the personal account of
defendant George King Tim Pua. The personal account of defendant
George King Tim Pua was fully satisfied through the remittances of
the fire insurance proceeds (Rollo, pp. 53-55).
According to petitioner bank, after it had deducted from the
insurance proceeds the entirety of respondent George King Tim Pua's
personal account, there remained of the insurance proceeds the
amount of P383,302.42. It then proceeded to apply said amount to
the unpaid loans of respondent George and George Trade, Inc. which
amounted to P671,772.22 as of September 7, 1979, thus leaving a
balance of P288,469.80 of the loans.
Petitioner instituted on April 7, 1980 an action (Civil Case No.
130915) against private respondents before the then Court of First
Instance of Manila for the recovery of the unpaid balances on the
three promissory notes, including attorney's fees equivalent to 10%
of the amount recoverable.
In their Answer with Special and Affirmative Defenses and
Counterclaim, private respondents claimed that the loans had been
extinguished by way of payment through the assignment by
respondent George King Tim Pua of the fire insurance proceeds and
that it was in fact petitioner which owed them by reason of its failure
to return to the latter the balance of said insurance proceeds.
No amicable settlement having been reached between the parties,
trial ensued. On November 4, 1982, the trial court rendered
judgment, finding for petitioner. The dispositive portion of the
decision reads:
PREMISES CONSIDERED, judgment is hereby rendered ordering
defendants George and George Trade, Inc., George King Tim Pua and
Pua Ke Seng, jointly and severally, to pay plaintiff, The Consolidated
Bank and Trust Corporation (Solidbank) the sum of P228,469.80, with
interest thereon at the legal rate from March 28, 1980, until the
same is fully paid, and attorney's fees in the sum of P25,000.00, with
costs of suit.
For lack of merit, the counterclaim filed by the defendants is
dismissed (Rollo, p. 174).

On appeal by private respondents, the Court of Appeals reversed the

decision of the trial court, decreeing as follows:
WHEREFORE, the decision appealed from herein is REVERSED, and
plaintiff-appellee Consolidated Bank and Trust Corporation
(Solidbank) is instead ordered to pay appellant George King Tim Pua
the amount of P466,182.39, with legal interest thereon per annum
from September 8, 1979 until said amount is fully paid, plus
P10,000.00 attorney's fees and the costs of this suit (Rollo, p. 14).
Failing to secure a reconsideration of said decision, petitioner is now
before the Court on a petition for review on certiorari.
Simply stated, the issue in this petition is whether private
respondents are indebted to petitioners in the amount of
P288,469.80 as held by the then Court of First Instance of Manila or
whether said private respondents are entitled to reimbursement from
petitioner in the amount of P466,182.39 as decreed by the Court of
Appeals?
The issues raised are factual. As a general rule, the findings of the
Court of Appeals upon factual questions are conclusive and ought
not to be disturbed. There are, however, exceptions to the rule. One
of the exceptions is when the findings of fact of the Court of Appeals
are contrary to those of the trial court (Massive Construction, Inc. v.
Intermediate Appellate Court, 223 SCRA 1 [1993]).
In the instant case, the findings of fact of the Court of Appeals are
contrary to the findings of the trial court. Under such circumstance,
this Court may review the findings of fact of the Court of Appeals and
may scrutinize the evidence on record.
The records show that respondent George King Tim Pua had two sets
of accounts with petitioner bank: his personal account and his
account for George and George Trade, Inc. For his personal account,
he obtained from petitioner on different dates six separate loans with
different due dates, viz:
Loan I

22-Apr-77

(b)

500,000.00

450,000.00

Payable August 22, 1977

(c)

Loan II

65,000.00

29-Apr-77

400,000.00

Payable on May 3, 1977

Payable August 29, 1977

Loan III

735,000.00

TOTAL

5/6/77

2,035,000.00

============

400000.00
Payable September 5, 1977
Loan IV

(a) 2/21/1977

220,000.00

All of these loans bore a 14% rate of interest, which was to be

compounded monthly, in case of failure on the part of respondent
George King Tim Pua to pay on maturity. In which case, he further
undertook to pay an additional sum equivalent to 10% of the total
amount due but in no case less than P200.00 as attorney's fees. The
maturity dates of the loans were extended up to either December 1
or December 5, 1977 and all interests were paid up to March 5,
1978.
Under the account of George and George Trade, Inc., respondent
George King Tim Pua, together with his co-maker, respondent Pua Ke

Seng, obtained the following loans:

Loan A

650,000.00

============

23-Jan-79

The first loan bore an annual interest of 13.23%, which was to be

increased to 14% in case of failure to pay on due date, compounded
monthly, until fully paid. An additional amount equivalent to 10% of
the total amount but not less than P200.00 was to be imposed in
case of failure to pay on due date as attorney's fees. The second and
third loans bore an interest rate of 14% per annum and carried a
penalty of 3% per annum on the amount due in case of failure to pay
on the date of maturity. An additional sum equivalent to 10% of the
total amount due, but not less than P200.00, was to be imposed as
and for attorney's fees. Interest were paid on the loans up to their
date of maturity.

19-Apr-79

The records further show that payments were made as follows:

September 12, 1978

200,000.00

Payable May 21, 1979

230,000.00

Loan C

October 28, 1978

149,000.00

8/2/79

November 28, 1978

100,000.00

150,000.00

June 8, 1979

Payable Sept. 17, 1979

525,000.00

September 6, 1979

TOTAL

2,383,485.00

300,000.00
Payable June 22, 1979
Loan B

Less: Payment November 28, 1978

100,000.00

Balance, November 28, 1978 P

65,116.77
Add:
Interest November 29, 1978 to June 8,
1979, 14%, compounded monthly
4,962.35

Total
P
70,079.12

TOTAL PAYMENTS
P
3,387,985.00
===========

Loan II (Promissory Note No. 55828)

Based on the foregoing figures, the accounts of respondents George

King Tim Pua and George and George Trade, Inc. with petitioner Bank
should stand as of September 6, 1979, thus:
GEORGE KING TIM PUA
Loan I (Promissory Note No. 55658)
14% interest, compounded monthly
Interest paid up to March 5, 1978
Add:
Interest, March 6 to Sept. 12, 1978

Total
P
537,219.46

37,219.46

Less: Payment September 12, 1978

230,000.00

Balance, September 12, 1978 P

307,219.46
Add:
Interest September 13 to Oct. 28, 1978
14%, compounded monthly
5,492.63

Total
P
312,712.09
Less: Payment, October 28, 1978
149,500.00

Balance, October 28, 1978

P
163,212.09
Add:
Interest October 29 to Nov. 28, 1978
14%, compounded monthly
1,904.68

Total
P
165,116.77

500,000.00

400,000.00

14% Interest, compounded monthly

Interest paid up to March 5, 1978
Add:
Interest March 6, 1978 to June 8, 1979 76,587.34

Total
P
476,587.34
LOANS
Loan I
Loan II
P

I and II, as of June 8, 1979

P
70,079.12
476,587.34
546,666.46

Less: Payment, June 8, 1979 525,000.00

Balance, June 8, 1979 P

21,666.46
Loan III (Promissory Note No. 55991)

400,000.00

14% Interest, compounded monthly

Interest paid up to March 7, 1978
Add:
Interest March 8, 1978 to Sept. 6, 1979 92,634.60

Total
P
492,634.60
Loan IV (Promissory Note No. 54221)
(Promissory Note No. 54222)

(Promissory Note No. 54223)

735,000.00

P
450,000.00
65,000.00

220,000.00

14% Interest, compounded monthly

Interest paid up to March 7, 1978
Add:
Interest March 8, 1978 to Sept. 6, 1979 170,216.17

Total
P
905,216.17

Balance of Insurance Proceeds

after payment of Loan B
P

Loan C (Promissory Note No. 794730)

Balance of Insurance Proceeds

after payment of all loans
P

1,419,517.23

Less: Payment, September 6, 1979

BALANCE OF INSURANCE PROCEEDS

2,383,485.00
P

963,967.77

GEORGE AND GEORGE TRADE, INC

Loan A (Promissory Note No. 790591)

300,000.00

14% Interest, compounded monthly

Interest paid up to June 22, 1979
Add:
Interest from June 23, 1979 to
Sept. 6, 1979 8,691.63

Total
P
308,691.63
Balance of Insurance Proceeds
after payment of Loan A
P

150,000.00

14% Interest per annum

Interest paid up to Sept. 17, 1979

LOANS II, III and IV, as of Sept. 6, 1979

Loan II P
21,666.46
Loan III 492,634.60
Loan IV 905,216.17
P

445,236.85

295,236.85

Less: Trust Receipts Obligations 291,620.00

Amount Refundable to
Respondent George King Tim Pua
P
============

3,616.85

The 14% interest rate charged by petitioner was within the limits set
by Section 3 of the Usury Law, as amended.
The charging of compounded interest has been held as proper as
long as the payment thereof has been agreed upon by the parties. In
Mambulao Lumber Company v. Philippine National Bank, 22 SCRA
359 (1968), we ruled that the parties may, by stipulation, capitalize
the interest due and unpaid, which as added principal shall earn new
interest. In the instant case, private respondents agreed to the
payment of 14% interest per annum, compounded monthly, should
they fail to pay the principal loan on the date of maturity.

655,276.14

Loan B (Promissory Note No. 792805)

14% Interest per annum
Interest paid up to May 21, 1979
Add:
Interest from May 22, 1979 to
Sept. 6, 1979 8,208.22
Penalty of 3% per annum
1,831.07

Total
P
210,039.29

200,000.00

As to handling charges, banks are authorized under Central Bank

Circular
No. 504 to collect such charges on loans over P500,000.00 with a
maturity of 730 days or less at the rate of 2% per annum, on the
principal or the outstanding balance thereof, whichever is lower;
1.75% on loans over P500,000.00 but not over P1,000,000.00; 1.50%
on loans over P1,000,000.00 but not over 2,000,000.00, etc. Section
7 of the same Circular, however, provides that all banks and nonbank financial intermediaries authorized to engage in quasi-banking
functions are required to strictly adhere to the provisions of Republic
Act No. 3765 otherwise known as the "Truth in Lending Act" and shall
make the true and effective cost of borrowing an integral part of

every loan contract. The promissory notes signed by private

respondents do not contain any stipulation on the payment of
handling charges. Petitioner bank cannot, therefore, charge private
respondents such handling charges.
The payment of penalty is sanctioned by law, although the penalty
may be reduced by the courts if it is iniquitous or unconscionable
(Equitable Banking Corporation v. Liwanag, 32 SCRA 293 [1970]).
The payment of penalty was provided for under the terms and
conditions of the promissory notes for Loans B and C of George and
George Trade, Inc. The penalty actually imposed, being only 3% per
annum of the unpaid balance of the principal of said Loan B, is
considered reasonable and proper.
The same cannot, however, be said of the payment being insisted
upon by petitioner of the attorney's fees stipulated in all the
promissory notes, consisting of 10% of the total amount due and
payable. A stipulation regarding the payment of attorney's fees is
neither illegal nor immoral and is enforceable as the law between the
parties as long as such stipulation does not contravene law, good
morals, good customs, public order or public policy (Social Security
Commission v. Almeda, 168 SCRA 474 [1988]; Reparations
Commission v. Visayan Packing Corporation, 193 SCRA 531 [1991]).
As stated in the promissory notes, respondent George King Tim Pua
agreed to pay attorney's fees only "in addition to expenses and costs
of suit." In other words, petitioner is entitled to collect from
respondent George King Tim Pua the attorney's fees agreed upon
only in case it was compelled to litigate with third persons or to incur
expenses to protect its interest (China Airlines, Ltd. v. Intermediate
Appellate Court, 169 SCRA 226 [1989]; Songcuan v. Intermediate
Appellate Court, 191 SCRA 28 [1990]). These conditions are not
obtaining in the case at bench. There was no need for petitioner to
litigate to protect its interest inasmuch as private respondents had
fully paid their obligations months before it filed the complaint for
recovery of sum of money. Neither has it been shown by competent
proof that petitioner had to engage the services of a lawyer or incur
expenses in collecting the fire insurance proceeds from Kerr and
Company.
The "Tentative Computation" to which respondent George King Tim
Pua allegedly affixed his initials to the item "Attorney's Fees, 10%"
cannot be taken as amending the stipulation contained in the

promissory notes on the payment of attorney's fees. The failure of

said Tentative Computation to express the true intent and agreement
of the parties thereto was put in issue in the Amended Answer with
Special and Affirmative Defenses and Counterclaim filed by private
respondents before the trial court. The corresponding testimony of
respondent George King Tim Pua that he did not understand the
import of this item in the Tentative Computation remains unrebutted.
The award of attorney's fees lies within the discretion of the court
and depends upon the circumstances of each case. However, the
discretion of the court to award attorney's fees under Article 2208 of
the Civil Code of the Philippines demands factual, legal and equitable
justification, without which the award is a conclusion without a
premise and improperly left to speculation and conjecture. It
becomes a violation of the proscription against the imposition of a
penalty on the right to litigate (Universal Shipping Lines, Inc. v.
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for
the award must be stated in the text of the court's decision. If it is
stated only in the dispositive portion of the decision, the same shall
be disallowed. As to the award of attorney's fees being an exception
rather than the rule, it is necessary for the court to make findings of
fact and law that would bring the case within the exception and
justify the grant of the award (Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]).
In this case, the Court of Appeals strictly followed the above-stated
standard set by this Court. The award of P10,000.00 as attorney's
fees to private respondents was reasonable and justified as they
were compelled to litigate and incur expenses to protect their
interest.
WHEREFORE, the Decision of the Court of Appeals is AFFIRMED with
the MODIFICATION that the amount which petitioner is ordered to
reimburse respondent George King Tim Pua is reduced to THREE
THOUSAND SIX HUNDRED SIXTEEN & 65/100 PESOS (P3,616.65),
with legal interest thereon from September 8, 1979 until said amount
is fully paid. No pronouncement as to costs.
SO ORDERED.

NISCE vs. EQUITABLE PCIB

DECISION
CALLEJO, SR., J.:
On November 26, 2002, Equitable PCI Bank[1] (Bank) as
creditor-mortgagee filed a petition for extrajudicial foreclosure before
the Office of the Clerk of Court as Ex-Officio Sheriff of the Regional
Trial Court (RTC) of Makati City. It sought to foreclose the following
real estate mortgage contracts executed by the spouses Ramon and
Natividad Nisce over two parcels of land covered by Transfer
Certificate of Title (TCT) Nos. S-83466 and S-83467 of the Registry of
Deeds of Rizal: one dated February 26, 1974; two (2) sets of
Additional Real Estate Mortgage dated September 27, 1978 and
June 3, 1996; and an Amendment to Real Estate Mortgage dated
February 28, 2000. The mortgage contracts were executed by the
spouses Nisce to secure their obligation under Promissory Note Nos.
1042793 and BD-150369, including a Suretyship Agreement
executed by Natividad. The obligation of the Nisce spouses totaled
P34,087,725.76 broken down as follows:
Spouses Ramon & Natividad Nisce - - - - - P17,422,285.99
Natividad P. Nisce (surety) - - - - - - - - - US$57,306.59
and - - - - - - - - - - - P16,665,439.77[2]
On December 2, 2002, the Ex-Officio Sheriff set the sale at
public auction at 10:00 a.m. on January 14, 2003,[3] or on January
30, 2003 in the event the public auction would not take place on the
earlier setting.
On January 28, 2003, the Nisce spouses filed before the RTC of
Makati City a complaint for nullity of the Suretyship Agreement,
damages and legal compensation with prayer for injunctive relief
against the Bank and the Ex-Officio Sheriff. They alleged the
following: in a letter[4] dated December 7, 2000 they had requested
the bank (through their lawyer-son Atty. Rosanno P. Nisce) to setoff
the peso equivalent of their obligation against their US dollar account
with PCI Capital Asia Limited (Hong Kong), a subsidiary of the Bank,
under Certificate Deposit No. 01612[5] and Account No. 090-0104
(Passbook No. 83-3041);[6] the Bank accepted their offer and
requested for an estimate of the balance of their account; they
complied with the Banks request and in a letter dated February 11,
2002, informed it that the estimated balance of their account as of

December 1991 (including the 11.875% per annum interest) was

US$51,000.42,[7] and that as of December 2002, Natividads US
dollar deposit with it amounted to at least P9,000,000.00; they were
surprised when they received a letter from the Bank demanding
payment of their loan account, and later a petition for extrajudicial
foreclosure.
The spouses Nisce also pointed out that the petition for foreclosure
filed by the Bank included the alleged obligation of Natividad as
surety for the loan of Vista Norte Trading Corporation, a company
owned and managed by their son Dino Giovanni P. Nisce
(P16,665,439.77 and US$57,306.59). They insisted, however, that
the suretyship agreement was null and void for the following
reasons:
(a) x x x [I]t was executed without the knowledge and
consent of plaintiff Ramon M. Nisce, who is by law the administrator
of the conjugal partnership;
(b) The suretyship agreement did not redound to the benefit
of the conjugal partnership and therefore did not bind the same;
(c) Assuming, arguendo, that the suretyship contract was
valid and binding, any obligation arising therefrom is not covered by
plaintiffs real estate mortgages which were constituted to secure the
payment of certain specific obligations only.[8]
The spouses Nisce likewise alleged that since they and the
Bank were creditors and debtors with respect to each other, their
obligations should have been offset by legal compensation to the
extent of their account with the Bank.
To support their plea for a writ of preliminary and prohibitory
injunction, the spouses Nisce alleged that the amount for which their
property was being sold at public auction (P34,087,725.76) was
grossly excessive; the US dollar deposit of Natividad with PCI Capital
Asia Ltd. (Hong Kong), and the obligation covered by the suretyship
agreement had not been deducted. They insisted that their property
rights would be violated if the sale at public auction would push
through. Thus, the spouses Nisce prayed that they be granted the
following reliefs:

(1) that upon the filing of this Complaint and/or after due
notice and summary hearing, the Honorable Court immediately issue
a temporary restraining order (TRO) restraining defendants, their
representatives and/or deputies, and other persons acting for and on
their behalf from proceeding with the extrajudicial foreclosure sale of
plaintiffs mortgaged properties on 30 January 2003 or on any other
dates subsequent thereto;
(2) that after due notice and hearing and posting of the
appropriate bond, the Honorable Court convert the TRO to a writ of
preliminary prohibitory injunction;
(3) that after trial on the merits, the Honorable Court render
judgment
(a)

making the preliminary injunction final and permanent;

(b) ordering defendant Bank to set off the present peso value of
Mrs. Nisces US dollar time deposit, inclusive of stipulated interest,
against plaintiffs loan obligations with defendant Bank;
(c)
declaring the Deed of Suretyship dated 25 May 1998 null and
valid and without any binding effect as to plaintiff spouses, and
ordering defendant Bank to exclude the amounts covered by said
suretyship contract from plaintiffs obligations with defendant Bank;
(d) ordering defendant Bank to pay plaintiffs the following sums:
(i)
at least P3,000,000.00 as moral damages;
(ii)
at least P1,500,000.00 as exemplary damages; and
(iii)
at least P500,000.00 as attorneys fees and for other
expenses of litigation.
Plaintiffs further pray for costs of suit and such other reliefs as may
be deemed just and equitable.[9]
On same day, the Bank filed an Amended Petition with the Office of
the Executive Judge for extrajudicial foreclosure of the Real Estate
Mortgage to satisfy the spouses loan account of P30,533,552.24,
exclusive of interests, penalties and other charges; and the amounts

of P16,665,439.77 and US$57,306.59 covered by the suretyship

agreement executed by Natividad Nisce.[10]
In the meantime, the parties agreed to have the sale at public
auction reset to January 30, 2003.
In its Answer to the complaint, the Bank alleged that the spouses
had no cause of action for legal compensation since PCI Capital was
a different corporation with a separate and distinct personality; if at
all, offsetting may occur only with respect to the spouses US$500.00
deposit account in its Paseo de Roxas branch.
In the meantime, the Ex-Officio Sheriff set the sale at public auction
at 10:00 a.m. on March 5 and 27, 2003.[11] The spouses Nisce then
filed a Supplemental Complaint with plea for a temporary restraining
order to enjoin the sale at public auction.[12] Thereafter, the RTC
conducted hearings on the plaintiffs plea for a temporary restraining
order, and the parties adduced testimonial and documentary
evidence on their respective arguments.
The Case for the Spouses Nisce
Natividad frequently traveled abroad and needed a facility with easy
access to foreign exchange. She inquired from E.P. Nery, the Bank
Manager for PCI Bank Paseo de Roxas Branch, about opening an
account. He assured her that she would be able to access it from
anywhere in the world. She and Nery also agreed that any balance of
account remaining at maturity date would be rolled over until further
instructions, or until she terminated the facility.[13] Convinced,
Natividad deposited US$20,500.00 on July 19, 1984, and was issued
Passbook No. 83-3041.[14] Upon her request, the bank transferred
the US$20,000.00 to PCI Capital Asia Ltd. in Hong Kong via cable
order.[15]
On July 11, 1996, the spouses Nisce secured a P20,000,000.00 loan
from the Bank under Promissory Note No. BD-150369.[16] The
maturity date of the loan was July 11, 2001, payable in monthly
installments at 16.731% interest per annum. To secure the payment
of the loan account, they executed an Amendment to the Real Estate
Mortgage over the properties[17] located in Makati City covered by
TCT Nos. S-83466 and S-83467.[18] They later secured another loan
of P13,089,936.90 on March 1, 2000 (to mature on March 1, 2005)
payable quarterly at 13.9869% interest per annum; this loan
agreement is evidenced by Promissory Note (PN) No. 1042793[19]

and covered by a Real Estate Mortgage[20] executed on February

28, 2000. They made a partial payment of P13,866,666.50 on the
principal of their loan account covered by PN No. BD-150369, and
P5,348,239.82 on the interests.[21] These payments are evidenced
by receipts and checks.[22] However, there were payments totaling
P4,600,000.00 received by the Bank but were not covered by checks
or receipts.[23] As of September 2000, the balance of their loan
account under PN No. BD-150369 was only P4,333,333.46.[24] They
also made partial payment on their loan account under PN No.
1042793 which, as of May 30, 2001, amounted to P2,218,793.61.[25]
On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD01612;[26] proof of receipt of the US$20,000.00 transferred to it by
PCI Bank Paseo de Roxas Branch as requested by Natividad. The
deposit account was to earn interest at the rate of 11.875% per
annum, and would mature on October 22, 1984, thereafter to be
payable at the office of the depositary in Hong Kong upon
presentation of the Certificate of Deposit.
In June 1991, two sons of the Nisce spouses were stranded in Hong
Kong. Natividad called the Bank and requested for a partial release
of her dollar deposit to her sons. However, she was informed that
according to its computer records, no such dollar account existed.
Sometime in November 1991, she submitted her US dollar passbook
with a xerox copy of the Certificate of Deposit for the PCIB to
determine the whereabouts of the account.[27] She reiterated her
request to the Bank on January 27, 1992[28] and September 11,
2000.[29]
In the meantime, in 1994, the Equitable Banking Corporation and the
PCIB were merged under the corporate name Equitable PCI Bank.
In a letter dated December 7, 2000, Natividad confirmed to the Bank,
through Ms. Shellane R. Casaysayan, her offer to settle their loan
account by offsetting the peso equivalent of her dollar account with
PCI Capital under Account No. 090-0104.[30] Their son, Atty. Rosanno
Nisce, later wrote the Bank, declaring that the estimated balance of
the US dollar account with PCI Capital as of December 1991 was
US$51,000.42.[31] Atty. Nisce corroborated this in his testimony,
and stated that Ms. Casaysayan had declared that she would refer
the matter to her superiors.[32] A certain Rene Esteven also told him
that another offer to setoff his parents account had been accepted,

and he was assured that its implementation was being processed.

[33] On cross examination, Atty. Nisce declared that there was no
response to his request for setoff,[34] and that Esteven assured him
that the Bank would look for the records of his mothers US dollar
savings deposit.[35] He was later told that the Bank had accepted
the offer to setoff the account.[36]
The Case for the Bank
The Bank adduced evidence that, as of January 31, 2003, the
balance of the spouses account under the two promissory notes,
including interest and penalties, was P30,533,552.24.[37] It had
agreed to restructure their loans on March 31, 1998, but they
nevertheless failed to pay despite repeated demands.[38] The
spouses had also been furnished with a statement of their account
as of June 2001. Thus, under the terms of the Real Estate Mortgage
and Promissory Notes, it had the right to the remedy of foreclosure. It
insisted that there is no showing in its records that the spouses had
delivered checks amounting to P4,600,000.00.[39]
According to the Bank, Natividads US$20,000.00 deposit with the
PCIB Paseo de Roxas branch was transferred to PCI Capital via cable
order,[40] and that it later issued Certificate of Deposit No. 01612
(Non-transferrable).[41] In a letter dated May 9, 2001, it informed
Natividad that it had acted merely as a conduit in facilitating the
transfer of the funds, and that her deposit was made with PCI Capital
and not with PCIB. PCI Capital had a separate and distinct personality
from the PCIB, and a claim against the former cannot be made
against the latter. It was later advised that PCI Capital had already
ceased operations.[42]
The spouses Nisce presented rebuttal documentary evidence to
show that PCI Capital was registered in Hong Kong as a corporation
under Registration No. 84555 on February 27, 1989[43] with an
authorized capital stock of 50,000,000 (with par value of HKD1.00);
the PCIB subscribed to 29,039,993 issued shares at the par value of
HKD1.00 per share;[44] on October 25, 2004, the corporate name of
PCI Capital was changed to PCI Express Padala (HK) Ltd.;[45] and the
stockholdings of PCIB remained at 29,039,999 shares.[46]
On March 24, 2003, the RTC issued an Order[47] granting the
spouses Nisces plea for a writ of preliminary injunction on a bond of

P10,000,000.00. The dispositive portion of the Order reads:

WHEREFORE, in order not to render the judgment ineffectual, upon
filing by the plaintiffs and the approval thereof by the court of a bond
in the amount of Php10,000,000.00, which shall answer for any
damage should the court finally decide that plaintiffs are not entitled
thereto, let a writ of preliminary injunction issue enjoining
defendants Equitable-PCI Bank, Atty. Engracio M. Escasinas, Jr., and
any person or entity acting for and in their behalf from proceeding
with the extrajudicial foreclosure sale of TCT Nos. 437678 and
437679 registered in the names of the plaintiffs.[48]
After weighing the parties arguments along with their documentary
evidence, the RTC declared that justice would be best served if a writ
of preliminary injunction would be issued to preserve the status quo.
It had yet to resolve the issue of setoff since only Natividad dealt
with the Bank regarding her dollar account. It also had to resolve the
issue of whether the Bank had failed to credit the amount of
P4,600,000.00 to the spouses Nisces account under PN No. BD150369, and their claim that the Bank had effectively accelerated
the respective maturity dates of their loan.[49] The spouses Nisce
posted the requisite bond which was approved by the RTC.
The Bank opted not to file a motion for reconsideration of the order,
and instead assailed the trial courts order before the CA via petition
for certiorari under Rule 65 of the Rules of Court. The Bank alleged
that the RTC had acted without or in excess of its jurisdiction, or with
grave abuse of its discretion amounting to lack or excess of
jurisdiction when it issued the assailed order;[50] the spouses Nisce
had failed to prove the requisites for the issuance of a writ of
preliminary injunction; respondents claim that their account with
petitioner had been extinguished by legal compensation has no
factual and legal basis. It further asserted that according to the
evidence, Natividad made the US$20,000.00 deposit with PCI Capital
before it merged with Equitable Bank hence, the Bank was not the
debtor of Natividad relative to the dollar account. The Bank cited the
ruling of this Court in Escao v. Heirs of Escao and Navarro[51] to
support its arguments. It insisted that the spouses Nisce had failed to
establish irreparable injury in case of denial of their plea for
injunctive relief.

The spouses, for their part, pointed out that the Bank failed to file a
motion for reconsideration of the trial courts order, a condition sine
qua non to the filing of a petition for certiorari under Rule 65 of the
Rules of Court. Moreover, the error committed by the trial court is a
mere error of judgment not correctible by certiorari; hence, the
petition should have been dismissed outright by the CA. They
reiterated their claim that they had made a partial payment of
P4,600,000.00 on their loan account which petitioner failed to credit
in their favor. The Bank had agreed to debit their US dollar savings
deposit in the PCI Capital as payment of their loan account. They
insisted that they had never deposited their US dollar account with
PCI Capital but with the Bank, and that they had never defaulted on
their loan account. Contrary to the Banks claim, they would have
suffered irreparable injury had the trial court not enjoined the
extrajudicial foreclosure of the real estate mortgage.
On December 22, 2004, the CA rendered judgment granting the
petition and nullifying the assailed Order of the RTC.[52] The
appellate court declared that a petition for certiorari under Rule 65 of
the Rules of Court may be filed despite the failure to file a motion for
reconsideration,
particularly in instances where the issue raised is one of law; where
the error is patent; the assailed order is void, or the questions raised
are the same as those already ruled upon by the lower court.
According to the appellate court, the issue raised before it was
purely one of law: whether the loan account of the spouses was
extinguished by legal compensation. Thus, a motion for the
reconsideration of the assailed order was not a prerequisite to a
petition for certiorari under Rule 65.
The appellate court further declared that the trial court committed
grave abuse of its discretion in issuing the assailed order, since no
plausible reason was given by the spouses Nisce to justify the
injunction of the extrajudicial foreclosure of the real estate
mortgage. Given their admission that they had not settled the
obligations secured by the mortgage, the Bank had a clear right to
seek the remedy of foreclosure.
The CA further declared as devoid of factual basis the spouses
Nisces argument that the Bank should have applied, by way of legal
compensation, the peso equivalent of their time deposit with PCI
Capital as partial settlement of their obligations. It held that for

compensation to take place, the requirements set forth in Articles

1278 and 1279 of the Civil Code of the Philippines must be present;
in this case, the parties are not mutually creditors and debtors of
each other. It pointed out that the time deposit which the spouses
Nisce sought to offset against their obligations to the Bank is
maintained with PCI Capital. Even if PCI Capital is a subsidiary of the
Bank, compensation cannot validly take place because the Bank and
PCI Capital are two separate and distinct corporations. It pointed out
the settled principle that a corporation has a personality separate
and distinct from its stockholders and from other corporations to
which it may be connected.
The CA further declared that the alleged P4,600,000.00 payment on
PN No. BD-150369 was not pleaded in the spouses complaint and
supplemental complaint before the court a quo. What they alleged,
aside from legal compensation, was that the mortgage is not liable
for the obligation of Natividad Nisce as surety for the loans obtained
by a trading firm owned and managed by their son. The CA further
pointed out that the Bank precisely amended the petition for
foreclosure sale by deleting the claim for Natividads obligation as
surety. The appellate court concluded that the injunctive writ was
issued by the RTC without factual and legal basis.[53]
The spouses Nisce moved to have the decision reconsidered, but the
appellate court denied the motion. They thus filed the instant
petition for review on the following grounds:
5.1. THE HONORABLE COURT OF APPEALS ERRED IN TAKING
COGNIZANCE OF THE PETITION FOR CERTIORARI DESPITE THE
BANKS FAILURE TO FILE A MOTION FOR RECONSIDERATION WITH
THE TRIAL COURT.
5.2. THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR WHEN IT PREMATURELY RULED ON THE MERITS OF THE MAIN
CASE.
5.3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT JUDGE HAD COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ISSUING A
TEMPORARY RESTRAINING ORDER AND A WRIT OF PRELIMINARY
INJUNCTION IN FAVOR OF THE SPOUSES NISCE.[54]
Petitioners aver that the CA erred in not dismissing respondent

Banks petition for certiorari outright because of the absence of a

condition precedent: the filing of a motion for reconsideration of the
assailed Order of the RTC before filing the petition for certiorari in the
CA. They insist that respondent banks failure to file a motion for
reconsideration of the assailed Order deprived the RTC of its option
to resolve the issue of whether it erred in issuing the writ of
preliminary injunction in their favor.
Petitioners insist that in resolving whether a petition for a writ of
preliminary injunction should be granted, the trial court and the
appellate court are not to resolve the merits of the main case. In this
case, however, the CA resolved the bone of contention of the parties
in the trial court: whether the loan account of petitioners with
respondent bank had been extinguished by legal compensation
against petitioner Natividad Nisces US dollar savings account with
PCI Capital in Hong Kong. The CA reversed the assailed order of the
trial court by resolving the main issue in the trial court on its merits,
and declaring that the US dollar savings deposit of the petitioner
Natividad Nisce with the PCI Capital cannot be used to offset the loan
account of petitioners with respondent bank. In fine, according to
petitioners, the CA preempted the ruling of the RTC on the main
issue even before the parties could be given an opportunity to
complete the presentation of their respective evidences. Petitioners
point out that in the assailed Order, the RTC declared that to
determine whether respondent had credited petitioners for the
amount of P4,600,000.00 under PN No. BD-150369 and whether
respondent as mortgagee-creditor accelerated the maturities of the
two (2) promissory notes executed by petitioner, there was a need
for a full-blown trial and an exhaustive consideration of the evidence
of the parties.
Petitioners further insist that a petition for a writ of certiorari is
designed solely to correct errors of jurisdiction and not errors of
judgment, such as errors in the findings and conclusions of the trial
court. Petitioners maintain that the trial courts erroneous findings
and conclusions (according to respondent bank) are not the proper
subjects for a petition for certiorari. Contrary to the findings of the
CA, they did not admit in the trial court that they were in default in
the payment of their loan obligations. They had always maintained
that they had no outstanding obligation to respondent bank precisely
because their loan account had been offset by the US dollar deposit
of petitioner Natividad Nisce, and that they had made check

payments of P4,600,000.00 which respondent bank had not credited

in their favor. Likewise erroneous is the CA ruling that they would not
suffer irreparable damage or injury if their properties would be sold
at public auction following the extrajudicial foreclosure of the
mortgage. Petitioners point out that their conjugal home stands on
the subject properties and would be lost if sold at public auction.
Besides, petitioners aver, the injury to respondent bank resulting
from the issuance of a writ of preliminary injunction is amply secured
by the P10,000,000.00 injunction bond which they had posted.
For its part, respondent avers that, as held by the CA, the
requirement of the filing of a motion for reconsideration of the
assailed Order admits of exceptions, such as where the issue
presented in the appellate court is the same issue presented and
resolved by the trial court. It insists that petitioners failed to prove a
clear legal right to injunctive relief; hence, the trial court committed
grave abuse of discretion in issuing a writ of preliminary injunction.
Respondent maintains that the sole issue involved in the petition for
certiorari of respondent in the CA was whether or not the trial court
committed grave abuse of its discretion in issuing the writ of
preliminary injunction. Necessarily, the CA would have to delve into
the circumstances behind such issuance. In so doing, the CA had to
consider and calibrate the testimonial and documentary evidence
adduced by the parties. However, the RTC and the CA did not resolve
with finality the threshold factual and legal issue of whether the loan
account of petitioners had been paid in full before it filed its petition
for extrajudicial foreclosure of the real estate mortgage.
The Ruling of the Court
The Petition in the
Court of Appeals
Not Premature
The general rule is that before filing a petition for certiorari
under Rule 65 of the Rules of Court, the petitioner is mandated to
comply with a condition precedent: the filing of a motion for
reconsideration of the assailed order, and the subsequent denial of
the court a quo. It must be stressed that a petition for certiorari is an
extraordinary remedy and should be filed only as a last resort. The
filing of a motion for reconsideration is intended to afford the public
respondent an opportunity to correct any actual error attributed to it

by way of re-examination of the legal and factual issues.[55]

However, the rule is subject to the following recognized exceptions:
(a) where the order is a patent nullity, as where the court a quo has
no jurisdiction; (b) where the questions raised in the certiorari
proceeding have been duly raised and passed upon by the lower
court, or are the same as those raised and passed upon in the lower
court; (c) where there is an urgent necessity for the resolution of the
question and any further delay would prejudice the interests of the
Government or of the petitioner or the subject matter of the action is
perishable; (d) where, under the circumstances, a motion for
reconsideration would be useless; (e) where petitioner was deprived
of due process and there is extreme urgency for relief; (f) where, in a
criminal case, relief from an order of arrest is urgent and the
granting of such relief by the trial court is improbable; (g) where the
proceedings in the lower court are a nullity for lack of due process;
(h) where the proceedings was ex parte or in which the petitioner
had no opportunity to object; and (i) where the issue raised is one
purely of law or public interest is involved.[56]
As will be shown later, the March 24, 2003 Order of the trial
court granting petitioners plea for a writ of preliminary injunction
was issued with grave abuse of discretion amounting to excess or
lack of jurisdiction and thus a nullity. If the trial court issues a writ of
preliminary injunction despite the absence of proof of a legal right
and the injury sustained by the plaintiff, the writ is a nullity.[57]
Petitioners Are Not
Entitled to a Writ of
Preliminary Prohibitory
Injunction
Section 3, Rule 58 of the Rules of Court provides that a preliminary
injunction may be granted when the following have been
established:
(a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the commission or
continuance of the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited period or
perpetually;

(b) That the commission, continuance or nonperformance of the act

or acts complained of during the litigation would probably work
injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is
attempting to do, or is procuring or suffering to be done, some act or
acts probably in violation of the rights of the applicant respecting the
subject of the action or proceeding, and tendering to render the
judgment ineffectual.
The grant of a preliminary injunction in a case rests on the
sound discretion of the court with the caveat that it should be made
with great caution. The exercise of sound judicial discretion by the
lower court should not be interfered with except in cases of manifest
abuse. Injunction is a preservative remedy for the protection of the
parties substantive rights and interests.
The sole aim of a
preliminary injunction is to preserve the status quo within the last
actual status that preceded the pending controversy until the merits
of the case can be heard fully. Moreover, a petition for a preliminary
injunction is an equitable remedy, and one who comes to claim for
equity must do so with clean hands. It is to be resorted to by a
litigant to prevent or preserve a right or interest where there is a
pressing necessity to avoid injurious consequences which cannot be
remedied under any standard of compensation. A petition for a writ
of preliminary injunction rests upon an alleged existence of an
emergency or of a special reason for such a writ before the case can
be regularly tried. By issuing a writ of preliminary injunction, the
court can thereby prevent a threatened or continued irreparable
injury to the plaintiff before a judgment can be rendered on the
claim.[58]
The plaintiff praying for a writ of preliminary injunction must
further establish that he or she has a present and unmistakable right
to be protected; that the facts against which injunction is directed
violate such right;[59] and there is a special and paramount
necessity for the writ to prevent serious damages. In the absence of
proof of a legal right and the injury sustained by the plaintiff, an
order for the issuance of a writ of preliminary injunction will be
nullified. Thus, where the plaintiffs right is doubtful or disputed, a
preliminary injunction is not proper. The possibility of irreparable

damage without proof of an actual existing right is not a ground for a

preliminary injunction.[60]
However, to establish the essential requisites for a preliminary
injunction, the evidence to be submitted by the plaintiff need not be
conclusive and complete.[61] The plaintiffs are only required to show
that they have an ostensible right to the final relief prayed for in
their complaint.[62] A writ of preliminary injunction is generally
based solely on initial or incomplete evidence.[63] Such evidence
need only be a sampling intended merely to give the court an
evidence of justification for a preliminary injunction pending the
decision on the merits of the case, and is not conclusive of the
principal action which has yet to be decided.[64]
It bears stressing that findings of the trial court granting or denying a
petition for a writ of preliminary injunction based on the evidence on
record are merely provisional until after the trial on the merits of the
case shall have been concluded.[65]
The trial court, in granting or dismissing an application for a writ of
preliminary injunction based on the pleadings of the parties and their
respective evidence must state in its order the findings and
conclusions based on the evidence and the law. This is to enable the
appellate court to determine whether the trial court committed grave
abuse of its discretion amounting to excess or lack of jurisdiction in
resolving, one way or the other, the plea for injunctive relief. The trial
courts exercise of its judicial discretion whether to grant or deny an
application for a writ of preliminary injunction involves the
assessment and evaluation of the evidence, and its findings of facts
are ordinarily binding and conclusive on the appellate court and this
Court.[66]
We agree with respondents contention that as creditor-mortgagee, it
has the right under the real estate mortgage contract and the
amendment thereto to foreclose extrajudicially, the real estate
mortgage and sell the property at public auction, considering that
petitioners had failed to pay their loans, plus interests and other
incremental amounts as provided for in the deeds. Petitioners
contend, however, that if respondent bank extrajudicially forecloses
the real estate mortgage and has petitioners property sold at public
auction for an amount in excess of the balance of their loan account,
petitioners contractual and substantive rights under the real estate

mortgage would be violated; in such a case, the extrajudicial

foreclosure sale may be enjoined by a writ of preliminary injunction.
Respondent bank sought the extrajudicial foreclosure of the real
estate mortgage and was to sell the property at public auction for
P30,533,552.24. The amount is based on Promissory Notes No.
1042793 and BD-150369, interests, penalty charges, and attorneys
fees, as of January 31, 2003, exclusive of all interests, penalties,
other charges, and foreclosure costs accruing thereafter.[67]
Petitioners asserted before the trial court that respondents sought
the extrajudicial foreclosure of the mortgaged deed for an amount
far in excess of what they owed, because the latter failed to credit
P4,600,000.00 paid in checks but without any receipts having been
issued therefor; and the P9,000,000.00 peso equivalent of the
US$20,000.00 deposit of petitioner Natividad Nisce with PCIB under
Passbook No. 83-3041 and Certificate of Deposit No. CD-01612
issued by PCI Capital on July 23, 1984. Petitioners maintain that the
US$20,000.00 dollar deposit should be setoff against their account
with respondent against their loan account, on their claim that
respondent is their debtor insofar as said deposit is concerned.
It was the burden of petitioners, as plaintiffs below, to adduce
preponderant evidence to prove their claim that respondent bank
was the debtor of petitioner Natividad Nisce relative to her dollar
deposit with PCIB, and later transferred to PCI Capital in Hong Kong,
a subsidiary of respondent Bank. Petitioners, however, failed to
discharge their burden.
Under Article 1278 of the New Civil Code, compensation shall take
place when two persons, in their own right, are creditors and debtors
of each other. In order that compensation may be proper, petitioners
were burdened to establish the following:
(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the
debtor.[68]
Compensation takes effect by operation of law when all the
requisites mentioned in Article 1279 of the New Civil Code are
present and extinguishes both debts to the concurrent amount even
though the creditors and debtors are not aware of the compensation.
Legal compensation operates even against the will of the interested
parties and even without their consent.[69] Such compensation
takes place ipso jure; its effects arise on the very day on which all
requisites concur.[70]
As its minimum, compensation presupposes two persons who, in
their own right and as principals, are mutually indebted to each other
respecting equally demandable and liquidated obligations over any
of which no retention or controversy commenced and communicated
in due time to the debtor exists. Compensation, be it legal or
conventional, requires confluence in the parties of the characters of
mutual debtors and creditors, although their rights as such creditors
or their obligations as such debtors need not spring from one and
the same contract or transaction.[71]
Article 1980 of the New Civil Code provides that fixed, savings and
current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loans. Under Article
1953, of the same Code, a person who secures a loan of money or
any other fungible thing acquires the ownership thereof, and is
bound to pay the creditor an equal amount of the same kind and
quality. The relationship of the depositors and the Bank or similar
institution is that of creditor-debtor. Such deposit may be setoff
against the obligation of the depositor with the bank or similar
institution.
When petitioner Natividad Nisce deposited her US$20,500.00 with
the PCIB on July 19, 1984, PCIB became the debtor of petitioner.
However, when upon petitioners request, the amount of
US$20,000.00 was transferred to PCI Capital (which forthwith issued
Certificate of Deposit No. 01612), PCI Capital, in turn, became the
debtor of Natividad Nisce. Indeed, a certificate of deposit is a written
acknowledgment by a bank or borrower of the receipt of a sum of

money or deposit which the Bank or borrower promises to pay to the

depositor, to the order of the depositor; or to some other person; or
to his order whereby the relation of debtor and creditor between the
bank and the depositor is created.[72] The issuance of a certificate
of deposit in exchange for currency creates a debtor-creditor
relationship.[73]

doctrine is as follows:
1. Control, not mere majority or complete stock control, but
complete dominion, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or
existence of its own;

Admittedly, PCI Capital is a subsidiary of respondent Bank. Even

then, PCI Capital [PCI Express Padala (HK) Ltd.] has an independent
and separate juridical personality from that of the respondent Bank,
its parent company; hence, any claim against the subsidiary is not a
claim against the parent company and vice versa.[74] The evidence
on record shows that PCIB, which had been merged with Equitable
Bank, owns almost all of the stocks of PCI Capital. However, the fact
that a corporation owns all of the stocks of another corporation,
taken alone, is not sufficient to justify their being treated as one
entity. If used to perform legitimate functions, a subsidiarys
separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to those
arising in their respective business.[75] A corporation has a separate
personality distinct from its stockholders and from other corporations
to which it may be conducted. This separate and distinct personality
of a corporation is a fiction created by law for convenience and to
prevent injustice.

2. Such control must have been used by the defendant to

commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal rights; and

This Court, in Martinez v. Court of Appeals[76] held that, being a

mere fiction of law, peculiar situations or valid grounds can exist to
warrant, albeit sparingly, the disregard of its independent being and
the piercing of the corporate veil. The veil of separate corporate
personality may be lifted when, inter alia, the corporation is merely
an adjunct, a business conduit or an alter ego of another corporation
or where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation; or when the corporation is
used as a cloak or cover for fraud or illegality; or to work injustice; or
where necessary to achieve equity or for the protection of the
creditors. In those cases where valid grounds exist for piercing the
veil of corporate entity, the corporation will be considered as a mere
association of persons. The liability will directly attach to them.[77]
The Court likewise declared in the same case that the test in
determining the application of the instrumentality or alter ego

3. The aforesaid control and breach of duty must proximately

cause the injury or unjust loss complaint of.
The Court emphasized that the absence of any one of these
elements prevents piercing the corporate veil. In applying the
instrumentality or alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the
individual defendants relationship to that operation.[78]
Petitioners failed to adduce sufficient evidence to justify the piercing
of the veil of corporate entity and render respondent Bank liable for
the US$20,000.00 deposit of petitioner Natividad Nisce as debtor.
On hindsight, petitioners could have spared themselves the
expenses and tribulation of a litigation had they just withdrawn their
deposit from the PCI Capital and remitted the same to respondent.
However, petitioner insisted on their contention of setoff.
On the P4,600,000.00 paid in checks allegedly remitted by
petitioners to respondent in partial payment of their loan account,
petitioners failed to adduce in evidence the checks to show that,
indeed, the checks were drawn by petitioners and delivered to
respondent, and that respondent was able to cash the checks. The
only evidence adduced by petitioners is a piece of paper listing the
serial numbers of the checks and the amount of each check:
PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS

1.
2.
3.
4.

Dec. 29, 1997 Jan. 22, 1998

Feb. 24, 1998 Mar. 23, 1998 -

EBC-0000039462
EBC-213016118C
UB -0000074619
EBC-213016121C

P2,000,000.00
1,000,000.00
800,000.00
800,000.00
----------------P4,600,000.00[79]

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of

merit. The Decision of the Court of Appeals is AFFIRMED. Costs
against petitioners.
SO ORDERED.

G.R. No. 148491

February 8, 2007

SPOUSES ZACARIAS BACOLOR and CATHERINE BACOLOR, Petitioners,

vs.
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, DAGUPAN CITY
BRANCH and MARCELINO C. BONUAN, Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Petition for Review on Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended, assailing the Decision 1 of the Court of
Appeals in CA-G.R. CV No. 47732 promulgated on February 23, 2001
and its Resolution dated May 30, 2001.
On February 11, 1982, spouses Zacarias and Catherine Bacolor,
herein petitioners, obtained a loan of P244,000.00 from Banco
Filipino Savings and Mortgage Bank, Dagupan City Branch,
respondent. They executed a promissory note providing that the
amount shall be payable within a period of ten (10) years with a
monthly amortization of P5,380.00 beginning March 11, 1982 and
every 11th day of the month thereafter; that the interest rate shall
be twenty-four percent (24%) per annum, with a penalty of three
percent (3%) on any unpaid monthly amortization; that there shall be
a service charge of three percent (3%) per annum on the loan; and
that in case respondent bank seeks the assistance of counsel to
enforce the collection of the loan, petitioners shall be liable for ten
percent (10%) of the amount due as attorneys fees and fifteen
percent (15%) of the amount due as liquidated damages.
As security for the loan, petitioners mortgaged with respondent bank
their parcel of land located in Dagupan City, Pangasinan, registered
under Transfer Certificate of Title No. 40827.

In its letter dated January 13, 1993, respondent bank informed

petitioners that should they fail to pay their loan within fifteen (15)
days from notice, appropriate action shall be taken against them.
Due to petitioners failure to settle their obligation, respondent
instituted, on March 5, 1993, an action for extra-judicial foreclosure
of mortgage.
Prior thereto, or on February 1, 1993, petitioners filed with Branch 40
of the same RTC, a complaint for violation of the Usury Law against
respondent, docketed as Civil Case No. D-10480. They alleged that
the provisions of the promissory note constitute a usurious
transaction considering the (1) rate of interest, (2) the rate of
penalties, service charge, attorneys fees and liquidated damages,
and (3) deductions for surcharges and insurance premium. In their
amended complaint, petitioners further alleged that, during the
closure of respondent bank, it ceased to be a banking institution and,
therefore, could not charge interests and institute foreclosure
proceeding.
On August 25, 1994, the RTC rendered its decision dismissing
petitioners complaint, holding that:
(1) The terms and conditions of the Deed of Mortgage and the
Promissory Note are legal and not usurious.
The plaintiff freely signed the Deed of Mortgage and the Promissory
Note with full knowledge of its terms and conditions.
The interest rate of 24% per annum is not usurious and does not
violate the Usury Law (Act 2655) as amended by P.D. No. 166.

From March 11, 1982 to July 10, 1991, petitioners paid respondent
bank P412, 199.36. Thereafter, they failed to pay the remaining
balance of the loan.

The rate of interest, including commissions, premiums, fees and

other charges, on a loan or forbearance of any money etc.,
regardless of maturity x x x, shall not be subject to any ceiling under
or pursuant to the Usury Law, as amended (CB Circular no. 905).
Hence, the 24% interest per annum is allowed under P.D. No. 166.

On August 7, 1992, petitioners received from respondent bank a

statement of account stating that their indebtedness as of July 31,
1992 amounts to P840,845.61.

For sometime now, usury has been legally non-existent. Interest can
now be as lender and borrower may agree upon (Verdejo v. CA, Jan.
29, 1988. 157 SCRA 743).

The imposition of penalties in case the obligation is not fulfilled is not

prohibited by the Usury Law. Parties to a contract of loan may validly
agree upon the imposition of penalty charges in case of delay or nonpayment of the loan. The purpose is to compel the debtor to pay his
debt on time (Go Chioco v. Martinez, 45 Phil. 256, 265).
(2) The closure of Banco Filipino did not suspend or stop its usual and
normal banking operations like the collection of loan receivables and
foreclosures of mortgages.
In view of the foregoing, plaintiffs failed to substantiate their cause
of action against the defendant. 2
On appeal, the Court of Appeals rendered its Decision affirming the
Decision of the trial court. Petitioners subsequent motion for
reconsideration was denied.
Hence, this present petition for review on certiorari raising this lone
issue: whether the interest rate is "excessive and unconscionable."
It is the petitioners contention that while the Usury Law ceiling on
interest rates was lifted by Central Bank Circular No. 905, there is
nothing in the said circular which grants respondent bank carte
blanche authority to raise interest rates to levels which "either
enslave the borrower or lead to a hemorrhaging of their assets." 3
In its comment 4 , respondent bank maintained that petitioner, by
signing the Deed of Mortgage and Promissory Note, knowingly and
freely consented to its terms and conditions. A contract between the
parties must not be impaired. The interest rate of 24% per annum is
not usurious and does not violate the Usury Law. 5
The petition lacks merit.

No. 166, which provides that the rate of interest for the forbearance
of money when secured by a mortgage upon real estate, should not
be more than 6% per annum or the maximum rate prescribed by the
Monetary Board of the Central Bank of the Philippines in force at the
time the loan was granted. Central Bank Circular No. 783, which took
effect on July 1, 1981, removed the ceiling on interest rates on a
certain class of loans, thus:
SECTION 2. The interest rate on a loan forbearance of any money,
goods, or credits with a maturity of more than seven hundred thirty
(730) days shall not be subject to any ceiling. 6
In the present case, the term of the subject loan is for a period of 10
years. Considering that its maturity is more than 730 days, the
interest rate is not subject to any ceiling following the above
provision. Therefore, the 24% interest rate agreed upon by parties
does not violate the Usury Law, as amended by P.D. 116.
This Court has consistently held that for sometime now, usury has
been legally non-inexistent and that interest can now be charged as
lender and borrower may agree upon. 7 As a matter of fact, Section
1 of Central Bank Circular No. 905 states that:
SECTION 1. The rate of interest, including commissions, premiums,
fees and other charges , on a loan or forbearance of any money,
goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether
natural or judicial, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended. 8
Moreover, in Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction Corporation, 9 this Court
has ruled that:

Article 1956 of the Civil Code provides that no interest shall be due
unless it has been expressly stipulated in writing. Here, the parties
agreed in writing on February 11, 1982 that the rate of interest on
the petitioners loan shall be 24% per annum.

With the suspension of the Usury Law and the removal of interest
ceiling, the parties are free to stipulate the interest to be imposed on
monetary obligations. Absent any evidence of fraud, undue
influence, or any vice of consent exercised by one party against the
other, the interest rate agreed upon is binding upon them.

At the time the parties entered into the loan transaction, the
applicable law was the Usury Law (Act 2655), as amended by P.D.

There is no indication in the records that any of the incidents which

vitiate consent on the part of petitioners is present. Indeed, the

interest rate agreed upon is binding on them. With respect to the

penalty and service charges, the same are unconscionable or
excessive.
Petitioners invoke this Courts rulings in Almeda vs. Court of Appeals
10 and Medel vs. Court of Appeals 11 to show that the interest rate
in the subject promissory note is unconscionable. Their reliance on
these cases is misplaced. In Almeda, what this Court struck down as
being unconscionable and excessive was the unilateral increase in
the interest rates from 18% to 68%. This Court ruled thus:
It is plainly obvious, therefore, from the undisputed facts of the case
that respondent bank unilaterally altered the terms of its contract by
increasing the interest rates of 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 the
interest rate provision of the credit agreement signed between the
parties is that petitioners were bound merely to pay 21% interest x x
x.
Petitioners also cannot find refuge in Medel. In this case, what this
Court declared as unconscionable was the imposition of a 66%
interest rate per annum. In the instant case, the interest rate is only
24% per annum, agreed upon by both parties. By no means can it be
considered unconscionable or excessive.1awphi1.net
Verily, petitioners cannot now renege on their obligation to comply
with what is incumbent upon them under the loan agreement. A
contract is the law between the parties and they are bound by its
stipulations. 12
Petitioners further contend that during the closure of respondent
bank (from January 1, 1985 to July 1, 1994), it lost its function as a
banking institution and, therefore, could no longer charge interests
and institute foreclosure proceedings.
In the case of Banco Filipino Savings & Mortgage Bank vs. Monetary
Board, Central Bank of the Philippines, 13 this Court ruled that the
banks closure did not diminish the authority and powers of the
designated liquidator to effectuate and carry on the administration of

the bank, thus:

x x x. We did not prohibit however acts such as receiving collectibles
and receivables or paying off creditors claims and other transactions
pertaining to the normal operations of a bank. There is no doubt that
that the prosecution of suits for collection and the foreclosure of
mortgages against debtors of the bank by the liquidator are among
the usual and ordinary transactions pertaining to the administration
of a bank. x x x.
Likewise, in Banco Filipino Savings and Mortgage Bank vs. Ybaez,
14 where one of the issues was whether respondent bank can collect
interest on its loans during its period of liquidation and closure, this
Court held:
In Banco Filipino Savings and Mortgage Bank v. Monetary Board, the
validity of the closure and receivership of Banco Filipino was put in
issue. But the pendency of the case did not diminish the authority of
the designated liquidator to administer and continue the banks
transactions. The Court allowed the bank liquidator to continue
receiving collectibles and receivables or paying off creditors claims
and other transactions pertaining to normal operations of a bank.
Among these transactions were the prosecution of suits against
debtors for collection and for foreclosure of mortgages. The bank
was allowed to collect interests on its loans while under liquidation,
provided that the interests were legal.
In fine, we hold that the interest rate on the loan agreed upon
between the parties is not excessive or unconscionable; and that
during the closure of respondent bank, it could still function as a
bonding institution, hence, could continue collecting interests from
petitioners.
WHEREFORE, we DENY the petition and AFFIRM the challenged
Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
47732. Costs against petitioners.
SO ORDERED.

TERESITA DIO, petitioner, vs. SPOUSES VIRGILIO and LUZ ROCES

JAPOR and MARTA[1] JAPOR, respondents.
DECISION
QUISUMBING, J.:

improvements, situated in Barangay Ibabang Mayao, Lucena City, as

shown by Transfer Certificate of Title (TCT) No. T-39514. Adjacent to
the Japors lot is another lot owned by respondent Marta Japor, which
consisted of 325.5 square meters and titled under TCT No. T-15018.

For review on certiorari is the Decision,[2] dated February 22, 2002,

of the Court of Appeals, in the consolidated cases CA-G.R. CV No.
51521 and CA-G.R. SP No. 40457. The decretal portion read:

On August 23, 1982, the respondents obtained a loan of P90,000

from the Quezon Development Bank (QDB), and as security therefor,
they mortgaged the lots covered by TCT Nos. T-39514 and T-15018
to QDB, as evidenced by a Deed of Real Estate Mortgage duly
executed by and between the respondents and QDB.

WHEREFORE, premises considered, in CA-G.R. CV No. 51521, the

decision of the trial court is AFFIRMED with MODIFICATION. Judgment
is rendered as follows:
1. Declaring the Real Estate Mortgage to be valid;
2. Fixing the interest at 12% per annum and an additional 1%
penalty charge per month such that plaintiffs-appellants contractual
obligation under the deed of real estate mortgage would amount to
P1,252,674.00;
3.
Directing defendant-appellee Dio to give the surplus of
P2,247,326.00 to plaintiffs-appellants; and
4. Affirming the dissolution of the writ of preliminary injunction
previously issued by the trial court.
No pronouncement as to costs.
The Petition in CA-G.R. SP No. 40457 is DENIED for being moot and
academic.
SO ORDERED.[3]
Equally assailed in this petition is the Resolution,[4] dated July 2,
2002, of the appellate court, denying Teresita Dios Motion for Partial
Reconsideration of March 19, 2002 and the Spouses Japor and Marta
Japors Motion for Reconsideration dated March 20, 2002.

On December 6, 1983, respondents and QDB amended the Deed of

Real Estate Mortgage increasing respondents loan to P128,000.
The respondents failed to pay their aforesaid loans. However, before
the bank could foreclose on the mortgage, respondents, thru their
broker, one Lucia G. Orian, offered to mortgage their properties to
petitioner Teresita Dio. Petitioner prepared a Deed of Real Estate
Mortgage, whereby respondents mortgaged anew the two properties
already mortgaged with QDB to secure the timely payment of a
P350,000 loan that respondents had from petitioner Dio. The Deed of
Real Estate Mortgage, though dated January 1989, was actually
executed on February 13, 1989 and notarized on February 17, 1989.
Under the terms of the deed, respondents agreed to pay the
petitioner interest at the rate of five percent (5%) a month, within a
period of two months or until April 14, 1989. In the event of default,
an additional interest equivalent to five percent (5%) of the amount
then due, for every month of delay, would be charged on them.
The respondents failed to settle their obligation to petitioner on April
14, 1989, the agreed deadline for settlement.
On August 27, 1991, petitioner made written demands upon the
respondents to pay their debt.

The antecedent facts are as follows:

Despite repeated demands, respondents did not pay, hence

petitioner applied for extrajudicial foreclosure of the mortgage. The
auction of the unredeemed properties was set for February 26, 1992.

Herein respondents Spouses Virgilio Japor and Luz Roces Japor were
the owners of an 845.5 square-meter residential lot including its

Meanwhile, on February 24, 1992, respondents filed an action for

Fixing of Contractual Obligation with Prayer for Preliminary

Mandatory Injunction/Restraining Order, docketed as Civil Case No.

92-26, with the Regional Trial Court (RTC) of Lucena City.
Respondents prayed that judgment be rendered fixing the
contractual obligations of plaintiffs with the defendant Dio plus legal
or allowable interests thereon.[5]
The trial court issued an Order enjoining the auction sale of the
aforementioned mortgaged properties.
On June 15, 1992, the Japors filed a Motion to Admit Amended
Complaint with an attached copy of their Amended Complaint
praying that the Deed of Real Estate Mortgage dated February 13,
1989 be declared null and void, but reiterating the plea that the trial
court fix the contractual obligations of the Japors with Dio. The trial
court denied the motion.
On September 27, 1994, respondents filed with the appellate court, a
petition for certiorari, docketed as CA-G.R. SP No. 35315, praying
that the Court of Appeals direct the trial court to admit their
Amended Complaint. The appellate court denied said petition.[6]
On December 11, 1995, the trial court handed down the following
judgment:
WHEREFORE, in view of the foregoing considerations, judgment is
rendered:
1.
Dismissing the complaint for failure of the plaintiffs to
substantiate their affirmative allegations;
2. Declaring the Real Estate Mortgage (Exhs. A to A-13/Exhs. 3
to 3-D) to be valid and binding as between the parties, more
particularly the plaintiffs Virgilio Japor, Luz Japor and Marta Japor or
the latters substituted heir or heirs, as the case may be;
3. Dissolving the writ of preliminary injunction previously issued by
this Court; and
4. To pay the cost of this suit.
SO ORDERED.[7]

On January 17, 1996, respondents filed their notice of appeal. On

April 26, 1996, they also filed a Petition for Temporary Restraining
Order And/Or Mandatory Injunction in Aid of Appellate Jurisdiction
with the Court of Appeals.
On May 8, 1996, petitioner Dio as the sole bidder in an auction
purchased the properties for P3,500,000.
On May 9, 1996, the Court of Appeals denied respondents
application for a temporary restraining order.[8]
On October 9, 1996, the appellate court consolidated CA-G.R. CV No.
51521 and CA-G.R. SP No. 40457.
As stated at the outset, the appellate court affirmed the decision of
the trial court with respect to the validity of the Deed of Real Estate
Mortgage, but modified the interest and penalty rates for being
unconscionable and exorbitant.
Before us, petitioner assigns the following errors allegedly committed
by the appellate court:
I
THE ALLEGED INIQUITY OF THE STIPULATED INTEREST AND PENALTY
WAS NOT RAISED BEFORE THE TRIAL COURT NOR ASSIGNED AS AN
ERROR IN RESPONDENTS APPEAL.
II
THE STIPULATED INTEREST AND PENALTY ARE NOT EXCESSIVE,
INIQUITOUS, UNCONSCIONABLE, EXORBITANT AND CONTRARY TO
MORAL[S].
III
PAYMENT OF THE SURPLUS OF P2,247,326.00 TO RESPONDENTS
WOULD RESULT IN THEIR UNJUST ENRICHMENT.
IV
RESPONDENTS APPEAL SHOULD HAVE BEEN DISMISSED DUE TO

FORUM SHOPPING.[9]
Simply stated, the issue is: Did the Court of Appeals err when it held
that the stipulations on interest and penalty in the Deed of Real
Estate Mortgage is contrary to morals, if not illegal? Corollarily, were
respondents entitled to any surplus on the auction sale price?
On the main issue, petitioner contends that The Usury Law[10] has
been rendered ineffective by Central Bank Circular No. 905, series of
1982 and accordingly, usury has become legally non-existent in this
jurisdiction, thus, interest rates may accordingly be pegged at such
levels or rates as the lender and the borrower may agree upon.
Petitioner avers she has not violated any law considering she is not
engaged in the business of money-lending. Moreover, she claims
she has suffered inconveniences and incurred expenses for some 13
years now as a result of respondents failure to pay her. Petitioner
further points out that the 5% interest rate was proposed by the
respondents and have only themselves to blame if the interests and
penalties ballooned to its present amount due to their willful delay
and default in payment. The appellate court thus erred, petitioner
now insists, in applying Sps. Almeda v. Court of Appeals[11] and
Medel v. Court of Appeals[12] to reduce the interest rate to 12% per
annum and the penalty to 1% per month.

interest may not technically and necessarily be usurious under

Circular No. 905, usury now being legally non-existent in our
jurisdiction,[14] nonetheless, said rate may be equitably reduced
should the same be found to be iniquitous, unconscionable, and
exorbitant, and hence, contrary to morals (contra bonos mores), if
not against the law.[15] What is iniquitous, unconscionable, and
exorbitant shall depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the 5% interest
rate per month and 5% penalty rate per month for every month of
default or delay is in reality interest rate at 120% per annum. This
Court has held that a stipulated interest rate of 5.5% per month or
66% per annum is void for being iniquitous or unconscionable.[16]
We have likewise ruled that an interest rate of 6% per month or 72%
per annum is outrageous and inordinate.[17] Conformably to these
precedent cases, a combined interest and penalty rate at 10% per
month or 120% per annum, should be deemed iniquitous,
unconscionable, and inordinate. Hence, we sustain the appellate
court when it found the interest and penalty rates in the Deed of
Real Estate Mortgage in the present case excessive, hence legally
impermissible. Reduction is legally called for now in rates of interest
and penalty stated in the mortgage contract.
What then should the interest and penalty rates be?

Respondents admit they owe petitioner P350,000 and do not

question any lawful interest on their loan but they maintain that the
Deed of Real Estate Mortgage is null and void since it did not state
the true intent of the parties, which limited the 5% interest rate to
only two (2) months from the date of the loan and which did not
provide for penalties and other charges in the event of default or
delay. Respondents vehemently contend that they never consented
to the said stipulations and hence, should not be bound by them.

The evidence shows that it was indeed the respondents who

proposed the 5% interest rate per month for two (2) months. Having
agreed to said rate, the parties are now estopped from claiming
otherwise. For the succeeding period after the two months, however,
the Court of Appeals correctly reduced the interest rate to 12% per
annum and the penalty rate to 1% per month, in accordance with
Article 2227[18] of the Civil Code.

On the first issue, we are constrained to rule against the petitioners

contentions.

But were respondents entitled to the surplus of P2,247,326[19] as

a result of the overpricing in the auction?

Central Bank Circular No. 905, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity. However, nothing in said
Circular grants lenders carte blanche authority to impose interest
rates which would result in the enslavement of their borrowers or to
the hemorrhaging of their assets.[13] While a stipulated rate of

We note that the surplus was the result of the computation by the
Court of Appeals of respondents outstanding liability based on a
reduced interest rate of 12% per annum and the reduced penalty
rate of 1% per month. The court a quo then proceeded to apply our
ruling in Sulit v. Court of Appeals,[20] to the effect that in case of
surplus in the purchase price, the mortgagee is liable for such

surplus as actually comes into his hands, but where he sells on credit
instead of cash, he must still account for the proceeds as if the price
were paid in cash, for such surplus stands in the place of the land
itself with respect to liens thereon or vested rights therein
particularly those of the mortgagor or his assigns.
In the instant case, however, there is no surplus to speak of. In
adjusting the interest and penalty rates to equitable and
conscionable levels, what the Court did was merely to reflect the true
price of the land in the foreclosure sale. The amount of the
petitioners bid merely represented the true amount of the mortgage
debt. No surplus in the purchase price was thus created to which the
respondents as the mortgagors have a vested right.
WHEREFORE, the Decision dated February 22, 2002, of the Court of
Appeals in the consolidated cases CA-G.R. CV No. 51521 and CA-G.R.
SP No. 40457 is hereby AFFIRMED with MODIFICATION. The interest
rate for the subject loan owing to QDB, or whoever is now the party
mortgagee, is hereby fixed at five percent (5%) for the first two (2)
months following the date of execution of the Deed of Real Estate
Mortgage, and twelve percent (12%) for the succeeding period. The
penalty rate thereafter shall be fixed at one percent (1%) per month.
Petitioner Teresita Dio is declared free of any obligation to return to
the respondents, the Spouses Virgilio Japor and Luz Roces Japor and
Marta Japor, any surplus in the foreclosure sale price. There being no
surplus, after the court below had applied our ruling in Sulit,[21]
respondents could not legally claim any overprice from the
petitioner, much less the amount of P2,247,326.00.
SO ORDERED.

MANSUETO CUATON, petitioner, vs. REBECCA SALUD and COURT OF

APPEALS (Special Fourteenth Division), respondents.
DECISION
YNARES-SANTIAGO, J.:

June 1992 ----------------------------------------------8% interest for the month of

July 1992 ------------------------------------------------

80,000.00

Before the Court is a petition for review on certiorari assailing the

August 31, 2001 Decision[1] of the Court of Appeals in CA-G.R. CV
No. 54715 insofar as it affirmed the Judgment[2] of the Regional Trial
Court of General Santos City, Branch 35, in SPL. Civil Case No. 359,
imposing interest at the rate of 8% to 10% per month on the onemillion-peso loan of petitioner.

8% interest for the month of

August 1992 --------------------------------------------

80,000.00

On January 5, 1993, respondent Rebecca Salud, joined by her

husband Rolando Salud, instituted a suit for foreclosure of real estate
mortgage with damages against petitioner Mansueto Cuaton and his
mother, Conchita Cuaton, with the Regional Trial Court of General
Santos City, Branch 35, docketed as SPL. Civil Case No. 359.[3] The
trial court rendered a decision declaring the mortgage constituted on
October 31, 1991 as void, because it was executed by Mansueto
Cuaton in favor of Rebecca Salud without expressly stating that he
was merely acting as a representative of Conchita Cuaton, in whose
name the mortgaged lot was titled. The court ordered petitioner to
pay Rebecca Salud, inter alia, the loan secured by the mortgage in
the amount of One Million Pesos plus a total P610,000.00
representing interests of 10% and 8% per month for the period
February 1992 to August 1992, thus
Original loan ------------------------------------------------------ P1,000,000.00
10% interest for the month of
February 1992
balance only --------------------------------------------50,000.00
10% interest for the month of
March 1992 ---------------------------------------------

100,000.00

10% interest for the month of

April 1992 ----------------------------------------------

100,000.00

10% interest for the month of

May 1992 -----------------------------------------------

100,000.00

10% interest for the month of

100,000.00

--------------------Total amount as of August 1992 ------------------P 1, 610,000.00[4]

The dispositive portion of the trial courts decision, reads:
WHEREFORE, premises considered, judgment is hereby rendered:
a)
Declaring the mortgage executed by Mansueto Cuaton over the
property owned by Conchita Cuaton, covered by TCT NO. T-34460,
dated October 31, 1991, in favor of Rebecca Salud as unauthorized,
void and unenforceable against defendant, Conchita Cuaton hence,
the TRO issued against the foreclosure thereof is hereby made
permanent. The annotation of the mortgage over said property is
likewise cancelled;
b)
Ordering defendant Mansueto Cuaton to pay plaintiff, Rebecca
Salud, the sum of One Million Six Hundred Ten Thousand
(P1,610,000.00) Pesos, with legal interest thereon, from January 5,
1993 until fully paid;
c)
Ordering defendant, Mansueto Cuaton, to pay Attorneys fees
of P25,000.00 in favor of the plaintiff, Rebecca Salud and to pay the
cost of this suit.
Defendants counterclaims, being merely a result of the filing of
plaintiffs complaint are hereby DISMISSED.
SO ORDERED.[5]
Both parties filed their respective notices of appeal.[6]
On August 31, 2001, the Court of Appeals rendered the assailed
decision affirming the judgment of the trial court. Petitioner filed a
motion for partial reconsideration of the trial courts decision with

respect to the award of interest in the amount of P610,000.00,

arguing that the same was iniquitous and exorbitant.[7] This was
denied by the Court of Appeals on May 7, 2003.[8]
Hence, the instant petition on the sole issue of whether the 8% and
10% monthly interest rates imposed on the one-million-peso loan
obligation of petitioner to respondent Rebecca Salud are valid.
We find merit in the petition.
In Ruiz v. Court of Appeals,[9] we declared that the Usury Law was
suspended by Central Bank Circular No. 905, s. 1982, effective on
January 1, 1983, and that parties to a loan agreement have been
given wide latitude to agree on any interest rate. However, nothing
in the said Circular grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets. The stipulated interest rates
are illegal if they are unconscionable.
Thus, in Medel v. Court of Appeals,[10] and Spouses Solangon v.
Salazar,[11] the Court annulled a stipulated 5.5% per month or 66%
per annum interest on a P500,000.00 loan and a 6% per month or
72% per annum interest on a P60,000.00 loan, respectively, for
being excessive, iniquitous, unconscionable and exorbitant. In both
cases, the interest rates were reduced to 12% per annum.
In the present case, the 10% and 8% interest rates per month on the
one-million-peso loan of petitioner are even higher than those
previously invalidated by the Court in the above cases. Accordingly,
the reduction of said rates to 12% per annum is fair and reasonable.
Stipulations authorizing iniquitous or unconscionable interests are
contrary to morals (contra bonos mores), if not against the law.[12]
Under Article 1409 of the Civil Code, these contracts are inexistent
and void from the beginning. They cannot be ratified nor the right to
set up their illegality as a defense be waived.[13]
Moreover, the contention regarding the excessive interest rates
cannot be considered as an issue presented for the first time on
appeal. The records show that petitioner raised the validity of the
10% monthly interest in his answer filed with the trial court.[14] To
deprive him of his right to assail the imposition of excessive interests

would be to sacrifice justice to technicality.

Furthermore, an
appellate court is clothed with ample authority to review rulings even
if they are not assigned as errors. This is especially so if the court
finds that their consideration is necessary in arriving at a just
decision of the case before it. We have consistently held that an
unassigned error closely related to an error properly assigned, or
upon which a determination of the question raised by the error
properly assigned is dependent, will be considered by the appellate
court notwithstanding the failure to assign it as an error.[15] Since
respondents pointed out the matter of interest in their Appellants
Brief[16] before the Court of Appeals, the fairness of the imposition
thereof was opened to further evaluation. The Court therefore is
empowered to review the same.
The case of Eastern Shipping Lines, Inc. v. Court of Appeals,[17] laid
down the following guidelines on the imposition of interest, to wit:
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 23 of the Civil Code.
xxx

xxx

xxx

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.
Applying the foregoing rules, the interest of 12% per annum imposed
by the Court (in lieu of the invalidated 10% and 8% per month
interest rates) on the one-million-peso loan should be computed from
the date of the execution of the loan on October 31, 1991 until
finality of this decision.
After the judgment becomes final and
executory until the obligation is satisfied, the amount due shall
further earn interest at 12% per year.

WHEREFORE, in view of all the foregoing, the instant petition is

GRANTED. The August 31, 2001 Decision of the Court of Appeals in
CA-G.R. CV No. 54715, which affirmed the Decision of the Regional
Trial Court of General Santos City, Branch 35, in SPL. Civil Case No.
359, is MODIFIED. The interest rates of 10% and 8% per month
imposed by the trial court is reduced to 12% per annum, computed
from the date of the execution of the loan on October 31, 1991 until
finality of this decision. After the judgment becomes final and
executory until the obligation is satisfied, the amount due shall
further earn interest at 12% per year.

JOSE SISON and EMILIO SISON, plaintiffs-appellants,

vs.
F. M. YAP TICO and AMANDO AVANCEA, provincial sheriff of IloIlo,
defendants-appellees.
C. Lozano for appellant.
No appearance for appellees.
JOHNSON, J.:
The principal question presented by this appeal is whether or not the
mortgagor of a chattel mortgage is relieved from liability by paying
the mortgagee after the mortgage has been assigned to a third
person, when he has no actual notice of said transfer.
The pertinent facts as they appear in the record are: That on the
11th day of April, 1912, the plaintiffs borrowed of Eugenio Kilayko
the sum they executed and delivered to the said Kilayko a chattel
mortgage covering machinery, crops and a number of carabaos; that
said debt was due and payable on or before the 30th day of May,
1913; that the mortgagors had to deliver to the mortgagee (Kilayko)
in the city of Iloilo their entire crop of sugar for the years 1912-13;
that in the compliance with the mortgage the plaintiffs herein did
deliver sugar for said years from time to time in the city of Iloilo at
the bodega (warehouse) of the defendant Yap Tico at the request of
the said Kilayko; that, finally a liquidation was made and there was
found to be still due the mortgagee (Kilayko) the sum of P650; that
sum was sent to the mortgagee by a representative of the
mortgagors (Antonio Horrilleno) and was by him delivered to Kilayko;
that upon the delivery of said sum (P650) the mortgagee (Kilayko) on
the 14th day of May, 1914, executed and delivered a cancellation of
said mortgage; that in the month of May, 1912, the mortgagee
(Kilayko) assigned and transferred said mortgage to the defendant
herein, F. M. Yap Tico; that said assignment and transfer were duly
registered upon the 14th day of April, 1913, nearly one year after the
transfer had been made; that the cancellation of said mortgage as
above indicated was duly registered on the 19th day of December,
1914; that neither Kilayko and Yap Tico gave any notice whatever to
the plaintiffs herein that said mortgage had been transferred; that
the plaintiffs had no notice that the mortgage had been transferred
nor that said transfer had been registered; that at the time the last

payment was made on said mortgage (14th day of May, 1914) the
mortgage (Kilayko) gave no notice to the mortgagors, or to their
representative, that the mortgage had been transferred, but upon
the contrary made a search among the papers of his office
attempting to find it, and not being able to find it at the time,
promised to return the same to the mortgagors as soon as he could
find it; that later the assignee of said mortgagee (Yap Tico), in
accordance with the provisions of the Chattel Mortgage Law (Act No.
1508), proceeded to foreclose said mortgage, and the sheriff
attached and took possession of all the property which said
mortgage covered. It is admitted that the sheriff, as well as Yap Tico,
were notified by the plaintiffs, at the time of said attachment, that
the mortgage had been paid and cancelled. Notwithstanding that
notice the sheriff insisted upon enforcing the attachment, and the
plaintiffs, after some delay, obtained the release of the property so
attached by the execution and delivery of a bond. This action was
brought for the purpose of recovering the property, together with
damages caused by said alleged illegal attachment.
The defendants answered by a general denial. Upon the issue
presented by the petition and answer, the cause was brought on for
trial, and after hearing the respective parties, the Honorable J. S.
Powell, judge, rendered a judgment relieving the defendants from all
liability under the complaint and ordered that the defendants recover
of the plaintiffs the sum of P2,000, with interest at 12 per cent from
the 28th day of May, 1912, and the costs of the suit. From that
judgment the plaintiffs appealed to this court.
The fact is not denied that while the mortgage in question was
transferred by the mortgagee, Kilayko, to the defendant, Yap Tico,
within less than two months after its execution and delivery, and that
the plaintiffs had delivered sugar at the bodega of Yap Tico from time
to time covering a period of nearly two years in partial payment to
the plaintiffs that he was the owner of said mortgage. It is further
established beyond question that the plaintiffs had no notice
whatever of said transfer, unless the registration of said assignment
had the effect of giving them notice, until long after full amount of
said mortgage had been paid to the original mortgagee, Kilayko, and
said mortgage had been cancelled.
Under the recording of the assignment operated as notice to the
mortgagors their payment of the same, without actual notice of said

transfer, relieved them from all liability under said mortgage. Article
1527 of the Civil Code provides that a debtor who, before having
been informed of the assignment, pays the creditor, shall be free
from the obligation. (See also, to the same effect, arts. 152 and 154
of the Mortgage Law.)
Manresa, in commenting upon the provisions of article 1527 of the
Civil Code, after discussing the articles of the Mortgage Law, says:
We have said that article 1527 deals with the individual phase or
aspect which presupposes the existence of a relationship with third
parties, that is, with the person of the debtor. Let us see what way.
"The above-mentioned article states that a debtor who, before
having knowledge, of the assignment, should pay the creditor shall
be released from the obligation.
In the first place, the necessity for the notice to the debtor in order
that the assignment may fully produce its legal effects may be
inferred from the above. It refers to a notice and not to a petition for
the consent which is not necessary. We say that the notice is not
necessary in order that the legal effects may be fully produce,
because if it should be omitted, such omission will not imply that the
assignment will not exist legally, but that its effects will be limited to
the parties thereto; at least, they will not reach the debtor.
xxx

xxx

xxx

Let us go to the legal effects produced by the failure to give the

notice. In the beginning, we have said that the contract does not lose
it efficacy with respect to the parties who made it; but article 1527
determines specifically one of the consequences arising from the
failure to give the notice, for it evidently takes for granted that the
debtor who, before having knowledge of the assignment, should pay
the creditor shall be released from the obligation. So that if the
creditor assigned his credit, acting in bad faith and taking advantage
of the fact that the debtor does not know anything about the
assignment because the latter has not been notified, and collects its
amount, the debtor shall be free from the obligation, inasmuch as it
has been legally extinguished by a payment which fully redounds to
his benefit. The assignee can take advantage of all civil and criminal
actions against the assignor, but he can ask no thing from the
debtor, because the latter did not know of the assignment, nor was

he bound to know it; the assignor should blame himself for his failure
to have the notice made.
xxx

xxx

xxx

Hence there not having been any notice to the debtor, the existence
of his knowledge of the assignment should be proved by him who is
interested therein; and the debtor is not bound to prove his
ignorance. (10 Manresa, 384, 385, 387.)
The question, whether or not the registration of the assignment
operated as notice, ipso facto, to the mortgagors, we are inclined to
answer in the negative, for the reason that the law does not require
such assignments to be recorded. While such assignments may be
recorded, the law is permissible and not mandatory. The filing and
recording of an instrument in the office of the registrar, when the law
does not require such filing and recording, does not constitute notice
to the parties. (Burck vs. Taylor, 152 U. S., 634; 5 Corpus Juris, 934.)
The debtor or party liable on contracts like the one in question is not
affected by the assignment until he has notice thereof, and
consequently he may set up against the claim of the assignee any
defense acquired before notice that would avail him against the
assignor had there been no assignment, and payment by the debtor
to the assignor, or any compromise or release of the assigned claim
by the latter before notice will be valid against the assignee and
discharge the debtor. (Vanbuskirk vs. Hartford Fire Insurance Co., 14
Conn., 141; Clodfelter vs. Cox, 1 Sneed [Tenn.], 330; 60 Am. Dec.,
157; Johnston vs. Allen, 22 Fla., 224; Shields vs. Taylor and Tarpley,
25 Miss., 13.)
In the case of Shields vs. Taylor and Tarpley, supra, the court said:
No man is bound to remain a debtor; he may pay to him with whom
he contracted to pay; and if he pay before notice that his debt has
been assigned, the law holds him exonerated, for the reason that it is
the duty of the person who has acquired a title by transfer to
demand payment of the debt to give his debtor notice.
Any act which a person may be compelled to perform to perform by
a proceeding at law may be done voluntarily, and he will be
protected by the law.

It is generally held that if the law does not require a particular

instrument to be recorded or registered, the recording of that
instrument will not be constructive notice of its existence to anyone.
(Burck vs. Taylor, 152 U. S., 634; Srewart vs. Kirkland, 19 Ala., 162;
Lambert vs. Morgan, 110 Md., 1; Dial vs. Inland Logging Co., 52
Wash., 81.)
The rule is very well stated in 4 Cyc. (pp. 33, 34):
Until notice of the assignment is given to the debtor, it will not bind
him so as to deprive him of equities arising between the date of the
assignment and the date when he received notice thereof. As to such
equities, the assignment takes effect from the time the debtor
receives notice and not from the time of the assignment.
In the case of Dial vs. Inland Logging Co., supra, the court said:
We are not aware of any statute, and not has been called to our
attention, requiring or authorizing the recording of an assignment of
a lien of the character of the one in this case. In the absence of such
statute, the recording of the assignment to the respondent before
the assignment to the appellant did not operate as constructive
notice.
It seems to be clear, then, that a debtor is protected if he pays his
creditor without actual notice that the debt has been assigned. Such
notice must be actual, and the recording of the assignment, there

being no law requiring the same, will not operate as constructive

notice to the debtor.
With reference to the question of damages, the proof shows that, by
reason of the said attachment of the property included within the
mortgage and the deprivation of the plaintiffs of the possession
thereof, they were unable to grind certain sugar cane then already
harvested and to reduce to sugar some juice already prepared,
amounting to, as the record shows, 52 picos of sugar, which was
worth P5 per pico. The damages resulting from the loss of sugar
would be P260. The evidence relating to the other damages claimed
is too indefinite upon which to base a finding.
It will be remembered that the defendants presented a general
denial. They did not pray for affirmative relief. In view, however, of
the conclusions which we have reached it is necessary to discuss the
question whether a judgment for an affirmative relief can be based
upon a general denial.
For the foregoing reasons, it is hereby ordered and decreed that the
judgment of the lower court be reversed; that all the property which
was taken possession of by the sheriff under the said foreclosure
proceedings be returned to the plaintiffs if it has not already been
done; that the bond theretofore given by the plaintiffs to secure
possession of said property be cancelled; and that a judgment be
rendered in favor of the plaintiffs and against the defendant Yap Tico
in the sum of P260, with interest at the rate of 6 per cent from the
8th day of March, 1915, and costs. So ordered.