not a trier of facts and generally does not weigh anew

evidence which lower courts have passed upon.

records bear that BOTH VERBAL AND WRITTEN

DEMANDS
WERE
IN
FACT
MADE
BY
RESPONDENT PRIOR TO THE INSTITUTION OF
THE CASE against petitioners. Even assuming, for
arguments sake, that no demand letter was sent
by respondent, there is really no need for it
because petitioners legally waived the necessity of
notice or demand in the Promissory Note with
Chattel Mortgage, which they voluntarily and
knowingly signed in favor of respondents
predecessor-in-interest. Said contract expressly
stipulates:

AGNER V. BPI SAVINGS BANK

(Promissory Note with Chattel Mortgage in favor of
Citimotors, Inc)
FACTS:

petitioner spouses Agner executed a Promissory Note

with Chattel Mortgage in favor of Citimotors, Inc. The
contract provides, among others, that: for receiving the
amount of Php834K, petitioners shall pay Php 17K every
15th day of each succeeding month until fully paid; the
loan is secured by a 2001 Mitsubishi Adventure Super
Sport; and an interest of 6% per month shall be
imposed for failure to pay each installment on or before
the stated due date.

On the same day, Citimotors, Inc. assigned all its

rights, title and interests in the Promissory Note with
Chattel Mortgage to ABN AMRO Savings Bank, Inc.
(ABN AMRO), which likewise assigned the same to
respondent BPI Family Savings Bank, Inc.5

For failure to pay four successive installments

respondent, sent to petitioners a demand letter
declaring the entire obligation as due and demandable
and requiring to pay Php576k, or surrender the
mortgaged vehicle immediately upon receiving the
letter. As the demand was left unheeded, respondent
filed an action for Replevin and Damages before the
Manila Regional Trial Court (RTC).

A writ of replevin was issued. Despite this, the subject

vehicle was not seized. Trial on the merits ensued.
Manila RTC Br. 33 ruled for the respondent and ordered
petitioners to jointly and severally pay the amount plus
interest at the rate of 72% per annum from August 20,
2002 until fully paid, and the costs of suit.
CA affirmed the lower courts decision and, subsequently,
denied MR hence, this petition.
ISSUES:
1.
respondent has no cause of action, because the Deed
of Assignment executed in its favor did not specifically
mention ABN AMROs account receivable from
petitioners;
2.
petitioners cannot be considered to have defaulted in
payment for lack of competent proof that they received
the demand letter; and
3.
respondents remedy of resorting to both actions of
replevin and collection of sum of money is contrary to
a.
provision of Article 1484
b.
Elisco Tool Manufacturing Corporation v. Court
of Appeals ruling.
HELD:
1.
the matter surrounding the Deed of Assignment had
already been considered by the TC and the CA.
Likewise, it is an issue of fact that is not a proper
subject of a petition for review under Rule 45. AN ISSUE
IS FACTUAL WHEN THE DOUBT OR DIFFERENCE ARISES
AS TO THE TRUTH OR FALSEHOOD OF ALLEGED FACTS,
OR WHEN THE QUERY INVITES CALIBRATION OF THE
WHOLE EVIDENCE, considering mainly the credibility of
witnesses, existence and relevancy of specific
surrounding circumstances, their relation to each other
and to the whole, and the probabilities of the
situation.Time and again, We stress that this Court is

In case of my/our failure to pay when due and

payable, any sum which I/We are obliged to pay
under this note and/or any other obligation which
I/We or any of us may now or in the future owe to
the holder of this note or to any other party
whether as principal or guarantor x x x then the
entire sum outstanding under this note shall,
without prior notice or demand, immediately
become due and payable. (Emphasis and
underscoring supplied)
2.

***A PROVISION ON WAIVER OF NOTICE OR

DEMAND HAS BEEN RECOGNIZED AS LEGAL AND
VALID in BPI v. CA: The Civil Code in Article 1169
provides that one incurs in delay or is in default from
the time the obligor demands the fulfillment of the
obligation from the obligee. However, the law expressly
provides that demand is not necessary under certain
circumstances, and one of these circumstances is when
the parties expressly waive demand. Hence, since the
co-signors expressly waived demand in the promissory
notes, demand was unnecessary for them to be in
default.
*** PRIOR DEMAND IS NOT A CONDITION
PRECEDENT TO AN ACTION FOR A WRIT OF
REPLEVIN,

Section 2, Rule 60 of the Rules of Court does not

require the applicant to make a demand on the
possessor of the property before an action for a
writ of replevin could be filed.

mere act of sending it would suffice. Again,

We look into the Promissory Note with Chattel
Mortgage, which provides:
xxx The mere act of sending any correspondence
by mail or by personal delivery to the said address
shall be valid and effective notice to the
mortgagor for all legal purposes and the fact that
any communication is not actually received by the
MORTGAGOR or that it has been returned
unclaimed to the MORTGAGEE or that no person
was found at the address given, or that the
address is fictitious or cannot be located shall not
excuse or relieve the MORTGAGOR from the
effects of such notice.16 (Emphasis and
underscoring supplied)

their postal address evidently remained

unchanged from the time they executed the
Promissory Note with Chattel Mortgage up to time
the case was filed against them. Thus, the
presumption that "a letter duly directed and

mailed was received in the regular course of the

mail stands in the absence of satisfactory proof to
the contrary.
Ting v. CA pertained to violation of Blg. 22 or the
Bouncing Checks Law. As a higher quantum of
proof that is, proof beyond reasonable doubt is
required failed to produce the original cash deposit
slips
proving
payment
of
the
monthly
amortizations in question.
Not even a photocopy of the alleged proof of
payment was appended to their Answer or shown
during the trial. Neither have they demonstrated
any written requests to respondent to furnish them
with official receipts or a statement of account.
Worse, petitioners were not able to make a formal
offer of evidence considering that they have not
marked any documentary evidence during the
presentation of Deo Agners testimony.

***RESPONDENT'S POSSESSION OF THE PROMISSORY

NOTE
WITH
CHATTEL
MORTGAGE
STRONGLY
BUTTRESSES ITS CLAIM THAT THE OBLIGATION HAS
NOT BEEN EXTINGUISHED.

in civil cases, one who pleads payment has the

burden of proving it; the burden rests on the
defendant to prove payment, rather than on the
plaintiff to prove non-payment.

When the creditor is in possession of the

document of credit, proof of non-payment is not
needed for it is presumed. As held in BPI v.
Spouses Royeca:

x x x The creditor's possession of the evidence of

debt is proof that the debt has not been
discharged by payment. A promissory note in the
hands of the creditor is a proof of indebtedness
rather than proof of payment.
o
In an action for replevin by a mortgagee,
it is prima facie evidence that the
promissory note has not been paid.
o
Likewise, an uncanceled mortgage in
the possession of the mortgagee gives
rise to the presumption that the
mortgage debt is unpaid.
Indeed, when the existence of a debt is fully established by
the evidence contained in the record, the burden of proving
that it has been extinguished by payment devolves upon the
debtor who offers such defense to the claim of the creditor.
The debtor has the burden of showing with legal certainty
that the obligation has been discharged by payment.
3.

Lastly, there is no violation of Article 1484 of the

Civil Code and the Courts decision in Elisco
Ruling:
In Elisco, petitioner's complaint contained the following
prayer:
The Court therein ruled:
THE REMEDIES PROVIDED FOR IN ART. 1484
ARE ALTERNATIVE, not cumulative. The exercise
of one bars the exercise of the others.
This limitation applies to contracts purporting to
be leases of personal property with option to buy
by virtue of Art. 1485. The condition that the
lessor has deprived the lessee of possession or
enjoyment of the thing for the purpose of applying

Art. 1485 was fulfilled in this case by the filing by

petitioner of the complaint for replevin to recover
possession of movable property. By virtue of the
writ of seizure issued by the trial court, the deputy
sheriff seized the vehicle on August 6, 1986 and
thereby deprived private respondents of its use.
The car was not returned to private respondent
until April 16, 1989, after two (2) years and eight
(8) months, upon issuance by the CA of a writ of
execution.
Petitioner prayed that private respondents be
made to pay the sum of P39k the amount that
they were supposed to pay as of May 1986, plus
interest at the legal rate. At the same time, it
prayed for the issuance of a writ of replevin or the
delivery to it of the motor vehicle "complete with
accessories and equipment." In the event the car
could not be delivered to petitioner, it was prayed
that private respondent Rolando Lantan be made
to pay petitioner the amount of P60,000.00, the
"estimated actual value" of the car, "plus accrued
monthly rentals thereof with interests at the rate
of fourteen percent (14%) per annum until fully
paid."
This prayer of course cannot be granted, even
assuming that private respondents have defaulted
in the payment of their obligation. This led the trial
court to say that petitioner wanted to eat its cake
and have it too.

respondent pursued, commenced or concluded its

actual foreclosure.
The trial court, therefore, rightfully granted the
alternative prayer for sum of money, which is
equivalent to the remedy of "exacting fulfillment of
the obligation." Certainly, there is no double
recovery or unjust enrichment to speak of.
6%/mo. reduced to one percent (1%) /mo. or
(12%) /annum to be reckoned from May 16, 2002
until full payment and with the remaining
outstanding balance of their car loan as of May 15,
2002 as the base amount.

Settled is the principle which this Court has affirmed in a

number of cases that stipulated interest rates of three
percent (3%) per month and higher are excessive, iniquitous,
unconscionable, and exorbitant. Since the stipulation on the
interest rate is void for being contrary to morals, if not
against the law, it is as if there was no express contract on
said interest rate; thus, the interest rate may be reduced as
reason and equity demand.33

STRONGHOLD INSURANCE
COMPANY v.
REPUBLIC-ASAHI GLASS CORP
(EFFECT OF DEATH ON SURETYS LIABILITY)

In contrast, respondent in this case prayed:

(a) Before trial, and upon filing and approval of the bond, to
forthwith issue a Writ of Replevin ordering the seizure of the
motor vehicle above-described, complete with all its
accessories and equipments, together with the Registration
Certificate thereof, and direct the delivery thereof to plaintiff
in accordance with law and after due hearing, to confirm the
said seizure;
(b) Or, in the event that manual delivery of the said motor
vehicle cannot be effected to render judgment in favor of
plaintiff and against defendant(s) ordering them to pay to
plaintiff, jointly and severally, the sum of P576,664.04 plus
interest and/or late payment charges thereon at the rate of
72% per annum from August 20, 2002 until fully paid;
(c) In either case, to order defendant(s) to pay jointly and
severally:
(1) the sum of P297,857.54 as attorneys fees, liquidated
damages, bonding fees and other expenses incurred in the
seizure of the said motor vehicle; and
(2) the costs of suit.
Plaintiff further prays for such other relief as this Honorable
Court may deem just and equitable in the premises.29
Compared with Elisco,
the vehicle subject matter of this case was never
recovered and delivered to respondent despite the
issuance of a writ of replevin. As there was no
seizure that transpired, it cannot be said that
petitioners were deprived of the use and
enjoyment of the mortgaged vehicle or that

A surety companys liability under the performance bond it

issues is solidary. The death of the principal obligor does not,
as a rule, extinguish the obligation and the solidary nature of
that liability.
FACTS:

"On May 24, 1989 (Republic-Asahi) entered into a

contract with Jose D. Santos, Jr., the proprietor of JDS
Construction (JDS), for the construction of roadways
and a drainage system in Republic-Asahis compound
in Pasig City, where [respondent] was to pay JDS 5m
inclusive of value added tax for said construction, which
was supposed to be completed within a period forty
(240) days beginning May 8, 1989.

In order to guarantee the faithful and satisfactory

performance of its undertakings, JDS shall post a
performance bond of 795k. JDS executed, jointly
and severally with [petitioner] Stronghold
Insurance Co., Inc. (SICI) Performance Bond.

Republic Asahi paid to JDS (P795k) by way of DP. "Two

progress billings dated August 14, 1989 and September
15, 1989, (P274,621.01) were submitted by JDS to
[respondent], which the latter paid. According to
[respondent], these two progress billings accounted for
only 7.301% of the work supposed to be undertaken by
x x x JDS under the terms of the contract

"Several times prior to November of 1989,

[respondents] engineers called the attention of JDS to
the
alleged
alarmingly
slow
pace
of
the
construction, which resulted in the fear that the
construction will not be finished within the stipulated
240-day period. However, said reminders went
unheeded by JDS.

"On November 24, 1989, dissatisfied with the progress

of the work undertaken by JDS, Republic-Asahi
extrajudicially
rescinded
the
contract
pursuant to Article XIII of said contract
wrote a letter to JDS informing the latter of such
rescission which shall not be construed as a
waiver of [respondents] right to recover
damages from JDS and the latters sureties.
as a result of JDSs failure to comply with the
provisions of the contract, which resulted in the
said contracts rescission, it had to hire another
contractor to finish the project, for which it
incurred an additional expense of 3m.
sent a letter to SICI filing its claim under the
bond for not less thanP795k; went unheeded.

"[Respondent] then filed [a] complaint against JDS

and SICI.
1.
It sought from JDS payment ofP3m representing
the additional expenses incurred by [respondent]
for the completion of the project using another
contractor, and
2.
from JDS and SICI, jointly and severally, payment
of P750k as damages in accordance with the
performance bond; exemplary damages in the
amount of P100k and attorneys fees in the
amount of at least P100k.

summons were duly served on defendant-appellee SICI.

However Jose D. Santos, Jr. died the previous year
(1990), and JDS Construction was no longer at its
address at Pasig, and its whereabouts were unknown.
SICI filed its answer, alleging that
money claims against [petitioner and JDS] have
been extinguished by the death of Jose D.
Santos, Jr.
there was no liquidation, with the active
participation and/or involvement, pursuant to
procedural due process, of herein surety and
contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of
Santos and SICI under the performance bond. At
this point in time, said liquidation was impossible
because of the death of Santos, who as such can
no longer participate in any liquidation.
[Respondent] can no longer prove its claim for
damages in view of the death of Santos. SICI was
not informed by [respondent] of the death of
Santos.
SICI was not informed by [respondent] of the
unilateral rescission of its contract with JDS, thus
SICI was deprived of its right to protect its
interests as surety under the performance bond,
and therefore it was released from all liability.
denied due process when it was not notified of
plaintiff-appellants process of determining and
fixing the amount to be spent in the completion of
the unfinished project. The procedure contained
in Article XV of the contract is against public
policy in that it denies SICI the right to procedural
due process.
Respondent deviated from the terms and
conditions of the contract without the written
consent of SICI, thus the latter was released from
all liability. SICI also prayed for the award of 59k as

attorneys
expenses.

fees,

andP5,000.00

as

litigation

RTC dismissed respos complaint against xJDS and SICI,

claim against JDS did not survive the death of its
sole proprietor, Jose D. Santos, Jr
CA: not extinguished by the death of Jose D. Santos, Jr. and
Republic-Asahi could still go after SICI for the bond.
TC erred in pronouncing that the performance of
the Contract in question had become impossible
by respondents act of rescission. The Contract
was rescinded because of the dissatisfaction of
respondent with the slow pace of work and
pursuant to Article XIII of its Contract with JDS.
"[p]erformance of the [C]ontract was impossible,
not because of [respondents] fault, but because of
the fault of JDS Construction and Jose D. Santos, Jr.
for failure on their part to make satisfactory
progress on the project, which amounted to nonperformance of the same. Pursuant to the surety
contract, SICI is liable for the non-performance of
said [C]ontract on the part of JDS Construction."
ISSUE
1.

W/N petitioners liability under the performance

bond was automatically extinguished by the death
of Santos, the principal. No.

HELD: Effect of Death on the Suretys Liability

Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety bond.
Consequently, it says, it is automatically released from any
liability under the bond.
GENERAL RULE: the death of either the creditor or the
debtor DOES NOT extinguish the obligation. Obligations are
transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the
nature of the obligation. Only obligations that are personal or
are identified with the persons themselves are extinguished
by death.
Section 5 of Rule 86 of the Rules of Court expressly
allows the prosecution of money claims arising from a
contract against the estate of a deceased debtor. Evidently,
those claims are not actually extinguished. What is
extinguished is only the obligees action or suit filed before
the court, which is not then acting as a probate court.
In the present case, whatever monetary liabilities or
obligations Santos had under his contracts with respondent
were not intransmissible by their nature, by stipulation, or by
provision of law. Hence, his death did not result in the
extinguishment of those obligations or liabilities, which
merely passed on to his estate. Death is not a defense
that he or his estate can set up to wipe out the
obligations
under
the
performance
bond.
Consequently, petitioner as surety cannot use his
death to escape its monetary obligation under its
performance bond.
The liability of petitioner is contractual in nature, because it
executed a performance bond worded as follows:

"NOW THEREFORE, if the principal shall perform well and

truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of said contract during the
original term of said contract and any extension thereof that
may be granted by the obligee, with notice to the surety and
during the life of any guaranty required under the contract,
and shall also perform well and truly and fulfill all the
undertakings, covenants, terms, conditions, and agreements
of any and all duly authorized modifications of said contract
that may hereinafter be made, without notice to the surety
except when such modifications increase the contract price;
and such principal contractor or his or its sub-contractors
shall promptly make payment to any individual, firm,
partnership, corporation or association supplying the
principal of its sub-contractors with labor and materials in
the prosecution of the work provided for in the said contract,
then, this obligation shall be null and void; otherwise it shall
remain in full force and effect. Any extension of the period of
time which may be granted by the obligee to the contractor
shall be considered as given, and any modifications of said
contract shall be considered as authorized, with the express
consent of the Surety.
"The right of any individual, firm, partnership, corporation or
association supplying the contractor with labor or materials
for the prosecution of the work hereinbefore stated, to
institute action on the penal bond, pursuant to the provision
of Act No. 3688, is hereby acknowledge and confirmed."16
As a surety, petitioner is SOLIDARILY liable with
Santos in accordance with the Civil Code, which provides as
follows:
"Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the
latter should fail to do so.
"If a person binds himself solidarily with the
principal debtor, the provisions of Section
4,17 Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a
suretyship."
"Art. 1216. The creditor may proceed against any
one of the solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so
long as the debt has not been fully collected."
Garcia v. Court of Appeals
The suretys obligation is not an original and
direct one for the performance of his own act, but
merely accessory or collateral to the obligation
contracted by the principal. Nevertheless,
although the contract of a surety is in essence
secondary only to a valid principal obligation, his
liability to the creditor or promisee of the principal
is said to be DIRECT, PRIMARY AND ABSOLUTE;
in other words, he is directly and equally bound
with the principal
respondent may sue, separately or together, the
principal debtor and the petitioner herein, in view
of the solidary nature of their liability. The death of
the principal debtor will not work to convert,
decrease or nullify the substantive right of the
solidary creditor. Evidently, despite the death of
the principal debtor, respondent may still sue
petitioner alone, in accordance with the solidary

nature of the latters

performance bond.

liability

under

the

1240- TO WHOM PAYMENT SHALL BE MADE

by the FEBTC that it allowed Sonia to encash Tans check on

the basis of SPA.

PNB v. CA
(Expropriation; 32k)
FACTS:Loreto Tan is the owner of a parcel of land abutting
the national highway in Bacolod. Expropriation proceedings
were instituted by the government against private
respondent Tan and other property owners before the CFI.
Tan filed a motion requesting issuance of an order for release
to him of the expropriation price of 32k.
PNB was subsequently required by the TC to release to Tan
the amount of 32k deposited with it by the government.
issued a managers check and delivered the dame
to
one
Sonia
Gonzaga
WITHOUT
TANS
KNOWLEDGE, CONSENT, and AUTHORITY.
Sonia Gonzaga deposited it in her account in
FEBTC and later on withdrew said amount.
Tan subsequently demanded payment from petitioner for
the same amount but the latter refused on the ground that
petitioner had already paid and delivered it to Sonia on the
strength of an SPA allegedly executed in her favor by Tan.
Tan executed an affidavit before petitioners
lawyer that
He never executed an SPA
Never authorized Sonia to receive the sum
He signed a motion for the court to issue an order
to release said sum of money to him and gave the
same to husband of Sonia to be filed in court.
However, after the order was subsequently issued
by the court, a certain Engr. Decena of Highway
Engrs Office issued the authority to release the
funds not to him but to Mr. Gonzaga.
filed a motion in court to require PNB to pay the
same to him.
Petitioner filed an opposition contending
Sonia Gonzaga presented to it a copy of an order
and
SPA by virtue of which petitioner delivered the
check to her.
failed to present the SPA before the court.
TC decided that there was need for the matter to be
ventilated in a separate civil action and thus Tan filed a
complaint with the RTC against petitioner and Juan
Tagamolila, PNBs assistant Branch Mgr., to recover said
amount. Petitioner contended that
Private respo had authorized Sonia to act as agent
Filed a 3rd party complaint against spouses
Gonzaga
Praying that they be ordered to pay 32k to pr
Tagamolila said that Sonia presented the SPA but
later borrowed it again for she needed it in
encashing the check
RTC ordered petitioner and Tagamolila to pay Tan jointly and
severally the amount + legal interest + damages + attys
fees.
ISSUE: W/N the SPA ever existed. Petitioner avers that
SPA need not be proved under the best evidence rule
because it already proved the existence of the SPA from the
testimonies of its witnesses and by the certification issued

HELD: No payment had ever been made as the check was

never delivered to pr. When the court ordered petitioner to
pay PR the amount of 32k, it had the obligation to deliver the
same to him.
Art. 1233 of CC, a debt shall not be understood
to have been paid unless the thing or service in
which the obligation consists has been completely
delivered or rendered, as the case may be.
The burden of Proof of such payment lies with the
debtor. In this case, neither the SPA nor the check
issued by petitioner was ever presented in court. The
testimonies of petitioners own witnesses regarding the
check were conflicting.
Tagamolila testified that the check was issued to the
order of Sonia Gonzaga as atty. In fact of Loreto Tan,
while
asst. cashier of PNB stated that the check was issued
to the order of Loreto Tan.
Mere SPA is insufficient, it is necessary for evidence to
be presented regarding the nature and extent of the
alleged powers and authority granted to Sonia
Gonzaga, more specifically, to determine whether the
document indeed authorized her to receive payment
intended for Tan. However, no such evidence was ever
presented.
Sec. 2, Rule 130 of ROC: original writing must be
produced: except when
the original has been lost/destroyed/cannot be
produced in court/possession of the party against whom
the evidence is offered/original is a record or other
document in the custody of a public officer; when the
original consists of numerous accounts or toher
docuemnts which cannot be examined in court w/o
great loss of time and the fact sought to be established
from them is only the general result of the whole.
Sec. 4, Rule 130- secondary evidence when the original is
lost.
Considering that the contents of the SPA are also in
issue here, the BEST EVIDENCE RULE applies. Hence,
only the original document which has not been
presented at all, is the best evidence of the fact as to
w/n ppr indeed authorized Sonia to receive the check.
In the absence of such, petitioners argument must fail.

CULABA V. CA
(SMC)

FACTS: The spouses Francisco and Demetria Culaba

were the owners and proprietors of the Culaba Store and
were engaged in the sale and distribution of San Miguel
Corporations (SMC) beer products. SMC sold beer products
on credit to the Culaba spouses in the amount of P28k, as
evidenced by Temporary Credit Invoice. Thereafter, the
Culaba spouses made a partial payment of P3,740.00,
leaving an unpaid balance of P24,910.00. As they failed to
pay despite repeated demands, SMC filed an action for
collection of a sum of money against them.

The defendant-spouses denied any liability,

already paid the plaintiff in full on four separate
occasions
o
defendants presented four (4) Temporary
Charge Sales (TCS) Liquidation Receipts.
o
Defendant Francisco Culaba testified that he
made the foregoing payments to an SMC
supervisor who came in an SMC van. He
was then showed a list of customers
accountabilities which included his account.
The defendant, in good faith, then paid to the
said supervisor, and he was, in turn, issued
genuine SMC liquidation receipts.
SMC submitted
publishers affidavit to prove that the entire booklet of
TCSL Receipts bearing Nos. xx were reported lost by it,
and that it caused the publication of the NOTICE OF
LOSS in the July 9, 1983 issue of the Daily Express
thereby informing that the receipts w/ the serial
numbers provided therein were lost and any transaction
entered into w/ the use of it will NOT be honored.
RTC Culaba spouses liable on the balance of its obligation,
thus:
he did not require the said collector to print his
name on the receipts.
the TCS Liquidation Receipts submitted by the
defendants did not appear to have been issued in
their natural sequence.
they were part of the lost booklet receipts, which
the public was duly warned of through the Notice
of Loss the plaintiff caused to be published in a
daily newspaper. This confirmed the plaintiffs
claim that the receipts presented by the
defendants were spurious ones.
Culaba asserted that while the trial courts observations
were true, it was the usual business practice in previous
transactions between them and SMC.
receiving receipts from SMCs agents instead of its
salesmen was a usual occurrence, as they had
been operating the store since 1979; The SMC
previously honored receipts not bearing the
salesmans name; he even lost some of the
receipts, but did not encounter any problems.
could not be faulted for paying the SMC collector
who came in A VAN AND WAS IN UNIFORM, and
that any regular customer would, without any
apprehension, transact with such an SMC
employee.
respective receipts issued to him at the time he
paid on the four occasions mentioned had not yet
then been declared lost. subsequent publication in
a daily newspaper declaring the booklets lost did
not affect the validity and legality of the payments
made. Accordingly, by its actuations, the SMC was
estopped from questioning the legality of the
payments and had no cause of action against the
appellants.

Anent the second issue, petitioner Francisco

Culaba avers that the agent to whom the accounts
were paid had all the PHYSICAL AND MATERIAL
ATTRIBUTES
OR
INDICATIONS
OF
A
REPRESENTATIVE of the private respondent,
leaving no doubt that he was duly authorized by
the latter. Petitioner Francisco Culabas testimony
that he does not necessarily check the contents of
the receipts issued to him except for the amount
indicated if [the] same accurately reflects his
actual payment is a common attitude of
customers. He could, thus, not be faulted for
paying the private respondents agent on four
occasions. Petitioner Francisco Culaba asserts that
he made the payment in GOOD FAITH, to an agent
who issued SMC receipts which appeared to be
genuine. Thus, according to the petitioners, they
had duly paid their obligation in accordance with
Articles 1240 and 1242 of the New Civil Code.

SMC, for its part, contended that the primary issue in the
case at bar revolved around the BASIC AND FUNDAMENTAL
PRINCIPLES OF AGENCY.
It was incumbent upon the Culaba to exercise
ordinary prudence and reasonable diligence to
verify and identify the extent of the alleged agents
authority.
It was their burden to establish the true identity of
the assumed agent, and this could not be
established by mere representation, rumor or
general reputation. As they utterly failed in this
regard,
the
appellants
must
suffer
the
consequences.
SMC, for its part, avers that the burden of proving
payment is with the debtor, in consonance with
the express provision of Article 1233 of the New
Civil Code. The petitioners miserably failed to
prove the self-serving allegation that they already
paid their liability to the private respondent.
under normal circumstances, an obligor would not
just pay a substantial amount to someone whom
he saw for the first time, without even asking for
the latters name.
CA affirmed RTC:
1)

2)

ISSUES:
W/N the respondent SMC had proven by preponderant
evidence that it had properly and timely notified Culaba of
lost booklet of receipts
W/N respondent SMC had proven by preponderant evidence
that Culaba was remiss in the payment of his accounts to
its agent.
HELD: dismissed. A careful study of the records of the case
reveal that the appellate court affirmed the trial courts
factual findings as follows:

Receipts were included in the private respondents lost

booklet, which loss was duly advertised in a newspaper of
general circulation; thus, the SMC could not have officially
issued them to the Culabas to cover the alleged payments
on the dates appearing thereon. There was something amiss
in the way the receipts were issued to the petitioners, as one
receipt bearing a higher serial number was issued ahead of
another receipt bearing a lower serial number, supposedly
covering a later payment. The petitioners failed to explain
the apparent mix-up in these receipts, and no attempt was
made in this regard.
The fact that the salesmans name was invariably left blank
in the four receipts and that the petitioners could not even
remember the name of the supposed impostor who received
the said payments strongly argue against the veracity of the
petitioners claim.
PAYMENT is a mode of extinguishing an obligation.
Article 1240 of the Civil Code provides that
payment shall be made to the person
1.
in whose favor the obligation has been
constituted, or
2.
his successor-in-interest, or
3.
any person authorized to receive it
In this case, the payments were purportedly made to a
supervisor of the private respondent, who was clad in an
SMC uniform and drove an SMC van. He appeared to be
authorized to accept payments as he showed a list of
customers accountabilities and even issued SMC liquidation
receipts which looked genuine.
Unfortunately for petitioner Francisco Culaba, he did not
ascertain the identity and authority of the said supervisor,
nor did he ask to be shown any identification to prove that
the latter was, indeed, an SMC supervisor. The petitioners
relied solely on the mans representation that he was
collecting payments for SMC. Thus, the payments the
petitioners claimed they made were not the payments that
discharged their obligation to the private respondent.

THE BASIS OF AGENCY IS REPRESENTATION.

A person dealing with an agent is put upon inquiry
and must discover upon his peril the authority of
the agent.
In the instant case, the petitioners loss could have been
avoided if they had simply exercised due diligence in
ascertaining the identity of the person to whom they
allegedly made the payments. The fact that they were
parting with valuable consideration should have made them
more circumspect in handling their business transactions.
Persons dealing with an assumed agent are bound at their
peril
-

to ascertain not only the fact of agency but also

the nature and extent of authority, and

in case either is controverted, the burden of proof
is upon them to establish it.

The petitioners in this case failed to discharge this burden,

considering that the private respondent vehemently denied
that the payments were accepted by it and were made to its
authorized representative.
NEGLIGENCE is the omission to do something which a
reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do, or
the doing of something, which a prudent and reasonable
man would not do.[25]
In the case at bar, the most prudent thing the petitioners
should have done was to ascertain the identity and authority
of the person who collected their payments. Failing this, the
petitioners cannot claim that they acted in good faith when
they made such payments. Their claim therefor is negated
by their negligence, and they are bound by its
consequences. Being negligent in this regard, the petitioners
cannot seek relief on the basis of a supposed agency.

ALLIED BANKING V. LIM SIO

WAN
(Money Market Placement)
FACTS: Lim Sio Wan deposited with petitioner (Allied) a
money market placement of PhP 1.1m for a term of 31
days to mature on December 15, 1983, as evidenced by
Provisional Receipt.
On December 5, 1983, a person claiming to be Lim Sio Wan
called up Cristina So, an officer of Allied, and instructed the
latter to pre-terminate Lim Sio Wans money market
placement, to issue a managers check representing the
proceeds of the placement, and to give the check to one
Deborah Dee Santos who would pick up the check. Lim Sio
Wan described the appearance of Santos so that So could
easily identify her.
Later, Santos arrived at the bank and signed the application
form for a managers check to be issued. The bank issued
Managers Check No. for PhP 1,1m representing the proceeds
of Lim Sio Wans money market placement in the name of
Lim Sio Wan, as payee. The check was cross-checked "For
Payees Account Only" and given to Santos.
Thereafter, the managers check was deposited in the
account of Filipinas Cement Corporation (FCC) at
respondent. (Metrobank), with the forged signature of Lim
Sio Wan as endorser. Earlier, on September 21, 1983, FCC
had deposited a money market placement for PhP 2m with
respondent Producers Bank. Santos was the money market
trader assigned to handle FCCs account. Such deposit is
evidenced by Official Receipt and a Letter of Santos
addressed to Angie Lazo of FCC, acknowledging receipt of

the placement. The placement matured on October 25, 1983

and was rolled-over until December 5, 1983 as evidenced by
a Letter. When the placement matured, FCC demanded the
payment of the proceeds of the placement. On the same
date that So received the phone call instructing her to
pre-terminate
Lim
Sio
Wans
placement,
the
managers check in the name of Lim Sio Wan was
deposited in the account of FCC, purportedly
representing the proceeds of FCCs money market placement
with Producers Bank. In other words, the Allied check was
deposited with Metrobank in the account of FCC as Producers
Banks payment of its obligation to FCC.
To clear the check and in compliance with the requirements
of the Philippine Clearing House Corporation (PCHC) Rules
and Regulations, Metrobank stamped a guaranty on the
check, which reads: "All prior endorsements and/or lack of
endorsement guaranteed."
The check was sent to Allied through the PCHC. Upon
the presentment of the check, Allied funded the check
even without checking the authenticity of Lim Sio
Wans purported indorsement. Thus, the amount on the
face of the check was credited to the account of FCC.
On December 9, 1983, Lim Sio Wan deposited with Allied a
second money market placement to mature on January
9, 1984.20
On December 14, 1983, upon the maturity date of the first
money market placement, Lim Sio Wan went to Allied to
withdraw it.21 She was then informed that the
placement had been pre-terminated upon her
instructions. She denied giving any instructions and
receiving the proceeds thereof. She desisted from further
complaints when she was assured by the banks manager
that her money would be recovered.22
Lim Sio Wan, realizing that the promise that her
money would be recovered would not materialize,
sent a demand letter to Allied asking for the payment of
the first placement.24 Allied refused to pay Lim Sio Wan,
claiming that the latter had authorized the pre-termination of
the placement and its subsequent release to Santos.
Consequently, Lim Sio Wan filed with the RTC a
Complaint dated against Allied to recover the proceeds of
her first money market placement. She also withdrew her
second placement.
I.
II.
III.

Allied filed a third party complaint against

Metrobank and Santos.
In turn, Metrobank filed a fourth party complaint
against FCC.
FCC for its part filed a fifth party complaint
against Producers Bank.

Summonses were duly served upon all the parties except for
Santos, who was no longer connected with Producers Bank.
six (6) months after funding the check, Allied informed
Metrobank that the signature on the check was forged. Thus,

Metrobank withheld the amount represented by the check

from FCC. Later on, Metrobank agreed to release the amount
to FCC after the latter executed an Undertaking, promising to
indemnify Metrobank in case it was made to reimburse the
amount.

where lenders and borrowers do not deal directly with each

other but through a middle man or dealer in open market. In
a money market transaction, the investor is a lender who
loans his money to a borrower through a middleman or
dealer.

Lim Sio Wan thereafter filed an amended complaint to

include Metrobank as a party-defendant, along with Allied.
The RTC admitted the amended complaint despite the
opposition of Metrobank. Consequently, Allieds third party
complaint against Metrobank was converted into a crossclaim and the latters fourth party complaint against FCC
was converted into a third party complaint. RTC dismissed.

In the case at bar, the money market transaction between

the petitioner and the private respondent is in the nature of
a loan.
Lim Sio Wan, as creditor of the bank for her money market
placement, is entitled to payment upon her request, or upon
maturity of the placement, or until the bank is released from
its obligation as debtor. Until any such event, the obligation
of Allied to Lim Sio Wan remains unextinguished.
Art. 1231 of the Civil Code enumerates the instances when
obligations are considered extinguished (see). From the
factual findings of the trial and appellate courts that Lim Sio
Wan did not authorize the release of her money market
placement to Santos and the bank had been negligent in so
doing, there is no question that the obligation of Allied to pay
Lim Sio Wan had not been extinguished. Art. 1240 of the
Code (see).

CA MODIFIED. Judgment is rendered ordering and sentencing

defendant-appellant Allied (60%) and Metropolitan Bank and
Trust Company (40%) of the amount of P1,158,648.49 plus
12% interest per annum from March 16, 1984 until fully paid.
The moral damages, attorneys fees and costs of suit
adjudged shall likewise be paid by defendant-appellant Allied
Banking Corporation and defendant-appellee Metropolitan
Bank and Trust Company in the same proportion of 60-40.
Except as thus modified, the decision appealed from is
AFFIRMED.

3)

4)
5)

ISSUES: Allied raises the following issues for our

consideration:
CA erred in holding that Lim Sio Wan did not authorize
[Allied] to pre-terminate the initial placement and to
deliver the check to Deborah Santos.
CA erred in absolving Producers Bank of any liability for the
reimbursement of amount adjudged demandable.
CA erred in holding [Allied] liable to the extent of 60% of
amount adjudged demandable in clear disregard to the
ultimate liability of Metrobank as guarantor of all
endorsement on the check, it being the collecting bank.38
HELD:
1) Allied questions the finding of both the trial and appellate
courts that Allied was not authorized to release the proceeds
of Lim Sio Wans money market placement to Santos. Allied
clearly raises a question of fact. When the CA affirms the
findings of fact of the RTC, the factual findings of both courts
are binding on this Court. Questions of Fact
authority to release the proceeds of money market
placement
the matter of negligence is also a factual question.
2) The Liability of the Parties RELATIONSHIP BETWEEN A
BANK AND A CLIENT IS ONE OF DEBTOR-CREDITOR.
Allied is liable to Lim Sio Wan.
Articles 1953 and 1980 of the Civil Code provide:
Thus, we have ruled in a line of cases that a BANK DEPOSIT
IS IN THE NATURE OF A SIMPLE LOAN OR MUTUUM.
More succinctly, in Citibank, N.A. (Formerly First National City
Bank) v. Sabeniano, this Court ruled that a money market
placement is a simple loan or mutuum.
[A] MONEY MARKET is a market dealing in standardized
short-term credit instruments (involving large amounts)

PAYMENT MADE BY THE DEBTOR TO A WRONG PARTY DOES

NOT EXTINGUISH THE OBLIGATION AS TO THE CREDITOR, IF
THERE IS NO FAULT OR NEGLIGENCE WHICH CAN BE
IMPUTED TO THE LATTER. Even when the debtor acted in
utmost good faith and by mistake as to the person of his
creditor, or through error induced by the fraud of a third
person, the payment to one who is not in fact his creditor, or
authorized to receive such payment, is VOID, except as
provided in Article 1241. Such payment does not prejudice
the creditor, and accrual of interest is not suspended by it.
Since there was no effective payment of Lim Sio Wans
money market placement, the bank still has an obligation to
pay her at six percent (6%) interest from March 16, 1984
until the payment thereof.
We cannot, however, say outright that Allied is solely liable
to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of the
loss of Lim Sio Wans money. It points out that Metrobank
guaranteed all prior indorsements inscribed on the
managers check, and without Metrobanks guarantee, the
present controversy would never have occurred. According
to Allied:
Failure on the part of the collecting bank to ensure that the
proceeds of the check is paid to the proper party is, aside
from being an efficient intervening cause, also the last
negligent act, x x x contributory to the injury caused in the
present case, which thereby leads to the conclusion that it is
the collecting bank, Metrobank that is the proximate cause
of the alleged loss of the plaintiff in the instant case.
We are not persuaded.
1.
PROXIMATE CAUSE is "that cause, which, in natural
and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the

result would not have occurred." Thus, there is an efficient

supervening event if the event breaks the sequence leading
from the cause to the ultimate result. To determine the
proximate cause of a controversy, the question that needs to
be asked is: If the event did not happen, would the
injury have resulted? If the answer is NO, then the event
is the proximate cause.
In the instant case, Allied avers that even if it had not issued
the check payment, the money represented by the check
would still be lost because of Metrobanks negligence in
indorsing the check without verifying the genuineness of the
indorsement thereon.
Section 66 in relation to Sec. 65 of the Negotiable
Instruments Law provides:
Section 66. Liability of general indorser.Every indorser who
indorses without qualification, warrants to all subsequent
holders in due course;
a) The matters and things mentioned in subdivisions (a), (b)
and (c) of the next preceding section; and b) That the
instrument is at the time of his indorsement valid and
subsisting;
And in addition, he engages that on due presentment, it
shall be accepted or paid, or both, as the case may be
according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it.
Section 65. Warranty where negotiation by delivery, so forth.
Every person negotiating an instrument by delivery or by a
qualified indorsement, warrants:
a.
That the instrument is genuine and in all respects
what it purports to be;
b.
That he has a good title of it;
c.
That all prior parties had capacity to contract;
d.
That he has no knowledge of any fact which would
impair the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee. The provisions of subdivision (c) of this section do
not apply to persons negotiating public or corporation
securities, other than bills and notes. (Emphasis supplied.)
The warranty "that the instrument is genuine and in all
respects what it purports to be" covers all the defects in the
instrument affecting the validity thereof, including a forged
indorsement. Thus, the last indorser will be liable for the
amount indicated in the negotiable instrument even if a
previous indorsement was forged. We held in a line of cases
that "a collecting bank which indorses a check bearing a
forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged
indorsement itself, and ultimately should be held liable
therefor."
Exception: issuance of the check itself was
attended with negligence.

Thus, in the cases cited above where the collecting bank is

generally held liable, in two of the cases where the checks
were negligently issued, this Court held the institution
issuing the check just as liable as or more liable than the
collecting bank.

real cashier, respondent Province contributed to the loss

amounting to P203,300.00 and shall be liable to the PNB for
fifty (50%) percent thereof. In effect, the Province of Tarlac
can only recover fifty percent (50%) of P203,300.00 from
PNB.

In isolated cases where the checks were deposited in an

account other than that of the payees on the strength of
forged indorsements, we held the collecting bank solely
liable for the whole amount of the checks involved for having
indorsed the same. In Republic Bank v. Ebrada, the check
was properly issued by the Bureau of Treasury. While in
Banco de Oro Savings and Mortgage Bank (Banco de Oro) v.
Equitable Banking Corporation,50 Banco de Oro admittedly
issued the checks in the name of the correct payees. And in
Traders Royal Bank v. Radio Philippines Network, Inc.,51 the
checks were issued at the request of Radio Philippines
Network, Inc. from Traders Royal Bank.1avvphi1
However, in BPI v. CA we said that the drawee bank is liable
for 60% of the amount on the face of the negotiable
instrument and the collecting bank is liable for 40%. We also
noted the relative negligence exhibited by two banks, to wit:

The collecting bank, Associated Bank, shall be liable to PNB

for fifty (50%) percent of P203,300.00. It is liable on its
warranties as indorser of the checks which were deposited
by Fausto Pangilinan, having guaranteed the genuineness of
all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also
remiss in its duty to ascertain the genuineness of the
payees indorsement.53
A reading of the facts of the two immediately preceding
cases would reveal that the reason why the bank or
institution which issued the check was held partially liable for
the amount of the check was because of the negligence of
these parties which resulted in the issuance of the checks.

Both banks were negligent in the selection and supervision

of their employees resulting in the encashment of the forged
checks by an impostor. Both banks were not able to
overcome the presumption of negligence in the selection and
supervision of their employees. It was the gross negligence
of the employees of both banks which resulted in the fraud
and the subsequent loss. While it is true that petitioner BPIs
negligence may have been the proximate cause of the loss,
respondent CBCs negligence contributed equally to the
success of the impostor in encashing the proceeds of the
forged checks. Under these circumstances, we apply Article
2179 of the Civil Code to the effect that while respondent
CBC may recover its losses, such losses are subject to
mitigation by the courts. (See Phoenix Construction Inc. v.
Intermediate Appellate Courts
Considering the comparative negligence of the two (2)
banks, we rule that the demands of substantial justice are
satisfied by allocating the loss of P2,413,215.16 and the
costs of the arbitration proceeding in the amount of
P7,250.00 and the cost of litigation on a 60-40 ratio.
Similarly, we ruled in Associated Bank v. CA that the issuing
institution and the collecting bank should equally share the
liability for the loss of amount represented by the checks
concerned due to the negligence of both parties:
The Court finds as reasonable, the proportionate sharing of
fifty percent-fifty percent (50%-50%). Due to the negligence
of the Province of Tarlac in releasing the checks to an
unauthorized person (Fausto Pangilinan), in allowing the
retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly
ascertaining why the retired hospital cashier was collecting
checks for the payee hospital in addition to the hospitals

In the instant case, the trial court correctly found Allied

negligent in issuing the managers check and in transmitting
it to Santos without even a written authorization. In fact,
Allied did not even ask for the certificate evidencing the
money market placement or call up Lim Sio Wan at her
residence or office to confirm her instructions. Both actions
could have prevented the whole fraudulent transaction from
unfolding.
ALLIEDS
NEGLIGENCE
MUST
BE
CONSIDERED AS THE PROXIMATE CAUSE OF THE
RESULTING LOSS.
To reiterate, had Allied exercised the diligence due from a
financial institution, the check would not have been issued
and no loss of funds would have resulted. In fact, there
would have been no issuance of indorsement had there been
no check in the first place.
3)
THE LIABILITY
OF ALLIED,
HOWEVER, IS
CONCURRENT WITH THAT OF METROBANK AS THE LAST
INDORSER OF THE CHECK. When Metrobank indorsed the
check in compliance with the PCHC Rules and Regulations55
without verifying the authenticity of Lim Sio Wans
indorsement and when it accepted the check despite the fact
that it was cross-checked payable to payees account
only,56 its negligent and cavalier indorsement contributed to
the easier release of Lim Sio Wans money and perpetuation
of the fraud. Given the relative participation of Allied and
Metrobank to the instant case, both banks cannot be
adjudged as equally liable. Hence, the 60:40 ratio of the
liabilities of Allied and Metrobank, as ruled by the CA, must
be upheld.
FCC, having no participation in the negotiation of the check
and in the forgery of Lim Sio Wans indorsement, can raise
the real defense of forgery as against both banks.
As to Producers Bank, Allied Banks argument that Producers
Bank must be held liable as employer of Santos under Art.
2180 of the Civil Code is erroneous. Art. 2180 One also

cannot apply the principle of subsidiary liability in Art. 103 of

the Revised Penal Code in the instant case.
As to the claim that there was unjust enrichment on the part
of Producers Bank, the same is correct. Allied correctly
claims in its petition that Producers Bank should reimburse
Allied for whatever judgment that may be rendered against it
pursuant to Art. 22 of the Civil Code, which provides: "
The above provision of law was clarified in Reyes v. Lim,
where we ruled that "[t]here is unjust enrichment when a
person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against
the fundamental principles of justice, equity and good
conscience."58
In Tamio v. Ticson, we further clarified the principle of unjust
enrichment, thus: "Under Article 22 of the Civil Code, there is
unjust enrichment when (1) a person is unjustly benefited,
and (2) such benefit is derived at the expense of or with
damages to another."59
In the instant case, Lim Sio Wans money market placement
in Allied Bank was pre-terminated and withdrawn without her
consent. Moreover, the proceeds of the placement were
deposited in Producers Banks account in Metrobank without
any justification. In other words, there is no reason that the
proceeds of Lim Sio Wans placement should be deposited in
FCCs account purportedly as payment for FCCs money
market placement and interest in Producers Bank. With such
payment, Producers Banks indebtedness to FCC was
extinguished, thereby benefitting the former. Clearly,
Producers Bank was unjustly enriched at the expense of Lim
Sio Wan. Based on the facts and circumstances of the case,
Producers Bank should reimburse Allied and Metrobank for
the amounts the two latter banks are ordered to pay Lim Sio
Wan.
It cannot be validly claimed that FCC, and not Producers
Bank, should be considered as having been unjustly
enriched. It must be remembered that FCCs money market
placement with Producers Bank was already due and
demandable; thus, Producers Banks payment thereof was
justified. FCC was entitled to such payment. As earlier
stated, the fact that the indorsement on the check was
forged cannot be raised against FCC which was not a part in
any stage of the negotiation of the check. FCC was not
unjustly enriched.
From the facts of the instant case, we see that Santos could
be the architect of the entire controversy. Unfortunately,
since summons had not been served on Santos, the courts
have not acquired jurisdiction over her.60 We, therefore,
cannot ascribe to her liability in the instant case.
Clearly, Producers Bank must be held liable to Allied and
Metrobank for the amount of the check plus 12% interest per
annum, moral damages, attorneys fees, and costs of suit
which Allied and Metrobank are adjudged to pay Lim Sio Wan
based on a proportion of 60:40.
WHEREFORE, premises considered, the decision appealed
from is MODIFIED. Judgment is rendered ordering and
sentencing defendant-appellant Allied Banking Corporation

to pay sixty (60%) percent and defendant-appellee

Metropolitan Bank and Trust Company forty (40%) of the
amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages,
attorneys fees and costs of suit adjudged shall likewise be
paid by defendant-appellant Allied Banking Corporation and
defendant-appellee Metropolitan Bank and Trust Company in
the same proportion of 60-40. Except as thus modified, the
decision appealed from is AFFIRMED.

amount remained unpaid, despite the transfer of

the title to the property to respondent.
Despite repeated demands, petitioners failed to collect the
amounts they claimed from respondent. Hence, the
Complaint for Sum of Money With Damages
-

DELA CRUZ V. CONCEPCION

(Contract to Sell Antipolo Property)
FACTS: Dela Cruz (as vendors) entered into a Contract to
Sell with Concepcion (as vendee) involving a house and lot in
Antipolo City for a consideration of P2m subject to the
following terms and conditions:
a)
b)
c)
d)

e)

f)

That an earnest money of P100k shall be paid

immediately;
That a full DP of 400k shall be paid on February
29, 1996;
That 500k shall be paid on or before May 5, 1996;
and
That the bal of 1m shall be paid on installment
with interest of (18%) per annum or (1-1/2 %)
interest per month, based on the diminishing
balance, compounded monthly, effective May 6,
1996. The interest shall continue to run until the
whole obligation shall have been fully paid. The
whole 1m Pesos shall be paid within three years
from May 6, 1996;
That the agreed monthly amortization of 50k
principal and interest included, must be paid to the
Vendors, without need of prior demand, on or
before May 6, 1996, and every month thereafter.
Failure to pay the monthly amortization on time, a
penalty equal to Five Percent (5%) of the amount
due shall be imposed, until the account is updated.
In addition, a penalty of One Hundred Pesos per
day shall be imposed until the account is updated;
That after receipt of the full payment, the Vendors
shall execute the necessary Absolute Deed of Sale
covering the house and lot mentioned above x x
x4

Concepcion paid the entire amount of 2m and Before

respondent issued the P500,000.00 replacement check,
she told petitioners that based on the computation
of her accountant as of July 6, 1997, her unpaid
obligation which includes interests and penalties
was only P200,000.00.6
Petitioners agreed with respondent and said "if
P200,000.00 is the correct balance, it is okay with
us."7
the title to the property was transferred
Petitioners later reminded respondent to pay
P209k w/I 3mos. They claimed that the said

During the presentation of the parties evidence, in

addition to documents showing the statement of
her paid obligations, respondent presented a
receipt purportedly indicating payment of the
remaining balance of P200k to Adoracion
Losloso (Losloso) who allegedly received the
same on behalf of petitioners.

RTC in favor of respondent

evidence formally offered by petitioners have not
actually been marked as none of the markings
were recorded.
no basis to grant their claims, especially since the
amount claimed in the complaint is different from
that testified to. The court, on the other hand,
granted respondents counterclaim.
CA affirmed but deleted award of moral damages and
attorneys fees in favor of respondent.
the evidence presented by petitioners cannot be
given credence in determining the correct liability
of respondent. Considering that the purchase price
had been fully paid by respondent ahead of the
scheduled date agreed upon by the parties,
petitioners were not awarded the excessive
penalties and interests.
respondents liability is limited to P200,000.00 as
claimed by respondent and originally admitted by
petitioners.
This amount, however, had already been
paid by respondent and received by
petitioners representative. Finally, the CA
pointed out that the RTC did not explain in its
decision why moral damages and attorneys fees
were awarded. Considering also that bad faith
cannot be attributed to petitioners when they
instituted the collection suit, the CA deleted the
grant of their counterclaims.
ISSUES:
(1) "the trial court erred in dismissing the complaint
on the ground that plaintiff failed to formally offer
their evidence as defendant judicially admitted in
her answer with compuls[o]ry counterclaim her
outstanding obligation still due to plaintiffs and
need no proof.
(2)

the trial court erred in dismissing the complaint for

alleged failure of plaintiffs to present computation
of the amount being claimed as defendant
judicially admitted having received the demand

letter dated october 22, 1997 with computation of

the balance due.
(3)

the trial court erred in dismissing the complaint on

the ground that the defendant fully paid the claims
of plaintiffs based on the alleged receipt of
payment by adoracion losloso from ana
marie concepcion maglasang which has
nothing to do with the judicially admitted
obligation of appellee."23

Invoking the rule on judicial admission, petitioners insist that

respondent admitted in her Answer with Compulsory
Counterclaim that she had paid only a total amount of P2
million and that her unpaid obligation amounts to
P200,000.00. They thus maintain that the RTC and the CA
erred in concluding that said amount had already been paid
by respondent. Petitioners add that respondents total
liability as shown in the latters statement of account was
erroneously computed for failure to compound the monthly
interest agreed upon. Petitioners also claim that the RTC and
the CA erred in giving credence to the receipt presented by
respondent to show that her unpaid obligation had already
been paid having been allegedly given to a person who was
not armed with authority to receive payment.
HELD:
It is undisputed that the parties entered into a contract to
sell a house and lot for a total consideration of P2 million.
Considering that the property was payable in installment,
they likewise agreed on the payment of interest as well as
penalty in case of default. It is likewise settled that
respondent was able to pay the total purchase price of P2
million ahead of the agreed term. Afterwhich, they agreed on
the remaining balance by way of interest and penalties
which is P200,000.00. Considering that the term of
payment was not strictly followed and the purchase price
had already been fully paid by respondent, the latter
presented to petitioners her computation of her liabilities for
interests and penalties which was agreed to by petitioners.
Petitioners also manifested their conformity to the
statement of account prepared by respondent.
In paragraph (9) of petitioners Complaint, they stated that:
9) That the Plaintiffs answered the Defendant as follows: "if
P200,000 is the correct balance, it is okay with us." x x
x.27
But in paragraph (17) thereof, petitioners claimed that
defendants outstanding liability as of November 6, 1997 was
P487,384.15.28 Different amounts, however, were claimed in
their demand letter and in their testimony in court.
With the foregoing factual antecedents, petitioners cannot
be permitted to assert a different computation of the correct
amount of respondents liability.

It is noteworthy that in answer to petitioners claim of her

purported unpaid obligation, respondent admitted in her
Answer with Compulsory Counterclaim that she paid a total
amount of P2 million representing the purchase price of the
subject house and lot. She then manifested to petitioners
and conformed to by respondent that her only balance was
P200,000.00. Nowhere in her Answer did she allege the
defense of payment. However, during the presentation of
her evidence, respondent submitted a receipt to
prove that she had already paid the remaining
balance. Both the RTC and the CA concluded that
respondent had already paid the remaining balance of
P200,000.00. Petitioners now assail this, insisting that the
court should have maintained the judicial admissions of
respondent in her Answer with Compulsory Counterclaim,
especially as to their agreed stipulations on interests and
penalties as well as the existence of outstanding obligations.
When the issue is tried without the objection of the parties, it
should be treated in all respects as if it had been raised in
the pleadings. On the other hand, when there is an objection,
the evidence may be admitted where its admission will not
prejudice him.
Thus, while respondent judicially admitted in her Answer that
she only paid P2 million and that she still owed petitioners
P200,000.00, respondent claimed later and, in fact,
submitted an evidence to show that she already paid the
whole amount of her unpaid obligation. It is noteworthy that
when respondent presented the evidence of payment,
petitioners did not object thereto. When the receipt was
formally offered as evidence, petitioners did not manifest
their objection to the admissibility of said document on the
ground that payment was not an issue. Apparently,
petitioners only denied receipt of said payment and assailed
the authority of Losloso to receive payment. Since there was
an implied consent on the part of petitioners to try the issue
of payment, even if no motion was filed and no amendment
of the pleading has been ordered, the RTC cannot be faulted
for admitting respondents testimonial and documentary
evidence to prove payment.
As stressed by the Court in Royal Cargo Corporation v. DFS
Sports Unlimited, Inc.
ISSUE: W/N respondents obligation had already been
extinguished by payment. Yes.
HELD:
Respondents obligation consists of payment of a sum of
money. In order to extinguish said obligation, payment
should be made to the proper person as set forth in Article
1240 of the Civil Code, to wit: See 1240
Payment made by the debtor to the person of the creditor
or to one authorized by him or by the law to receive it
extinguishes the obligation. When payment is made to the
wrong party, however, the obligation is not extinguished as
to the creditor who is without fault or negligence even if the

debtor acted in utmost good faith and by mistake as to the

person of the creditor or through error induced by fraud of a
third person.
In general, a payment in order to be effective to discharge
an obligation, must be made to the proper person. Thus,
payment must be made to the obligee himself or to an agent
having authority, express or implied, to receive the particular
payment. Payment made to one having apparent authority
to receive the money will, as a rule, be treated as though
actual authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to act for
the creditor, it will work a discharge. The receipt of money
due on a judgment by an officer authorized by law to accept
it will, therefore, satisfy the debt.
Admittedly, payment of the remaining balance was not made
to the creditors themselves. Rather, it was allegedly made to
a certain Losloso. Respondent claims that Losloso was the
authorized agent of petitioners, but the latter dispute it.
Loslosos authority to receive payment
embodied in petitioners Letter addressed to
respondent where they informed respondent of the
amounts they advanced for the payment of the
1997 real estate taxes.
In said letter, petitioners reminded respondent of
her remaining balance, together with the amount
of taxes paid. Taking into consideration the busy
schedule of respondent, petitioners advised the
latter to leave the payment to a certain "Dori" who
admittedly is Losloso, or to her trusted helper. This
is an express authority given to Losloso to
receive payment.
following admissions of plaintiff-appellant Atty.
Miniano dela Cruz
Thus, as shown in the receipt signed by
petitioners agent and pursuant to the authority
granted by petitioners to Losloso, payment made
to the latter is deemed payment to petitioners. We
find no reason to depart from the RTC and the CA
conclusion that payment had already been made
and that it extinguished respondent's obligations.
1245- DACION IN PAYMENT

ESTANISLAO V. EASTWEST
BANKING CORP
(replevin with damages)
FACTS: On July 24, 1997, petitioners obtained a loan from
the respondent in the amount of P3,925,000.00 evidenced
by a promissory note and secured by two deeds of chattel
mortgage dated July 10, 1997: one covering two dump
trucks and a bulldozer to secure the loan amount of
P2,375,000.00, and another covering bulldozer and a wheel
loader to secure the loan amount of P1,550,000.00.
Petitioners defaulted in the amortizations and the entire
obligation became due and demandable.

EastWest
filed a suit for replevin with damages, praying that
the equipment covered by the first deed of chattel
mortgage be seized and delivered to it. In the
alternative, respondent prayed that petitioners be
ordered to pay the outstanding principal amount of
P3,846,127.73 with 19.5% interest per annum
reckoned from judicial demand until fully paid,
exemplary damages of P50,000.00, attorneys fees
equivalent to 20% of the total amount due, other
expenses and costs of suit.
-

moved for suspension of the proceedings on

account of an earnest attempt to arrive at an
amicable settlement of the case. During the
course of negotiations, a deed of assignment
dated August 16, 2000 was drafted by the
respondent, which provides in part, that:

x x x the ASSIGNOR is indebted to the ASSIGNEE in the

aggregate sum of (P7,305,459.52) inclusive of accrued
interests and penalties as of August 16, 2000, and in full
payment thereof, the ASSIGNOR does hereby ASSIGN,
TRANSFER and CONVEY unto the ASSIGNEE those motor
vehicles, with all their tools and accessories, more
particularly described as follows:
1.
Isuzu Dump Truck
2.
Isuzu Dump Truck
3.
Caterpillar Bulldozer
That the ASSIGNEE hereby accepts the assignment in full
payment of the above-mentioned debt. Petitioners affixed
their signatures on the deed of assignment. However, for
some unknown reason, respondent banks duly authorized
representative failed to sign the deed.
On October 6, 2000 and March 8, 2001, respectively,
petitioners completed the delivery of the heavy equipment
mentioned in the deed of assignment two dump trucks and a
bulldozer to respondent, which accepted the same without
protest or objection.
However, on June 20, 2001, respondent filed a manifestation
and motion to admit an amended complaint for the seizure
and delivery of two more heavy equipment the bulldozer and
wheel loader which are covered under the second deed of
chattel mortgage.
Respondent claimed that
its representative inadvertently failed to include
the second deed of chattel mortgage among the
documents forwarded to its counsel when the
original complaint was being drafted.
petitioners were given a chance to submit a
refinancing scheme that would allow them to keep
the remaining two heavy equipment, but they
failed to come up with such a scheme despite
repeated promises to do so.
amended complaint for replevin alleged that
petitioners outstanding indebtedness as of June
14, 2001 stood at P4,275,919.61 which is more or

less equal to the aggregate value of the additional

units of heavy equipment sought to be recovered.
It also prayed that, in the event the two heavy
equipment could not be replevied, petitioners be
ordered to pay the outstanding sum of
P3,846,127.73 with 19.5% interest per annum
reckoned from January 24, 1998, compound
interest, exemplary damages of P50,000.00,
attorneys fees equivalent to 20% of the total
amount due, other expenses and costs of suit.
Petitioners sought to dismiss the amended complaint.
their previous payments on loan amortizations, the
execution of the deed of assignment on August 16,
2000, and respondents acceptance of the three
units of heavy equipment, had the effect of full
payment or satisfaction of their total outstanding
obligation which is a bar on respondent bank from
recovering any more amounts from them.
TC dismissed the amended complaint for lack of merit.
deed of assignment and the petitioners delivery of
the heavy equipment effectively extinguished
petitioners total loan obligation.
Respondent was estopped from further collecting
from the petitioners when it accepted, without any
protest, delivery of the three units of heavy
equipment as full and complete satisfaction of the
petitioners total loan obligation.
failed to timely rectify its alleged mistake in the
original complaint and deed of assignment, taking
almost a year to act.
CA reversed the TCs decision. The reversal of the lower
courts decision hinges on:
(1) the appellate courts finding that the deed of assignment
cannot bind the EastWest because it did not sign the same;
the assignment contract was never perfected although it was
prepared and drafted by the respondent;
(2) EastWest was not estopped by its own declarations in the
deed of assignment, because such declarations were the
result of ignorance founded upon an innocent mistake and
plain oversight on the part of Eastwests staff in the banks
loan operations department, who failed to forward the
complete documents pertaining to petitioners account to the
banks legal department, such that when the original
complaint for replevin was prepared, the second deed of
chattel mortgage covering two other pieces of heavy
equipment was inadvertently excluded;
(3) Estanislaos are aware that there were five pieces of
heavy equipment under chattel mortgage for an outstanding
balance of over P7 million; and
(4) the appellate court held that even after the delivery of
the heavy equipment covered by the deed of assignment,
Estanislao continued to negotiate with Eastwest on a
possible refinancing scheme that will enable them to retain
the two other units of heavy equipment still in their
possession and which are the subject of the second deed of
chattel mortgage.
Petitioners argue that CA erred
a)
in ordering the payment of the principal obligation in a
replevin suit which it erroneously treated as a collection
case;

b)

c)

the deed of assignment is binding between the parties

although it was not signed by the respondent,
constituting as it did an offer which they validly
accepted; and
the respondent is estopped from collecting or
foreclosing on the second deed of chattel mortgage.

Respondent bank argues

a)
the deed of assignment produced no legal effect
between the parties for failure of the respondent to
sign the same;
b)
the deed was founded on a mistake on its part because
it honestly believed that only one chattel mortgage had
been constituted to secure the petitioners obligation;
c)
the non-inclusion of the second deed of chattel
mortgage in the original complaint was a case of plain
oversight on the part of the loan operations unit of
respondent bank, which failed to forward to the legal
department the complete documents pertaining to the
petitioners loan account;
d)
the continued negotiations in August 2001 between the
parties, after delivery of the three units of heavy
equipment, proves that petitioners acknowledged their
continuing obligations to respondent under the second
deed of mortgage; and, e) the deed of assignment did
not have the effect of novating the original loan
obligation.
ISSUE: Did the deed of assignment which expressly provides
that the transfer and conveyance to respondent of the three
units of heavy equipment, and its acceptance thereof, shall
be in full payment of the petitioners total outstanding
obligation to the latter operate to extinguish petitioners debt
to respondent, such that the replevin suit could no longer
prosper? Yes.
HELD:
PURE REPLEVIN SUIT, AND NOT A COLLECTION CASE.
The appellate court erroneously denominated the replevin
suit as a collection case. A reading of the original and
amended complaints show that what the respondent
initiated was a pure replevin suit, and not a collection case.
Recovery of the heavy equipment was the
principal aim of the suit; payment of the total
obligation was merely an alternative prayer which
respondent sought in the event manual delivery of
the heavy equipment could no longer be made.
Replevin, broadly understood, is both a form of principal
remedy and a provisional relief. It may refer either to the
action itself, i.e., to regain the possession of personal
chattels being wrongfully detained from the plaintiff by
another, or to the provisional remedy that would allow the
plaintiff to retain the thing during the pendency of the action
and hold it pendente lite.
The deed of assignment was a perfected agreement which
extinguished petitioners total outstanding obligation to the
respondent. The deed explicitly provides that the assignor
(petitioners), in full payment of its obligation in the amount
of P7,305,459.52, shall deliver the three units of heavy
equipment to the assignee (respondent), which accepts the
assignment in full payment of the above-mentioned debt.

This could only mean that should petitioners complete the

delivery of the three units of heavy equipment covered by
the deed, respondents credit would have been satisfied in
full,
and
petitioners
aggregate
indebtedness
of
P7,305,459.52 would then be considered to have been paid
in full as well.
NATURE OF THE ASSIGNMENT WAS A DATION IN
PAYMENT, whereby property is alienated to the creditor in
satisfaction of a debt in money. Such transaction is governed
by the law on sales.
Even if we were to consider the agreement as a
Compromise Agreement, there was no need for
respondent banks signature on the same, because
with the delivery of the heavy equipment which
the latter accepted, the agreement was
consummated.
Respondents approval may be inferred from its
unqualified acceptance of the heavy equipment.
CONSENT TO CONTRACTS is manifested by
the meeting of the offer and the acceptance of the
thing
the cause which are to constitute the contract;
the offer must be certain and the acceptance
absolute.
The acceptance of an offer must be made known
to the offeror, and unless the offeror knows of the
acceptance, there is no meeting of the minds of
the parties, no real concurrence of offer and
acceptance. Upon due acceptance, the contract is
perfected, and from that moment the parties are
bound not only to the fulfillment of what has been
expressly stipulated but also to all the
consequences which, according to their nature,
may be in keeping with good faith, usage and law.
With its years of banking experience, resources and
manpower, respondent bank is presumed to be familiar with
the implications of entering into the deed of assignment,
whose terms are categorical and left nothing for
interpretation. The alleged non-inclusion in the deed of
certain units of heavy equipment due to inadvertence, plain
oversight or mistake, is tantamount to inexcusable manifest
negligence, which should not invalidate the juridical tie that
was created. Respondent is presumed to have maintained a
high level of meticulousness in its dealings with petitioners.
The business of a bank is affected with public interest; thus,
it makes a sworn profession of diligence and meticulousness
in giving irreproachable service.
Besides, respondents protestations of mistake and plain
oversight are self-serving. The evidence show that
respondent did not raise any objections nor make any move
to question, invalidate or rescind the deed of assignment. It
was not until June 20, 2001 that respondent raised the issue
of its alleged mistake by filing an amended complaint for
replevin involving different chattels, although founded on the
same principal obligation.
The legal presumption is always on the validity of
contracts.[12] In order to judge the intention of the
contracting parties, their contemporaneous and subsequent

acts shall be principally considered.[13] When respondent

accepted delivery of all three units of heavy equipment
under the deed of assignment, there could be no doubt that
it intended to be bound under the agreement. Since the
agreement was consummated by the delivery on March 8,
2001 of the last unit of heavy equipment under the deed,
petitioners are deemed to have been released from all their
obligations to respondent.
Since there is no more credit to collect, no principal
obligation to speak of, then there is no more second deed of
chattel mortgage that may subsist. A chattel mortgage
cannot exist as an independent contract since its
consideration is the same as that of the principal contract.
Being a mere accessory contract, its validity would depend
on the validity of the loan secured by it.[14] This being so,
the amended complaint for replevin should be dismissed,
because the chattel mortgage agreement upon which it is
based had been rendered ineffectual.

ONG V. ROBAN LENDING 557 S

516
FACTS:

On different dates from July 14, 1999 to March 20,

2000, petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from
Roban Lending Corporation (respondent) in the total
amount of P4M. These loans were secured by a real
estate mortgage on petitioners parcels of land located
in Binauganan, Tarlac City.

On February 12, 2001, petitioners and respondent

executed an Amendment to Amended Real Estate
Mortgage consolidating their loans inclusive of charges
thereon which totaled P5.9m. On even date, the parties
executed a Dacion in Payment Agreement wherein
petitioners assigned the properties to respondent in
settlement of their total obligation, and a Memorandum
of Agreement reading:
That the FIRST PARTY [Roban Lending Corporation] and the
SECOND PARTY [the petitioners] agreed to consolidate and
restructure all aforementioned loans, which have been all
past due and delinquent since April 19, 2000, and
outstanding obligations totaling P5.9m. The SECOND PARTY
hereby sign [sic] another promissory note in the amount of
P5.9m.(a copy of which is hereto attached and forms xxx an
integral part of this document), with a promise to pay the
FIRST PARTY in full within one year from the date of the
consolidation and restructuring, otherwise the SECOND
PARTY agree to have their DACION IN PAYMENT agreement,
which they have executed and signed today in favor of the
FIRST PARTY be enforced.

In April 2002 (the day is illegible), petitioners filed a

civil complaint
before the RTC for declaration of
mortgage contract as abandoned, annulment of deeds,
illegal exaction, unjust enrichment, accounting, and

damages, alleging that the MoA and the Dacion in

Payment executed are void for being pactum
commissorium.

a)

b)
c)

d)
e)

Petitioners alleged that

the loans extended to them from July 14, 1999 to March
20, 2000 were founded on several uniform promissory
notes, which provided for 3.5% monthly interest rates,
5% penalty per month on the total amount due and
demandable, and a further sum of 25% attorneys fees
thereon,[8] and in addition, respondent exacted certain
sums denominated as EVAT/AR.
additional charges as illegal, iniquitous, unconscionable,
and revolting to the conscience as they hardly allow
any borrower any chance of survival in case of default.
previously made payments on their loan accounts, but
because of the illegal exactions thereon, the total
balance appears not to have moved at all, hence,
accounting was in order.
Declaring the REM Contract and its amendments x x x as null
and void and without legal force and effect for
having been renounced, abandoned, and given
up;
Declaring the MoA and Dacion in Payment null and void for
being pactum commissorium;
Declaring the interests, penalties, Evat [sic] and attorneys
fees assessed and loaded into the loan accounts
of the plaintiffs with defendant as unjust,
iniquitous, unconscionable and illegal and
therefore, stricken out or set aside;
Ordering an accounting on plaintiffs loan accounts to
determine the true and correct balances on their
obligation against legal charges only; and
Ordering defendant to [pay] to the plaintiffs: --Moral
damages in an amount not less than P100,000.00
and exemplary damages of P50,000.00;Attorneys
fees in the amount of P50,000.00 plus P1,000.00
appearance fee per hearing; andThe cost of
suit.mas well as other just and equitable reliefs.
respondent maintained the legality of its transactions with
petitioners, -If the voluntary execution of the MoA and Dacion in
Payment Agreement novated the Real Estate Mortgage
then the allegation of Pactum Commissorium has no
more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as
it is recognized under Art. 1245 of the Civil Code as a
special form of payment whereby the debtor-Plaintiffs
alienates their property to the creditor-Defendant in
satisfaction of their monetary obligation;
The accumulated interest and other charges which were
computed for more than two (2) years would stand
reasonable and valid taking into consideration [that]
the principal loan is 4m and if indeed it became beyond
the Plaintiffs capacity to pay then the fault is attributed
to them and not the Defendant
RTC
The counsel[s] agreed to reset this case on April 14, 2004, at
10:00 oclock in the morning. However, the counsels are
directed to be ready with their memorand[a] together with
all the exhibits or evidence needed to support their
respective positions which should be the basis for the

a)

judgment on the pleadings if the parties fail to settle the

case in the next scheduled setting.
At the scheduled hearing, both counsels appeared but only
the counsel of Roban Lending filed a memorandum.
there was no pactum commissorium, complaint dismissed.
CA [W]hile the trial court in its decision stated that it was
rendering judgment on the pleadings, what it actually
rendered was a summary judgment. A judgment on the
pleadings is proper when the answer fails to tender an issue,
or otherwise admits the material allegations of the adverse
partys pleading. However, a judgment on the pleadings
would not have been proper in this case as the answer
tendered an issue, i
.e. the validity of the MOA and DPA.
On the other hand, a summary judgment may be rendered
by the court if the pleadings, supporting affidavits, and other
documents show that, except as to the amount of damages,
there is no genuine issue as to any material fact.
upheld the RTC decision that there was no pactum
commissorium.
-

MR having been denied petitioners filed the

instant Petition for Review on Certiorari,[28]
faulting the Court of Appeals for having committed
a clear and reversible error

ISSUES:
when it failed and refused to apply procedural requisites
which would warrant the setting aside of the summary
judgment in violation of appellants right to due process;

b)

when it failed to consider that trial in this case is necessary

because the facts are very much in dispute;

c)

when it failed and refused to hold that the memorandum of

agreement (moa) and the dacion en pago agreement
(dpa) were designed to circumvent the law against
pactum commissorium; and

d)

when it failed to consider that the memorandum of

agreement (moa) and the dacion en pago (dpa) are null
and void for being contrary to law and public policy.

HELD:
Both parties admit the execution and contents of MoA and
Dacion in Payment. They differ, however, on whether both
contracts constitute pactum commissorium or dacion en
pago.
MoA
and
Dacion
in
Payment
constitute
pactum
commissorium, which is prohibited under Article 2088 of the
Civil Code which provides:
The creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void.

The ELEMENTS OF PACTUM COMMISSORIUM, which

enables the mortgagee to acquire ownership of the
mortgaged property without the need of any foreclosure
proceedings,are:
(1) there should be a property mortgaged by way of
security for the payment of the principal
obligation, and
(2) there should be a stipulation for automatic
appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal
obligation within the stipulated period.
In the case at bar, the MoA and the Dacion in Payment
contain no provisions for foreclosure proceedings nor
redemption. Under the MoA
failure by the petitioners to pay their debt within
the one-year period gives respondent the right to
enforce the Dacion in Payment transferring to it
ownership of the properties covered by TCT No.
297840. Respondent, in effect, automatically
acquires ownership of the properties upon
petitioners failure to pay their debt within the
stipulated period.
Respondent
law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to
the creditor in satisfaction of a monetary
obligation.
In TRUE DACION EN PAGO, the assignment of the property
extinguishes the monetary debt. In the case at bar, the
alienation of the properties was by way of security, and not
by way of satisfying the debt. The Dacion in Payment did not
extinguish petitioners obligation to respondent. On the
contrary, under the MoA executed on the same day as the
Dacion in Payment, petitioners had to execute a promissory
note for P5.9m which they were to pay within one year.
Respondent cites Solid Homes, Inc. v. Court of Appeals where
this Court upheld a MoA/Dacion en Pago. That case did not
involve the issue of pactum commissorium.
That the questioned contracts were freely and voluntarily
executed by petitioners and respondent is of no moment,
pactum commissorium being void for being prohibited by
law.
Respecting the charges on the loans, courts may reduce
interest rates, penalty charges, and attorneys fees if they are
iniquitous or unconscionable.
This Court, based on existing jurisprudence, finds the
monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per annum. This
Court finds too the penalty fee at the monthly rate of 5%
(60% per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added
to and becoming part of the principal and likewise bearing
interest at the same rate, compounded monthly[42]
unconscionable and reduces it to a yearly rate of 12% of the

amount due, to be computed from the time of demand.[43]

This Court finds the attorneys fees of 25% of the principal,
interests and interests thereon, and the penalty fees
unconscionable, and thus reduces the attorneys fees to 25%
of the principal amount only.[44]
The prayer for accounting in petitioners complaint requires
presentation of evidence, they claiming to have made partial
payments on their loans, vis a vis respondents denial
thereof.[45] A remand of the case is thus in order.
SUMMARY JUDGMENT NOT PROPER. Prescinding from the
above disquisition, the trial court and the Court of Appeals
erred in holding that a summary judgment is proper. A
summary judgment is permitted only if there is no genuine
issue as to any material fact and a moving party is entitled
to a judgment as a matter of law.[46] A summary judgment
is proper if, while the pleadings on their face appear to raise
issues, the affidavits, depositions, and admissions presented
by the moving party show that such issues are not genuine.
[47] A genuine issue, as opposed to a fictitious or contrived
one, is an issue of fact that requires the presentation of
evidence.[48] As mentioned above, petitioners prayer for
accounting requires the presentation of evidence on the
issue of partial payment.
But neither is a judgment on the pleadings proper. A
judgment on the pleadings may be rendered only when an
answer fails to tender an issue or otherwise admits the
material allegations of the adverse partys pleadings. In the
case at bar, respondents Answer with Counterclaim disputed
petitioners claims that the MoA and Dation in Payment are
illegal and that the extra charges on the loans are
unconscionable. Respondent disputed too petitioners
allegation of bad faith.
WHEREFORE, the challenged Court of Appeals Decision is
REVERSED and SET ASIDE. The Memorandum of Agreement
and the Dacion in Payment executed by petitioner- spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are
declared NULL AND VOID for being pactum commissorium.

TYPINCO V. LIM (600K USD)

FACTS: Sometime between December 1996 and February
1997, respondents-spouses Lina Wong Lim (Lina) and
Johnson Sychingho (Johnson) borrowed from petitioner
Joseph Typingco (Typingco) the sum of US$600k which was
later restructured, payable on or before December 31, 1997,
under a promissory note executed by
the spouses and
co-signed by their children-co-respondents Jerry
Sychingho (Jerry) and Jackson Sychingho (Jackson)
as sureties.
Following their default in payment, sureties
Typingco via dacion en pago their house
Greenhills, San Juan (subject property), in the
and her sons, after first paying respondent

conveyed to
and lot in
name of Lina
(FEBTC) the

balance of a promissory note to clear the title of a Real

Estate Mortgage annotated thereon in favor of FEBTC.
Typingcos repeated demands for the delivery of the owners
duplicate copy of the title, the last of which was by letter of
March 2, 1998, having remained unheeded, he filed a
complaint for specific performance and recovery of the title
against respondents. Sychinghos and FEBTC before the
Quezon City Regional Trial Court (RTC).
Respondents Sychinghos
it was FEBTC that was unlawfully withholding
delivery of the owners duplicate copy of the title
despite full payment of the mortgage loan with it.
FEBTC, which was absorbed after a merger by (BPI),
contended that
spouses Lina and Johnson had unsettled
obligations as sureties for JSY International
Philippines, Inc. and J&J Brothers Corporation
under Comprehensive Surety Agreements which
they had executed authorizing FEBTC to retain and
proceed against their properties in its possession;
that the REM annotated on the title was a
continuing security for their present and future
obligations;
Typingco was not a buyer in good faith, he having
failed to conduct further inquiry on the status of
the subject property given that the mortgage in its
favor was annotated on the title.
At the pre-trial, the parties clarified that the subject matter
of the case was only 1/3 inchoate portion of the subject
property[7] or that pertaining to Lina as co-owner (as the 2/3
belongs to her sons Jerry and Jackson), she being a signatory
to the REM along with her sons, as well as to the
Comprehensive Surety Agreements, along with her husband,
both documents in favor of FEBTC.
RTC dismissed the complaint, holding that
Typingco was bound by the REM in favor of FEBTC
not only because the same was duly annotated on
the title, but also because he failed to verify the
status of the subject property despite his
awareness of the said mortgage.
Petitioner
copy of the REM submitted by BPI is inadmissible,
the witness who identified it having no personal
knowledge of its existence and due execution,
hence,
should not be considered annotated on the
title; and that there was no evidence that
respondents Sychinghos had other unpaid
obligations with FEBTC for which the title should
continue to stand as security.
By Manifestation of June 12, 2008, individual respondents
informed the Court of
Johnsons passing during the proceedings in TC,
and
waiving of the filing of a Comment to the present
petition, given that their position before the trial
and appellate courts[14] is now also petitioners.

BPI+ due execution and authenticity of Exhibit 10, a

notarized instrument, need not be proved unlike that of a
private writing.
ISSUE: W/N respondent Sychinghos had the right to sell or
convey title to the subject property at the time of the dacion
en pago. Yes.
HELD:
DACION EN PAGO is the delivery and transmission of
ownership of another thing by the debtor to the creditor as
an accepted equivalent of performance of an obligation. It
partakes of the nature of a contract of sale, where the thing
offered by the debtor is the object of the contract, while the
debt is the consideration or purchase price.
There having been no previous foreclosure of the REM on the
subject property, respondent Sychinghos ownership thereof
remained intact. Indeed, a mortgage does not affect the
ownership of the property as it is nothing more than a lien
thereon serving as security for a debt. The mortgagee does
not acquire title to the mortgaged real estate unless he
purchases it at a public auction, and it is not redeemed
within the period provided for by the Rules of Court. This
applies a fortiori to the present case where only 1/3, not the
whole, of the subject property was actually encumbered
to
FEBTC.
With respect to whatever amount Lina and her sons may still
owe BPI (then FEBTC), the Court finds that this is not a
concern of petitioner as he is not a party to the loan
documents covering it. Since petitioner agreed to the full
extinguishment of respondents spouses then outstanding
obligation in view of the unconditional conveyance to him of
the subject property, there is a perfected and
enforceable dacion en pago. He should thus enjoy full
entitlement to the subject property.
The question of whether the subject property stands as a
continuing security for any outstanding obligations of Lina
and her sons to BPI (then FEBTC) should not detain the Court
any further. Surrender of the certificate of title will not impair
any existing mortgage on the subject property. It is an
elementary principle in civil law that a REM subsists
notwithstanding changes in ownership, and all subsequent
purchasers of the property must respect the mortgage.
Finally, while the remedy of petitioner is to file a petition in
court, following Presidential Decree No. 1529, to compel then
FEBTC (now BPI) to surrender the owners duplicate copy of
the title to the Register of Deeds of San Juan to facilitate the
issuance of a new title in his name, the Court deems his
action for specific performance and recovery of the title as
substantial compliance with the prescribed procedure. To
require him to institute a new action seeking essentially the
same relief would be to encourage endless litigations and
multiplicity of suits an end abhorrent to the proper
administration of justice.

TAN SHUY V. MAULAWIN

(COPRA & CORN)

FACTS: Petitioner Tan Shuy is engaged in the business of

buying copra and corn in the Fourth District of Quezon
Province. According to Vicente Tan (Vicente), son of
petitioner, whenever they would buy copra or corn from crop
sellers, they would prepare and issue a pesada in their favor.
A PESADA is a document containing details of the
transaction,
including the date of sale,
weight of the crop delivered,
the trucking cost, and the
net price of the crop.
PD meant that the crop delivered had already
been paid for by petitioner.
Guillermo Maulawin (Guillermo), respondent in this case, is
a farmer-businessman engaged in the buying and selling of
copra and corn. Tan Shuy extended a loan to Guillermo in the
amount of 420K. In consideration thereof, Guillermo
obligated himself TO PAY THE LOAN AND TO SELL LUCAD
OR COPRA to petitioner. Below is a reproduction of the
contract:
XXX Inaako ko na isusulit sa kanya ang aking LUCAD at
babayaran ko ang nasabing halaga. Kung hindi ako
makasulit ng LUCAD o makabayad bago sumapit ang ., 19
maaari niya akong ibigay sa may kapangyarihan. Kung ang
pagsisingilan ay makakarating sa Juzgado ay sinasagutan ko
ang lahat ng kaniyang gugol.
Most of the transactions involving Tan Shuy and Guillermo
were coursed through Elena Tan, daughter of petitioner. She
served as cashier in the business of Tan Shuy, who primarily
prepared and issued the pesada. In case of her absence,
Vicente would issue the pesada. He also helped his father in
buying copra and granting loans to customers (copra
sellers). According to Vicente, part of their agreement with
Guillermo was that they would put the annotation sulong on
the pesada when partial payment for the loan was made.
Petitioner alleged that despite repeated demands, Guillermo
remitted only 23K in August 1998 and 5,5K in October
1998, or a total of 28.5K, He claimed that respondent had
an outstanding balance of 391,500. Thus, convinced that
Guillermo no longer had the intention to pay the loan,
petitioner brought the controversy to the Lupon
Tagapamayapa. When no settlement was reached, petitioner
filed a Complaint before the Regional Trial Court (RTC).
Respondent Guillermo countered that he had already paid
the subject loan in full. According to him, he continuously
delivered and sold copra to petitioner from April 1998 to
April 1999. Respondent said they had an oral arrangement
that the net proceeds thereof shall be applied as installment
payments for the loan. He alleged that his deliveries
amounted to 420,537.68 worth of copra. To bolster his
claim, he presented copies of pesadas issued by Elena and
Vicente. He pointed out that the pesadas did not contain the
notation pd, which meant that actual payment of the net
proceeds from copra deliveries was not given to him, but

was instead applied as loan payment. He averred that Tan

Shuy filed a case against him, because petitioner got mad at
him for selling copra to other copra buyers.

that respondents copra deliveries were duly paid for in cash,

and that the pesadas were in fact documentary receipts for
those payments.

RTC: net proceeds from Guillermos copra deliveries

represented in the pesadas, which did not bear the notation
pd should be applied as installment payments for the loan. It
gave weight and credence to the pesadas, as their due
execution and authenticity was established by Elena and
Vicente, children of petitioner. However, the court did not
credit the net proceeds from 12 pesadas, as they were
deliveries for corn and not copra.
Guillermo himself testified that it was the net
proceeds from the copra deliveries that were to
be applied as installment payments for the loan.
total amount of 41,585.25, which corresponded
to the net proceeds from corn deliveries, should be
deducted from the amount of 420,537.68
claimed by Guillermo to be the total value of his
copra deliveries.
respondent had NOT made a full payment for the
loan, as the total creditable copra deliveries
merely amounted to 378,952.43, leaving a
balance of 41,047.57 in his loan.

The defendant further averred that if in the receipts or

pesadas issued by the plaintiff to those who delivered
copras to them there is a notation pd on the total amount of
purchase price of the copras, it means that said amount was
actually paid or given by the plaintiff or his daughter Elena
Tan Shuy to the seller of the copras. To prove his averments
the defendant presented as evidence two (2) receipts or
pesadas issued by the plaintiff to a certain Cario (Exhibits 1
and 2 defendant) showing the notation pd on the total
amount of the purchase price for the copras. Such claim of
the defendant was further bolstered by the testimony of
Apolinario Cario which affirmed that he also sell copras to
the plaintiff Tan Shuy. He also added that he incurred
indebtedness to the plaintiff and whenever he delivered
copras the amount of the copras sold were applied as
payments to his loan. The witness also pointed out that the
plaintiff did not give any official receipts to those who
transact business with him (plaintiff). This Court gave weight
and credence to the documents receipts (pesadas) (Exhibits
3 to 64) offered as evidence by the defendant which does
not bear the notation pd or paid on the total amount of the
purchase price of copras appearing therein. Although said
pesadas were private instrument their execution and
authenticity were established by the plaintiffs daughter
Elena Tan and sometimes by plaintiffs son Vicente Tan. x x x.
[14] (Emphasis supplied)

CA affirmed.
petitioner could have easily belied the existence of
the pesadas and the purpose for which they were
offered in evidence by presenting his daughter
Elena as witness; however, he failed to do so.
Thus, it gave credence to the testimony of
respondent Guillermo in that the net proceeds
from the copra deliveries were applied as
installment payments for the loan.
ISSUES
(1)
(2)

W/N pesadas require authentication before they

can be admitted in evidence, and
Whether the delivery of copra amounted to
installment payments for the loan obtained by
respondents from petitioner.

HELD: petitioner asserts that the pesadas should not have

been admitted in evidence, since they were private
documents that were not duly authenticated. He further
contends that the pesadas were fabricated in order to show
that the goods delivered were copra and not corn. Finally, he
argues that five of the pesadas mentioned in the Formal
Offer of Evidence of respondent were not actually offered.
With regard to the second issue, petitioner argues that
respondent undertook two separate obligations (1) to pay for
the loan in cash and (2) to sell the latters lucad or copra.
Since their written agreement did not specifically provide for
the application of the net proceeds from the deliveries of
copra for the loan, petitioner contends that he cannot be
compelled to accept copra as payment for the loan. He
emphasizes that the pesadas did not specifically indicate
that the net proceeds from the copra deliveries were to be
used as installment payments for the loan. He also claims

HELD:
We found no clear showing that the TC and the CA
committed reversible errors of law in giving credence and
according weight to the pesadas presented by respondents.
According to Rule 132, Section 20 of the Rules of Court,
there are two ways of proving the due execution and
authenticity of a private document, to wit: SEC. 20. Proof of
private document. Before any private document offered as
authentic is received in evidence, its due execution and
authenticity must be proved either:(a) By anyone who saw
the document executed or written; or (b) By evidence of the
genuineness of the signature or handwriting of the
maker.Any other private document need only be identified as
that which it is claimed to be. (21a)
As reproduced above, the trial court found that the due
execution and authenticity of the pesadas were established
by the plaintiffs daughter Elena Tan and sometimes by
plaintiffs son Vicente Tan.
In any event, petitioner is already estopped from questioning
the due execution and authenticity of the pesadas. As found
by the CA, Tan Shuy could have easily belied the existence of
x x x the pesadas or receipts, and the purposes for which
they were offered in evidence by simply presenting his
daughter, Elena Tan Shuy, but no effort to do so was actually

done by the former given that scenario. The pesadas having

been admitted in evidence, with petitioner failing to timely
object thereto, these documents are already deemed
sufficient proof of the facts contained therein. We hereby
uphold the factual findings of the RTC, as affirmed by the CA,
in that the pesadas served as proof that the net proceeds
from the copra deliveries were used as installment payments
for the debts of respondents.[19]
Indeed, pursuant to Article 1232 of the Civil Code,
an obligation is extinguished by payment or
performance. There is payment when there is
delivery of money or performance of an obligation.
Article 1245 of the Civil Code provides for a
special mode of payment called dation in payment
(dacin en pago). There is dation in payment when
property is alienated to the creditor in satisfaction
of a debt in money.
Here, the debtor delivers and transmits to the creditor the
formers ownership over a thing as an accepted equivalent of
the payment or performance of an outstanding debt. In such
cases, Article 1245 provides that the law on sales shall
apply, since the undertaking really partakes in one sense of
the nature of sale; that is, the creditor is really buying the
thing or property of the debtor, the payment for which is to
be charged against the debtors obligation. Dation in
payment extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by
agreement express or implied, or by their silence consider
the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.
TC found thus:x x x [T]he preponderance of evidence is on
the side of the defendant. x x x The defendant explained
that for the receipts (pesadas) from April 1998 to April 1999
he only gets the payments for trucking while the total
amount which represent the total purchase price for the
copras that he delivered to the plaintiff were all given to
Elena Tan Shuy as installments for the loan he owed to
plaintiff. The defendant further averred that if in the receipts
or pesadas issued by the plaintiff to those who delivered
copras to them there is a notation pd on the total amount of
purchase price of the copras, it means that said amount was
actually paid or given by the plaintiff or his daughter Elena
Tan Shuy to the seller of the copras. To prove his averments
the defendant presented as evidence two (2) receipts or
pesadas issued by the plaintiff to a certain Cario showing the
notation pd on the total amount of the purchase price for the
copras. Such claim of the defendant was further bolstered by
the testimony of Apolinario Cario which affirmed that he also
sell [sic] copras to the plaintiff Tan Shuy. He also added that
he incurred indebtedness to the plaintiff and whenever he
delivered copras the amount of the copras sold were applied
as payments to his loan. The witness also pointed out that
the plaintiff did not give any official receipts to those who
transact business with him (plaintiff). x x x
Be that it may, this Court cannot however subscribe to the
averments of the defendant that he has fully paid the
amount of his loan to the plaintiff from the proceeds of the

copras he delivered to the plaintiff as shown in the pesadas

(Exhibits 3 to 64). Defendant claimed that based on the said
pesadas he has paid the total amount of P420,537.68 to the
plaintiff. However, this Court keenly noted that some of the
pesadas offered in evidence by the defendant were not for
copras that he delivered to the plaintiff but for mais (corn).
The said pesadas for mais or corn were the following, to wit:

Shuy. We therefore uphold the findings of the trial court, as

affirmed by the CA, that the net proceeds from Guillermos
copra deliveries amounted to 378,952.43. With this partial
payment, respondent remains liable for the balance totaling
41,047.57.[27]

To the mind of this Court the aforestated amount (P41k)

which the above listed pesadas show as payment for mais or
corn delivered by the defendant to the plaintiff cannot be
claimed by the defendant to have been applied also as
payment to his loan with the plaintiff because he does not
testify on such fact. He even stressed during his testimony
that it was the proceeds from the copras that he delivered to
the plaintiff which will be applied as payments to his loan. x
x x Thus, equity dictates that the total amount of P41k which
corresponds to the payment for mais (corn) delivered by the
plaintiff shall be deducted from the total amount of P420k
which according to the defendant based on the pesadas he
presented as evidence, is the total amount of the payment
that he made for his loan to the plaintiff.

EQUITABLE PCI V. NG SHEUNG

NGOR
541 S 223

Clearly from the foregoing, since the total amount of

defendants loan to the plaintiff is P420k and the evidence on
record shows that the actual amount of payment made by
the defendant from the proceeds of the copras he delivered
to the plaintiff is P378k, the defendant is still indebted to the
plaintiff in the amount of P41k.
In affirming this finding of fact by the trial court, the CA cited
the above-quoted portion of the RTCs Decision and stated
the following: In fact, as borne by the records on hand,
herein defendant-appellee Guillermo was able to describe
and spell out the contents of Exhs. 3 to 64 which were then
prepared by Elena Tan Shuy or sometimes by witness Vicente
Tan. Herein defendant-appellee Guillermo professed that
since the release of the subject loan was subject to the
condition that he shall sell his copras to the plaintiffappellant, the former did not already receive any money for
the copras he delivered to the latter starting April 1998 to
April 1999. Hence, this Court can only express its approval to
the apt observation of the trial court on this matter[.]
Notwithstanding the above, however, this Court fully agrees
with the pronouncement of the trial court that not all
amounts indicated in Exhs. 3 to 64 should be applied as
payments to the subject loan since several of which clearly
indicated mais deliveries on the part of defendant-appellee
Guillermo instead of copras[.][26] (Emphasis supplied)
The subsequent arrangement between Tan Shuy and
Guillermo can thus be considered as one in the nature of
dation in payment. There was partial payment every time
Guillermo delivered copra to petitioner, chose not to collect
the net proceeds of his copra deliveries, and instead applied
the collectible as installment payments for his loan from Tan

1250- EXTRAORDINARY INFLATION/DEFLATION

(action for annulment and/or reformation of documents and

contracts)
FACTS: On October 7, 2001, respondents Ng Sheung Ngor,
Ken Appliance Division, Inc. and Benjamin E. Go filed an
action for annulment and/or reformation of documents and
contracts
against
petitioner
Equitable
PCI
Bank
(Equitable) and its employees, Aimee Yu and Bejan Lionel
Apas.
Equitable induced them to avail of its peso and
dollar credit facilities by offering low interest rates
so they accepted Equitable's proposal and signed
the bank's pre-printed promissory notes on various
dates beginning 1996.
They however, were unaware that the documents
contained identical escalation clauses granting
Equitable authority to increase interest rates
without their consent.

c.
d.

e.

f.

g.
i.

Ordering [Equitable] to pay [respondents] the sum of

P10 [m]illion [p]esos as exemplary damages;
Ordering defendants Aimee Yu and Bejan [Lionel] Apas
to pay [respondents], jointly and severally, the sum of
[t]wo [m]illion [p]esos as moral and exemplary
damages;
Ordering [Equitable, Aimee Yu and Bejan Lionel Apas],
jointly and severally, to pay [respondents'] attorney's
fees in the sum of P300,000; litigation expenses in the
sum of P50,000 and the cost of suit;
Directing plaintiffs Ng Sheung Ngor and Ken Marketing
to pay [Equitable] the unpaid principal obligation for the
peso loan as well as the unpaid obligation for the dollar
denominated loan;
Directing plaintiff Ng Sheung Ngor and Ken Marketing to
pay [Equitable] interest as follows:
12% per annum for the peso loans;

2)
8% per annum for the dollar loans. The basis for the
payment of the dollar obligation is the conversion rate of
P26.50 per dollar availed of at the time of incurring of the
obligation in accordance with Article 1250 of the Civil Code
of the Philippines;
H)
Dismissing [Equitable's] counterclaim except the
payment of the aforestated unpaid principal loan obligations
and interest.

Equitable and respondents filed their respective notices of

appeal.[20]

Equitable, in its answer, asserted that

respondents knowingly accepted all the terms and
conditions contained in the promissory notes
In fact, they continuously availed of and benefited
from Equitable's credit facilities for five years

In the March 1, 2004 order of the RTC, both notices were

denied due course because Equitable and respondents failed
to submit proof that they paid their respective appeal fees.
[21]

RTC upheld the validity of the promissory notes.

in 2001 alone, Equitable restructured respondents'
loans amounting to US$228,200 and P1,000,000.
[11]
invalidated the escalation clause contained therein
because it violated the principle of mutuality of
contracts
Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening
period and declared the existence of extraordinary
deflation.
RTC ordered the use of the 1996 dollar
exchange rate in computing respondents' dollardenominated loans
Lastly, because the business reputation of
respondents was (allegedly) severely damaged
when Equitable froze their accounts, the trial court
awarded moral and exemplary damages to them.

On June 16, 2004, the CA granted Equitable's application for

injunction.
A
writ
of
preliminary
injunction
was
correspondingly issued.

RTC
a.
Ordering [Equitable] to reinstate and return the amount
of [respondents'] deposit placed on hold status;
b.
Ordering [Equitable] to pay [respondents] the sum of
P12 [m]illion [p]esos as moral damages;

Notwithstanding the writ of injunction, the properties of

Equitable previously levied upon were sold in a public
auction on July 1, 2004. Respondents were the highest
bidders and certificates of sale were issued to them.
Equitable moved to annul the July 1, 2004 auction sale and
to cite the sheriffs who conducted the sale in contempt for
proceeding with the auction despite the injunction order of
the CA.[36]
CA dismissed the petition for certiorari.[37] It found
Equitable guilty of forum shopping because the bank filed its
petition for certiorari in the CA several hours before
withdrawing its petition for relief in the RTC.[38]
ISSUE:
W/N
there
inflation/deflation?
HELD: None.

was

an

extraordinary

ESCALATION CLAUSE VIOLATED THE PRINCIPLE OF

MUTUALITY OF CONTRACTS Escalation clauses are not
void per se. However, one which grants the creditor an
unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to
assent to an important modification in the agreement is
VOID. Clauses of that nature violate the principle of
mutuality of contracts.
Article 1308 of the Civil Code holds that a
contract must bind both contracting parties; its
validity or compliance cannot be left to the will of
one of them.
For this reason, we have consistently held that a valid
escalation clause provides:
1.
that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by
law or by the Monetary Board; and
2.
that the stipulated rate of interest will be reduced if
the applicable maximum rate of interest is reduced
by law or by the Monetary Board (de-escalation
clause).[69]

The RTC found that Equitable's promissory notes uniformly

stated: If subject promissory note is extended, the interest
for subsequent extensions shall be at such rate as shall be
determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for
repayment) of the loan was extended. Respondents had no
choice but to accept them. This was a violation of Article
1308 of the Civil Code. Furthermore, the assailed
escalation clause did not contain the necessary provisions
for validity, that is, it neither provided that the rate of
interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these
reasons, the escalation clause was void.
With regard to the proper rate of interest, in New
Sampaguita Builders v. PNB we held that, because the
escalation clause was annulled, the principal amount of the
loan was subject to the original or stipulated rate of interest.
Upon maturity, the amount due was subject to legal interest
at the rate of 12% per annum.
Consequently, respondents should pay Equitable the interest
rates of 12.66% p.a. for their dollar-denominated loans and
20% p.a. for their peso-denominated loans from January 10,
2001 to July 9, 2001. Thereafter, Equitable was entitled to
legal interest of 12% p.a. on all amounts due.

THERE WAS NO EXTRAORDINARY DEFLATION

Extraordinary inflation exists when there is an unusual
decrease in the purchasing power of currency (that is,
beyond the common fluctuation in the value of currency) and
such decrease could not be reasonably foreseen or was
manifestly beyond the contemplation of the parties at the

time of the obligation. Extraordinary deflation, on the other

hand, involves an inverse situation.
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or
deflation of the currency stipulated should
intervene, the value of the currency at the time of
the establishment of the obligation shall be the
basis of payment, unless there is an agreement to
the contrary.

1)
2)
3)

For extraordinary inflation (or deflation) to affect an

obligation, the following requisites must be proven: OCE
that there was an official declaration of extraordinary
inflation or deflation from the BSP;
that the obligation was contractual in nature; and
that the parties expressly agreed to consider the effects of
the extraordinary inflation or deflation.
Despite the devaluation of the peso, the BSP never
declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance arose out
of a contract, the parties did not agree to recognize the
effects of extraordinary inflation (or deflation). The RTC
never mentioned that there was a such stipulation either in
the promissory note or loan agreement. Therefore,
respondents should pay their dollar-denominated loans at
the exchange rate fixed by the BSP on the date of maturity.

ALMEDA V. BATHALA MARKETING

542 S 470
FACTS:
Sometime in May 1997, respondent Bathala Marketing
Industries, Inc., as lessee, represented by its president
Ramon H. Garcia, renewed its Contract of Lease with
Ponciano L. Almeda (Ponciano), as lessor, husband of
petitioner Eufemia and father of petitioner Romel Almeda.
Under the said contract, Ponciano agreed to lease a portion
of the Almeda Compound for a monthly rental of
P1,107,348.69, for a term of four (4) years from May 1, 1997
unless sooner terminated as provided in the contract.[5] The
contract of lease contained the following pertinent provisions
which gave rise to the instant case:
SIXTH It is expressly understood by the parties hereto that
the rental rate stipulated is based on the present rate of
assessment on the property, and that in case the
assessment should hereafter be increased or any new tax,
charge or burden be imposed by authorities on the lot and
building where the leased premises are located, LESSEE
shall pay, when the rental herein provided becomes due, the
additional rental or charge corresponding to the portion
hereby leased; provided, however, that in the event that the
present assessment or tax on said property should be
reduced, LESSEE shall be entitled to reduction in the
stipulated rental, likewise in proportion to the portion leased
by him;
SEVENTH IN CASE AN EXTRAORDINARY INFLATION OR
DEVALUATION OF PHILIPPINE CURRENCY should
supervene, the value of Philippine peso at the time of the

establishment of the obligation shall be the basis of

payment;
During the effectivity of the contract, Ponciano died.
Thereafter, respondent dealt with petitioners. In a letter
dated
December
29,
1997,
petitioners
advised
respondent that the former shall assess and collect
(VAT) on its monthly rentals. In response, respondent
contended that VAT may not be imposed as the rentals fixed
in the contract of lease were supposed to include the VAT
therein, considering that their contract was executed on May
1, 1997 when the VAT law had long been in effect.[8]
On January 26, 1998, respondent received another
letter from petitioners informing the former that its
monthly rental should be increased by 73%
pursuant to condition No. 7 of the contract and
Article 1250 of the Civil Code.
Respondent
opposed petitioners demand and insisted that
there was no extraordinary inflation to warrant the
application of Article 1250 in light of the
pronouncement of this Court in various cases.
refused to pay the VAT and adjusted rentals as
demanded by petitioners but continued to pay the
stipulated amount set forth in their contract.
instituted an action for declaratory relief for
purposes of determining the correct interpretation
of condition Nos. 6 and 7 of the lease contract to
prevent damage and prejudice.[10]
petitioners in turn filed
an action for ejectment, rescission and damages
against respondent for failure of the latter to
vacate the premises after the demand made by
the former
Before respondent could file an answer, petitioners
filed a Notice of Dismissal.[12] They subsequently
refiled the complaint before the Metropolitan Trial
Court of Makati
Petitioners later moved for the dismissal of the
declaratory relief case for being an improper
remedy considering that respondent was already
in breach of the obligation and that the case would
not end the litigation and settle the rights of the
parties. The trial court, however, was not
persuaded, and consequently, denied the motion.
RTC ruled in favor of respondent and against petitioners. The
pertinent portion of the decision reads: WHEREFORE,
premises considered, this Court renders judgment on the
case as follows:
1)
2)

3)

declaring that plaintiff is not liable for the payment of

(VAT) of 10% of the rent for [the] use of the leased
premises;
declaring that plaintiff is not liable for the payment of
any rental adjustment, there being no [extraordinary]
inflation or devaluation, as provided in the Seventh
Condition of the lease contract, to justify the same;
holding defendants liable to plaintiff for the total
amount of P1,119,102.19, said amount representing

4)

TC

payments erroneously made by plaintiff as VAT charges

and rental adjustment for the months of January,
February and March, 1999; and
holding defendants liable to plaintiff for the amount of
P1,107,348.69, said amount representing the balance
of plaintiffs rental deposit still with defendants.
-

denied petitioners their right to pass on to

respondent the burden of paying the VAT since it
was not a new tax that would call for the
application of the sixth clause of the contract.
court, likewise, denied their right to collect the
demanded increase in rental, there being no
extraordinary inflation or devaluation as provided
for in the seventh clause of the contract.
Because of the payment made by respondent of
the rental adjustment demanded by petitioners,
the court ordered the restitution by the latter to
the former of the amounts paid, notwithstanding
the well-established rule that in an action for
declaratory relief, other than a declaration of
rights and obligations, affirmative reliefs are not
sought by or awarded to the parties.

CA The appellate court agreed with the conclusions of law

and the application of the decisional rules on the matter
made by the RTC. However, it found that the trial court
exceeded its jurisdiction in granting affirmative relief to the
respondent, particularly the restitution of its excess
payment.
ISSUES:
1)
whether the action for declaratory relief is proper; Yes.
No breach
2)
whether respondent is liable to pay 10% VAT pursuant
to Republic Act (RA) 7716; and
3)
whether the amount of rentals due the petitioners
should be adjusted by reason of extraordinary inflation
or devaluation.
HELD:
Petitioners repeatedly made a demand on respondent for the
payment of VAT and for rental adjustment allegedly brought
about by extraordinary inflation or devaluation. Both the trial
court and the appellate court found no merit in petitioners
claim. We see no reason to depart from such findings.
As to the liability of respondent for the payment of VAT, we
cite with approval the ratiocination of the appellate court,
viz.:
Clearly, the person primarily liable for the payment of VAT is
the lessor who may choose to pass it on to the lessee or
absorb the same. Beginning January 1, 1996, the lease of
real property in the ordinary course of business, whether for
commercial or residential use, when the gross annual
receipts exceed P500,000.00, is subject to 10% VAT.
Notwithstanding the mandatory payment of the 10% VAT by
the lessor, the actual shifting of the said tax burden upon the
lessee is clearly optional on the part of the lessor, under the
terms of the statute. The word may in the statute, generally

speaking, denotes that it is directory in nature. It is generally

permissive only and operates to confer discretion. In this
case, despite the applicability of the rule under Sec. 99 of
the NIRC, as amended by R.A. 7716, granting the lessor the
option to pass on to the lessee the 10% VAT, to existing
contracts of lease as of January 1, 1996, the original lessor,
Ponciano L. Almeda did not charge the lessee-appellee the
10% VAT nor provided for its additional imposition when they
renewed the contract of lease in May 1997. More
significantly, said lessor did not actually collect a 10% VAT on
the monthly rental due from the lessee-appellee after the
execution of the May 1997 contract of lease. The inevitable
implication is that the lessor intended not to avail of
the option granted him by law to shift the 10% VAT
upon the lessee-appellee. x x x.[19]
In short, petitioners are estopped from shifting to respondent
the burden of paying the VAT.
SIXTH STIPULATION COVERAGE.Petitioners reliance on
the sixth condition of the contract is, likewise, unavailing.
This provision clearly states that respondent can only be
held liable for new taxes imposed after the effectivity of the
contract of lease, that is, after May 1997, and only if they
pertain to the lot and the building where the leased premises
are located. Considering that RA 7716 took effect in 1994,
the VAT cannot be considered as a new tax in May 1997, as
to fall within the coverage of the sixth stipulation.
NEITHER CAN PETITIONERS LEGITIMATELY DEMAND
RENTAL ADJUSTMENT BECAUSE OF EXTRAORDINARY
INFLATION OR DEVALUATION.Petitioners contend that
Article 1250 of the Civil Code does not apply to this case
because the contract stipulation speaks of extraordinary
inflation or devaluation while the Code speaks of
extraordinary inflation or deflation. They insist that the
doctrine pronounced in Del Rosario v. The Shell Company,
Phils. Limited[20] should apply.
Essential to contract construction is the ascertainment of the
intention of the contracting parties, and such determination
must take into account the contemporaneous and
subsequent acts of the parties. This intention, once
ascertained, is deemed an integral part of the contract.[21]
While, indeed, condition No. 7 of the contract speaks of
extraordinary inflation or devaluation as compared to Article
1250s extraordinary inflation or deflation, we find that when
the parties used the term devaluation, they really did not
intend to depart from Article 1250 of the Civil Code.
Condition No. 7 of the contract should, thus, be read in
harmony with the Civil Code provision.
That this is the intention of the parties is evident from
petitioners letter[22] dated January 26, 1998, where, in
demanding rental adjustment ostensibly based on condition
No. 7, petitioners made explicit reference to Article 1250 of
the Civil Code, even quoting the law verbatim. Thus, the
application of Del Rosario is not warranted. Rather,
jurisprudential rules on the application of Article 1250 should
be considered.

Article 1250 of the Civil Code states: In case an

extraordinary inflation or deflation of the currency stipulated
should supervene, the value of the currency at the time of
the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

Inflation has been defined as the sharp increase of money

or credit, or both, without a corresponding increase in
business transaction. There is inflation when there is an
increase in the volume of money and credit relative to
available goods, resulting in a substantial and continuing rise
in the general price level.[23] In a number of cases, this
Court had provided a discourse on what constitutes
extraordinary inflation, thus:
[E]xtraordinary inflation exists when there is a decrease
or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation
in the value of said currency, and such increase or decrease
could not have been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the time of the
establishment of the obligation.[24]
The factual circumstances obtaining in the present case do
not make out a case of extraordinary inflation or devaluation
as would justify the application of Article 1250 of the Civil
Code. We would like to stress that the erosion of the value of
the Philippine peso in the past three or four decades, starting
in the mid-sixties, is characteristic of most currencies. And
while the Court may take judicial notice of the decline in the
purchasing power of the Philippine currency in that span of
time, such downward trend of the peso cannot be considered
as the extraordinary phenomenon contemplated by Article
1250 of the Civil Code. Furthermore, absent an official
pronouncement or declaration by competent authorities of
the existence of extraordinary inflation during a given
period, the effects of extraordinary inflation are not to be
applied. [25]
1252- APPLICATION OF PAYMENTS

PREMIERE DEVELOPMENT BANK V.

CENTRAL SURETY 579 S 223
(industrial loan of 6m)
FACTS:

Central Surety & Insurance Company (Central

Surety) obtained an industrial loan of P6M from
petitioner Premiere Development Bank (Premiere
Bank) with a maturity date of August 14, 2000.
This P6m, evidenced by Promissory Note (PN) stipulates
payment of 17% interest per annum payable monthly in
arrears and the principal payable on due date. In
addition, PN No. 714-Y provides for a penalty charge of
24% interest per annum based on the unpaid
amortization/installment or the entire unpaid balance of
the loan. In all, should Central Surety fail to pay, it
would be liable to Premiere Bank for:
(1) unpaid interest up to maturity date;
(2) unpaid penalties up to maturity date; and
(3) unpaid balance of the principal.

Deed of Assignment with Pledge4 covering Central

Suretys
Membership Fee Certificate
No.
217
representing its proprietary share in Wack Wack Golf
and
Country
Club
Incorporated
(Wack
Wack
Membership) was the security to ensure payment of the
loan. In both PN and DA, the Pres and Vp of Central
Surety respectively, represented Central Surety and
solidarily bound themselves to the payment of the
obligation.
Parenthetically,
Central
Surety
had
another
commercial loan with Premiere Bank in the amount
of P40m maturing on October 10, 2001. This loan was,
likewise, evidenced by a PN and secured by a REM over
a Makati Condominium Title. PN No. was availed of
through a renewal of Central Suretys prior loan. As with
the 6m loan and the constituted pledge over the Wack
Wack Membership, the P40m loan with real estate
mortgage was transacted by Constancio and Engracio
Castaeda on behalf of Central Surety.
It appears that on August 22, 2000, Premiere Bank sent
a letter to Central Surety demanding payment of
theP6,000,000.00 loan, to wit:

August 22, 2000

Gentlemen:
This has reference to your overdue loan of P6.0 Million.
We regret to inform you that despite efforts to restructure
the same, you have failed up to this time, to submit the
required documents and come up with equity necessary to
implement the restructuring scheme.
In view thereof, we regret that unless the above loan is
settled on or before five (5) days from the date hereof, we
shall exercise our option to have the Stock Certificate duly
issued by Wack Wack Golf and Country Club, Inc. transferred
in the name of Premiere Development Bank in accordance
with the terms and conditions of the Deed of Assignment
with Pledge executed in favor of Premiere Development
Bank.
We shall appreciate your prompt compliance.
Very truly yours,
Sir:
With reference to this 6.0 Million loan account, we have
informed Ms. Evangeline Veloira that we are intending to
settle the account by the end of September. As of 14 August
2000 we made payment to your bank as per receipt
attached.
As you may know, present conditions have been difficult for
the insurance industry whose performance is so closely
linked to the nations economic prosperity; and we are now
asking for some consideration and leeway on your very stiff
and immediate demands.
Kindly extend to us your favorable approval.
Very truly yours,
Accordingly, by September 20, 2000, Central Surety issued
Bank of Commerce Check dated September 22, 2000 in the
amount of P6m and payable to Premiere Bank. The check
was received by Premiere Banks Senior Account Manager,
Evangeline Veloira, with the notation "full payment of
loan-Wack Wack," as reflected in Central Suretys

Disbursement Voucher.10 However, for undisclosed reasons,

Premiere Bank returned BC Check to Central Surety, and in
its letter dated September 28, 2000, demanded from the
latter, not just payment of the P6m loan, but also the 40m
loan. In the same letter, Premiere Bank threatened
foreclosure of the loans respective securities, the pledge
and REM, should Central Surety fail to pay these within ten
days from date, thus:
We write on behalf of our client, Premiere Development
Bank, in connection with your above-captioned loan account.
While our client has given you all the concessions, facilities
and opportunities to service your loans, we regret to inform
you that you have failed to settle the same despite their
past due status.
In view of the foregoing and to protect the interest of our
client, please be advised that unless the outstanding
balances of your loan accounts as of date plus interest,
penalties and other fees and charges are paid in full or
necessary arrangements acceptable to our client is made by
you within ten (10) days from date hereof, we shall be
constrained much to our regret, to file foreclosure
proceedings against the collateral of the loan mortgaged to
the Bank or pursue such action necessary in the premises.
We trust, therefore, that you will give this matter your
preferential attention.
The very next day, on September 29, 2000, Central Surety,
through its counsel, wrote Premiere Bank and re-tendered
payment of the check: our client delivered to your bank BC
cheque no. 08114 payable to Premiere Bank in the amount
of SIX MILLION PESOS (P6,000,000.00), which was received
by your Senior Account Manager, Ms. Evangeline Veloira.
However, for unexplained reasons the cheque was returned
to us.
On even date, a separate letter with another BC Check No.
08115 in the amount of P2.6m was also tendered to
Premiere Bank as payment for the Spouses Engracio and
Lourdes Castaedas (Spouses Castaedas) personal loan
and secured by Manila Polo Club, Inc. membership
shares.
Premiere Bank responded and signified acceptance of
Central Suretys checks under the following application of
payments:
As previously relayed to your client, Premiere
Bank cannot accept the two (2) checks as full
settlement of the obligation under Account the
two separate PN as the amount is insufficient.
In accordance with the terms and conditions of the
PN executed by your clients in favor of Premiere
Development Bank, we have applied the two (2)
checks to the due obligations of your clients as
follows:
1) Account No.: COM 235-Z14 P1,044,939.45
(casent)
2) Account No.: IND 717P1,459,693.15 (sps
Ignacio)
3) Account No.: COM 367-Z15 P4,476,200.18
4) Account No.: COM 714-Y P1,619,187.22
TOTAL P8,600,000.00
We are enclosing Xerox copy each of four (4) official receipts
covering the above payments. The originals are with us

which your clients or their duly authorized representative

may pick-up anytime during office hours.
We shall appreciate the settlement in full of the accounts of
your client or necessary arrangements for settlement
thereof be made as soon as possible to put the accounts on
up to-date status.
Thank you.
Very truly yours,
Significantly, the 8.6m check payments were not applied in
full to Central Suretys P6m loan under PN No. and the
Spouses Castaedas personal loan of P2.6m under PN.
Premiere Bank also applied proceeds thereof to a commercial
loan under PN No. 235-Z taken out by (Casent Realty), 17 and
to Central Suretys loan originally covered by PN No. 367-Z,
renewed under PN No. 376-X, maturing on October 20, 2001.
Strongly objecting to Premiere Banks application of
payments, Central Suretys counsel wrote Premiere Bank
and reiterated Central Suretys demand for the application of
the check payments to the loans covered by PN Nos. 714-X
and 714-Y. Additionally, Central Surety asked that the Wack
Wack Membership pledge, the security for theP6,000,000.00
loan, should be released.
Premiere Bank
refused to accede to Central Suretys demand
insisted that the PN covering 6m loan granted
Premiere Bank sole discretion respecting: (1) debts
to which payments should be applied in cases of
several obligations by an obligor and/or debtor;
and (2) the initial application of payments to other
costs, advances, expenses, and past due interest
stipulated thereunder.
Central Surety
filed a complaint for damages and
release of security collateral, specifically praying
that the court render judgment:
(1) declaring Central Suretys P6m loan covered by
PN No. 714-Y as fully paid;
(2) ordering Premiere Bank to release to Central
Surety its membership certificate of shares in
Wack Wack;
(3) ordering Premiere Bank to pay Central Surety
compensatory and actual damages, exemplary
damages, attorneys fees, and expenses of
litigation; and (4) directing Premiere Bank to pay
the cost of suit.
RTC dismissed Central Suretys complaint
the stipulation in the PN granting Premiere Bank
sole discretion in the application of payments,
although it partook of a contract of adhesion,
was valid. It disposed of the case, to wit:
[Premiere Bank] was right in contending that it had
the right to apply [Central Suretys] payment to
the most onerous obligation or to the one it sees
fit to be paid first from among the several
obligations. The application of the payment to the
other two loans of Central Surety was within
[Premiere Banks] valid exercise of its right
according the stipulation.lawphil.net
However, [Premiere Bank] erred in applying the
payment to the loan of Casent Realty and to the

personal obligation of Mr. Engracio Castaeda

despite their connection with one another.
Therefore, [Premiere Bank] cannot apply the
payment tendered by Central Surety to the other
two entities capriciously and expressly violating
the law and pertinent Central Bank rules and
regulations.
Hence, the application of the payment to the loan
of Casent Realty (Account No. COM 236-Z) and to
the loan of Mr. Engracio Castaeda (Account No.
IND 717-X) is void and must be annulled.

As to the issue of W/N [Central Surety] is entitled to the

release of Membership Fee Certificate in the Wack Wack Golf
and Country Club, considering now that [Central Surety]
cannot compel [Premiere Bank] to release the subject
collateral.
With regard to the issue of damages and
attorneys fees, the court finds no basis to grant [Premiere
Banks] prayer for moral and exemplary damages but deems
it just and equitable to award in its favor attorneys fees in
the sum of Php 100,000.00.
CA reversed.The appellate court held that with Premiere
Banks letter specifically demanding payment of Central
SuretysP6m loan, it was deemed to have waived the
stipulation in PN No. 714-Y granting it the right to solely
determine application of payments, and was, consequently,
estopped from enforcing the same. In this regard, with the
holding of full settlement of Central Suretys P6,000,000.00
loan under PN No. 714-Y, the CA ordered the release of the
Wack Wack Membership pledged to Premiere Bank.
ISSUES::
1.
W/N the honorable court of appeals committed
reversible and palpable error when it applied the
principle of waiver and estoppel in the present
case insofar as the demand letter sent to [central
surety] is concerned nullifying the application of
payments exercised by [premiere bank]
2.

W/N the finding of waiver and estoppel by the

honorable court of appeals could prevail over the
clear and unmistakable statutory and contractual
right of [premiere bank] to exercise application of
payment as warranted by the promissory note

3.

even assuming ex gratia that the 6 million should

be applied to the subject loan of respondent, W/N
the subject wack-wack shares could be release[d]
despite the cross default and cross guarantee
provisions of the deed of assignment with pledge
and relevant real estate mortgage contracts
executed by [central surety], casent realty and
sps. castaeda.

4.

whether or not there is a valid tender of payment

and consignation of the subject two check
payments by [central surety].

5.

whether or not, as correctly found by the court a

quo [central surety] is estopped from contesting
the stipulations or provisions of the promissory
notes authorizing [premiere bank] to make such
application of payments

6.

whether or not as correctly found by the lower

court [premiere bank] is entitled to an award of
damages as occasioned by the malicious filing of
this suit.19

At the outset, we qualify that this case deals only with the
extinguishment of Central Suretys P6M loan secured by the
Wack Wack Membership pledge. We note that both lower
courts were one in annulling Premiere Banks application of
payments to the loans of Casent Realty and the Spouses
Castaeda under PN Nos. 235-Z and 717-X, respectively,
thus:
It bears stressing that the parties to PN No. 714-Y secured by
Wack Wack membership certificate are only Central Surety,
as debtor and [Premiere Bank], as creditor. Thus, when the
questioned stipulation speaks of "several obligations", it only
refers to the obligations of [Central Surety] and nobody else.
[I]t is plain that [Central Surety] has only two loan
obligations, namely:
1.) Account No. 714-Y secured by Wack Wack
membership certificate; and
2.)
Account No. 367-Z secured by Condominium
Certificate of Title.
The two loans are secured by separate and different
collaterals. The collateral for Account No. 714-Y, which is the
Wack Wack membership certificate answers only for that
account and nothing else. The collateral for Account No. 367Z, which is the Condominium Certificate of Title, is
answerable only for the said account.
The fact that the loan obligations of [Central Surety] are
secured by separate and distinct collateral simply shows that
each collateral secures only a particular loan obligation and
does not cover loans including future loans or
advancements.
As regards the loan covered by Account No. 235-Z, this was
obtained by Casent Realty, not by [Central Surety]. Although
Mr. Engracio Castaeda is the vice-president of [Central
Surety], and president of Casent Realty, it does not follow
that the two corporations are one and the same. Both are
invested by law with a personality separate and distinct from
each other.
Thus, [Central Surety] cannot be held liable for the obligation
of Casent Realty, absent evidence showing that the latter is
being used to defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a shield to confuse
the legitimate issues, or when it is merely an adjunct, a
business conduit or an alter ego of [Central Surety] or of
another corporation; or used as a cloak to cover for fraud or
illegality, or to work injustice, or where necessary to achieve
equity or for the protection of creditors.1avvphi1
Likewise, [Central Surety] cannot be held accountable for the
loan obligation of spouses Castaeda under Account No. IND
717-X. Settled is the rule that a corporation is invested by
law with a personality separate and distinct from those of
the persons composing it. The corporate debt or credit is
not the debt or credit of the stockholder nor is the
stockholders debt or credit that of the corporation.
The mere fact that a person is a president of the corporation
does not render the property he owns or possesses the

property of the corporation, since that president, as an

individual, and the corporation are separate entities.20

1.
2.
3.

In fact, Premiere Bank did not appeal or question the RTCs

ruling specifically annulling the application of theP6M check
payment to the respective loans of Casent Realty and the
Spouses Castaeda. Undoubtedly, Premiere Bank cannot be
allowed, through this petition, to surreptitiously include the
validity of its application of payments concerning the loans
to Casent Realty and the Spouses Castaeda.
Thus, we sift through the issues posited by Premiere Bank
and restate the same, to wit:
Whether Premiere Bank waived its right of application of
payments on the loans of Central Surety.
In the alternative, whether the P6M loan of Central Surety
was extinguished by the encashment of BC Check
No. 08114.
Corollarily, whether the release of the Wack Wack
Membership pledge is in order.
HELD: We shall take the first and the second issues in
tandem.
CREDITOR GIVEN RIGHT TO APPLY PAYMENTS
At the hub of the controversy is the statutory provision on
application of payments, specifically Article 1252 of the Civil
Code, viz.:
Article 1252. He who has various debts of the
same kind in favor of one and the same creditor,
may declare at the time of making the payment,
to which of them the same must be applied.
Unless the parties so stipulate, or when the
application of payment is made by the party for
whose benefit the term has been constituted,
application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating
the contract.
THE DEBTORS RIGHT TO APPLY PAYMENT IS NOT
MANDATORY. This is clear from the use of the word "may"
rather than the word "shall" in the provision which reads: "He
who has various debts of the same kind in favor of one and
the same creditor, may declare at the time of making the
payment, to which of the same must be applied."
Indeed, the debtors right to apply payment has been
considered merely directory, and not mandatory,21 following
this Courts earlier pronouncement that "the ordinary
acceptation of the terms may and shall may be resorted to
as guides in ascertaining the mandatory or directory
character of statutory provisions."22
Article 1252 gives the right to the debtor to choose to
which of several obligations to apply a particular payment
that he tenders to the creditor. But likewise granted in the
same provision is the right of the creditor to apply such
payment in case the debtor fails to direct its application. This
is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts
from the creditor a receipt in which an application of
payment is made, the former cannot complain of the same."
It is the directory nature of this right and the subsidiary right
of the creditor to apply payments when the debtor does not
elect to do so that make this right, like any other right,
waivable.

Rights may be waived, unless the waiver is contrary to law,

public order, public policy, morals or good customs, or
prejudicial to a third person with a right recognized by law.23
A debtor, in making a voluntary payment, may at the time of
payment direct an application of it to whatever account he
chooses, unless he has assigned or waived that right. If the
debtor does not do so, the right passes to the creditor, who
may make such application as he chooses. But if neither
party has exercised its option, the court will apply the
payment according to the justice and equity of the case,
taking into consideration all its circumstances. 24
Verily, the debtors right to apply payment can be waived
and even granted to the creditor if the debtor so
agrees.25 This was explained by former Senator Arturo M.
Tolentino, an acknowledged expert on the Civil Code, thus:
The following are some limitations on the right of the debtor
to apply his payment:
xxxx
5) when there is an agreement as to the debts which are to
be paid first, the debtor cannot vary this agreement.26
Relevantly, in a Decision of the Supreme Court of Kansas in a
case with parallel facts, it was held that:
The debtor requested Planters apply the payments to the
1981 loan rather than to the 1978 loan. Planters refused.
Planters notes it was expressly provided in the security
agreement on the 1981 loan that Planters had a legal right
to direct application of payments in its sole discretion.
Appellees do not refute this. Hence, the debtors had no right
by agreement to direct the payments. This also precludes
the application of the U.S. Rule, which applies only in
absence of a statute or specific agreement. Thus the trial
court erred. Planters was entitled to apply the Hi-Plains
payments as it saw fit.27
In the case at bench, the records show that Premiere Bank
and Central Surety entered into several contracts of loan,
securities by way of pledges, and suretyship agreements. In
at least two (2) PN between the parties, Promissory Note No.
714-Y and Promissory Note No. 376-X, Central Surety
expressly agreed to grant Premiere Bank the authority to
apply any and all of Central Suretys payments, thus:
In case I/We have several obligations with [Premiere Bank],
I/We hereby empower [Premiere Bank] to apply without
notice and in any manner it sees fit, any or all of my/our
deposits and payments to any of my/our obligations whether
due or not. Any such application of deposits or payments
shall be conclusive and binding upon us.
This proviso is representative of all the other Promissory
Notes involved in this case. It is in the exercise of this
express authority under the Promissory Notes, and following
Bangko Sentral ng Pilipinas Regulations, that Premiere Bank
applied payments made by Central Surety, as it deemed fit,
to the several debts of the latter.
All debts were due; There was no
waiver on the part of petitioner
Undoubtedly, at the time of conflict between the parties
material to this case, Promissory Note No. 714-Y dated
August 20, 1999, in the amount of P6,000,000.00 and
secured by the pledge of the Wack Wack Membership, was
past the due and demand stage. By its terms, Premiere Bank

was entitled to declare said Note and all sums payable

thereunder immediately due and payable, without need of
"presentment, demand, protest or notice of any kind." The
subsequent demand made by Premiere Bank was, therefore,
merely a superfluity, which cannot be equated with a waiver
of the right to demand payment of all the matured
obligations of Central Surety to Premiere Bank.
Moreover, this Court may take judicial notice that the
standard practice in commercial transactions to send
demand letters has become part and parcel of every
collection effort, especially in light of the legal requirement
that demand is a prerequisite before default may set in,
subject to certain well-known exceptions, including the
situation where the law or the obligations expressly declare
it unnecessary.28
Neither can it be said that Premiere Bank waived its right to
apply payments when it specifically demanded payment of
the P6,000,000.00 loan under Promissory Note No. 714-Y. It is
an elementary rule that the existence of a waiver must be
positively demonstrated since a waiver by implication is not
normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly,
intelligently, and with sufficient awareness of the relevant
circumstances and likely consequences. There must be
persuasive evidence to show an actual intention to relinquish
the right. Mere silence on the part of the holder of the right
should not be construed as a surrender thereof; the courts
must indulge every reasonable presumption against the
existence and validity of such waiver.29
Besides, in this case, any inference of a waiver of Premiere
Banks, as creditor, right to apply payments is eschewed by
the express provision of the Promissory Note that: "no failure
on the part of [Premiere Bank] to exercise, and no delay in
exercising any right hereunder, shall operate as a waiver
thereof."
Thus, we find it unnecessary to rule on the applicability of
the equitable principle of waiver that the Court of Appeals
ascribed to the demand made by Premiere Bank upon
Central Surety to pay the amount ofP6,000,000.00, in the
face of both the express provisions of the law and the
agreements entered into by the parties. After all, a diligent
creditor should not needlessly be interfered with in the
prosecution of his legal remedies.30
When Central Surety directed the application of its payment
to a specific debt, it knew it had another debt with Premiere
Bank, that covered by Promissory Note 367-Z, which had
been renewed under Promissory Note 376-X, in the amount
of P40.898 Million. Central Surety is aware that Promissory
Note 367-Z (or 376-X) contains the same provision as in
Promissory Note No 714-Y which grants the Premiere Bank
authority to apply payments made by Central Surety, viz.:
In case I/We have several obligations with [Premiere Bank],
I/We hereby empower [Premiere Bank] to apply without
notice and in any manner it sees fit, any or all of my/our
deposits and payments to any of my/our obligations whether
due or not. Any such application of deposits or payments
shall be conclusive and binding upon us.31
Obviously, Central Surety is also cognizant that Promissory
Note 367-Z contains the proviso that:

the bank shall be entitled to declare this Note and all sums
payable
hereunder to be immediately due and payable, without need
of presentment, demand, protest or notice of nay kind, all of
which I/We hereby expressly waive, upon occurrence of any
of the following events: x x x (ii) My/Our failure to pay
any amortization or installment due hereunder; (iii) My/Our
failure to pay money due under any other document or
agreement evidencing obligations for borrowed money x x
x.32
by virtue of which, it follows that the obligation under
Promissory Note 367-Z had become past due and
demandable, with further notice expressly waived, when
Central Surety defaulted on its obligations under Promissory
Note No. 714-Y.
Mendoza v. Court of Appeals33 forecloses any doubt that an
acceleration clause is valid and produces legal effects. In
fact, in Selegna Management and Development Corporation
v. United Coconut Planters Bank,34 we held that:
Considering that the contract is the law between the parties,
respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable.
That clause obliged petitioners to pay the entire loan on
January 29, 1999, the date fixed by respondent.
It is worth noting that after the delayed payment
of P6,000,000.00 was tendered by Central Surety, Premiere
Bank returned the amount as insufficient, ostensibly because
there was, at least, another account that was likewise due.
Obviously, in its demand of 28 September 2000, petitioner
sought payment, not just of theP6,000,000.00, but of all
these past due accounts. There is extant testimony to
support this claim, as the transcript of stenographic notes on
the testimony of Atty. Araos reveals:
Atty. Opinion: Q. But you accepted this payment of Six Million
(P6,000,000.00) later on when together with this was paid
another check for 1.8 Million?
Witness: A. We accepted.
Atty. Opinion: Q. And you applied this to four (4) other
accounts three (3) other accounts or to four (4) accounts
mentioned in Exhibit "J." Is that correct?
Atty. Tagalog: We can stipulate on that. Your Honor.
Court: This was stipulated?
Atty. Tagalog: Yes, Your Honor. In fact, there is already
stipulation that we confirm that those are the applications of
payments made by the defendant Bank on those loan
accounts.
Atty. Opinion: Q. Were these accounts due already when you
made this application, distribution of payments?
Witness: A. Yes sir.35
Conversely, in its evidence-in-chief, Central Surety did not
present any witness to testify on the payment of its
obligations. In fact, the record shows that after marking its
evidence, Central Surety proceeded to offer its evidence
immediately. Only on the rebuttal stage did Central Surety
present a witness; but even then, no evidence was adduced
of payment of any other obligation. In this light, the Court is
constrained to rule that all obligations of Central Surety to
Premiere Bank were due; and thus, the application of
payments was warranted.
Being in receipt of amounts tendered by Central Surety,
which were insufficient to cover its more onerous obligations,
Premiere Bank cannot be faulted for exercising the authority
granted to it under the Promissory Notes, and applying
payment to the obligations as it deemed fit. Subject to the
caveat that our ruling herein shall be limited only to the

transactions entered into by the parties to this case, the

Court will not disturb the finding of the lower court that
Premiere Bank rightly applied the payments that Central
Surety had tendered. Corollary thereto, and upon the second
issue, the tender of the amount of P6,000,000.00 by Central
Surety, and the encashment of BC Check No. 08114 did not
totally extinguish the debt covered by PN No. 714-Y.
Release of the pledged
Wack Wack Membership
Contract of Adhesion
To the extent that the subject promissory notes were
prepared by the Premiere Bank and presented to Central
Surety for signature, these agreements were, indeed,
contracts of adhesion. But contracts of adhesion are not
invalid per se. Contracts of adhesion, where one party
imposes a ready-made form of contract on the other, are not
entirely prohibited. The one who adheres to the contract is,
in reality, free to reject it entirely; if he adheres, he gives his
consent.
In interpreting such contracts, however, courts are expected
to observe greater vigilance in order to shield the unwary or
weaker party from deceptive schemes contained in readymade covenants.36 Thus, Article 24 of the Civil Code
pertinently states:
In all contractual, property or other relations, when one of
the parties is at a disadvantage on account of his moral
dependence, ignorance, indigence, mental weakness, tender
age or other handicap, the courts must be vigilant for his
protection.
But in this case, Central Surety does not appear so weak as
to be placed at a distinct disadvantage vis--vis the bank. As
found by the lower court:
Considering that [Central Surety] is a known business entity,
the [Premiere Bank] was right in assuming that the [Central
Surety] could not have been cheated or misled in agreeing
thereto, it could have negotiated with the bank on a more
favorable term considering that it has already established a
certain reputation with the [Premiere Bank] as evidenced by
its numerous transactions. It is therefore absurd that an
established company such as the [Central Surety] has no
knowledge of the law regarding bank practice in loan
transactions.
The Dragnet Clause.
The factual circumstances of this case showing the chain of
transactions and long-standing relationship between
Premiere Bank and Central Surety militate against the
latters prayer in its complaint for the release of the Wack
Wack Membership, the security attached to Promissory Note
714-Y.
A tally of the facts shows the following transactions between
Premiere Bank and Central Surety:

Date

August

Instrume
nt

20,

PN 714-Y

Amoun
t
covere
d

P6M

1999

August
1999

29,

Deed
of
Assignme
nt
with
Pledge

P 15 M

As security for PN
714-Y and/or such
Promissory
Note/s
which
the
ASSIGNOR
/
PLEDGOR
shall
hereafter execute in
favor
of
the
ASSIGNEE/PLEDGEE

From these transactions and the proviso in the Deed of

Assignment with Pledge, it is clear that the security, which
peculiarly specified an amount at P15,000,000.00 (notably
greater than the amount of the promissory note it secured),
was intended to guarantee not just the obligation under PN
714-Y, but also future advances. Thus, the said deed is
explicit:
As security for the payment of loan obtained by the
ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00)
Philippine Currency in accordance with the Promissory Note
attached hereto and made an integral part hereof as Annex
"A" and/or
such
Promissory
Note/s
which
the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the
ASSIGNEE/PLEDGEE,
the
ASSIGNOR/PLEDGOR
hereby
transfers, assigns, conveys, endorses, encumbers and
delivers by way of first pledge unto the ASSIGNEE/PLEDGEE,
its successors and assigns, that certain Membership fee
Certificate Share in Wack Wack Golf and Country Club
Incorporate covered by Stock Certificate No. 217 with Serial
No. 1793 duly issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the name of the
ASSIGNOR." (Emphasis made in the Petition.)
Then, a Continuing Guaranty/Comprehensive Surety
Agreement was later executed by Central Surety as follows:
Date

Instrument

Notarized, Sept. 22,

1999

Continuing
Guaranty/Comprehensive
Surety Agreement

And on October 10, 2000, Promissory Note 376-X was

entered into, a renewal of the prior Promissory Note 367-Z,
in the amount of P40,898,000.00. In all, the transactions that
transpired between Premiere Bank and Central Surety
manifest themselves, thusly:
Date

Instrument

August 20, 1999

PN 714-Y

August 29, 1999

Deed of Assignment
Pledge

Stipulation

Notarized,
Sept. 22, 1999

Continuing
Guaranty/Comprehensive
Surety Agreement

P4
00

October 10, 2000

Promissory Note 376-X (PN

367-Z)

P4
00

From the foregoing, it is more than apparent that when, on

August 29, 1999, the parties executed the Deed of
Assignment with Pledge (of the Wack Wack Membership), to
serve as security for an obligation in the amount
ofP15,000,000.00 (when the actual loan covered by PN No.
714-Y was only P6,000,000.00), the intent of the parties was
for the Wack Wack Membership to serve as security also for
future advancements. The subsequent loan was nothing
more than a fulfillment of the intention of the parties. Of
course, because the subsequent loan was for a much greater
amount (P40,898,000.00), it became necessary to put up
another security, in addition to the Wack Wack Membership.
Thus, the subsequent surety agreement and the specific
security for PN No. 367-X were, like the Wack Wack
Membership, meant to secure the ballooning debt of the
Central Surety.
The above-quoted provision in the Deed of Assignment, also
known as the "dragnet clause" in American jurisprudence,
would subsume all debts of respondent of past and future
origins. It is a valid and legal undertaking, and the amounts
specified as consideration in the contracts do not limit the
amount for which the pledge or mortgage stands as security,
if from the four corners of the instrument, the intent to
secure future and other indebtedness can be gathered. A
pledge or mortgage given to secure future advancements is
a continuing security and is not discharged by the
repayment of the amount named in the mortgage until the
full amount of all advancements shall have been paid.37
Our ruling in Prudential Bank v. Alviar38 is instructive:
A "blanket mortgage clause," also known as a "dragnet
Amount
clause" in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or future
P40,898,000.
origins. Such clauses are "carefully scrutinized and strictly
00
construed." Mortgages of this character enable the parties to
provide continuous dealings, the nature or extent of which
may not be known or anticipated at the time, and they avoid
the expense and inconvenience of executing a new security
on each new transaction. A "dragnet clause" operates as a
convenience and accommodation to the borrowers as it
makes available additional funds without their having to
execute additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services,
recording fees, et cetera. Indeed, it has been settled in a
long line of decisions that mortgages given to secure future
advancements are valid and legal contracts, and the
amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent
to secure future and other indebtedness can be gathered.
The "blanket mortgage clause" in the instant case states:
with
That for and in consideration of certain loans, overdraft and
other credit accommodations obtained from the Mortgagee
by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the
payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two

Hundred Fifty Thousand (P250,000.00) Pesos, Philippine

Currency, as well as those that the Mortgagee may extend to
the Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the Mortgagee,
whether direct or indirect, principal or secondary as appears
in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the
back of this document, and/or appended hereto, together
with all the buildings and improvements now existing or
which may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute
owner free from all liens and incumbrances. . . .
xxxx
In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a
"hold-out" on his foreign currency savings account, while PN
BD#76/C-430, executed by respondents for Donalco Trading,
Inc., was secured by "Clean-Phase out TOD CA 3923" and
eventually by a deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co., and by a chattel
mortgage on various heavy and transportation equipment.
The matter of PN BD#76/C-430 has already been discussed.
Thus, the critical issue is whether the "blanket mortgage"
clause applies even to subsequent advancements for which
other securities were intended, or particularly, to PN
BD#76/C-345.
Under American jurisprudence, two schools of thought have
emerged on this question. One school advocates that a
"dragnet clause" so worded as to be broad enough to cover
all other debts in addition to the one specifically secured will
be construed to cover a different debt, although such other
debt is secured by another mortgage. The contrary thinking
maintains that a mortgage with such a clause will not secure
a note that expresses on its face that it is otherwise secured
as to its entirety, at least to anything other than a deficiency
after exhausting the security specified therein, such
deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it
from the arrangement.
The latter school represents the better position. The parties
having conformed to the "blanket mortgage clause" or
"dragnet clause," it is reasonable to conclude that they also
agreed to an implied understanding that subsequent loans
need not be secured by other securities, as the subsequent
loans will be secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary component
of the "dragnet clause." But of course, there is no
prohibition, as in the mortgage contract in issue, against
contractually requiring other securities for the subsequent
loans. Thus, when the mortgagor takes another loan for
which another security was given it could not be inferred
that such loan was made in reliance solely on the original
security with the "dragnet clause," but rather, on the new
security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the
California court in the cited case made an inquiry whether
the second loan was made in reliance on the original security
containing a "dragnet clause." Accordingly, finding a
different security was taken for the second loan no intent
that the parties relied on the security of the first loan could
be inferred, so it was held. The rationale involved, the court
said, was that the "dragnet clause" in the first security

instrument constituted a continuing offer by the borrower to

secure further loans under the security of the first security
instrument, and that when the lender accepted a different
security he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet
clause" is an "offer" by the mortgagor to the bank to provide
the security of the mortgage for advances of and when they
were made. Thus, it was concluded that the "offer" was not
accepted by the bank when a subsequent advance was
made because (1) the second note was secured by a chattel
mortgage on certain vehicles, and the clause therein stated
that the note was secured by such chattel mortgage; (2)
there was no reference in the second note or chattel
mortgage indicating a connection between the real estate
mortgage and the advance; (3) the mortgagor signed the
real estate mortgage by her name alone, whereas the
second note and chattel mortgage were signed by the
mortgagor doing business under an assumed name; and (4)
there was no allegation by the bank, and apparently no
proof, that it relied on the security of the real estate
mortgage in making the advance.
Indeed, in some instances, it has been held that in the
absence of clear, supportive evidence of a contrary
intention, a mortgage containing a "dragnet clause" will not
be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage
as providing security therefor.
It was therefore improper for petitioner in this case to seek
foreclosure of the mortgaged property because of nonpayment of all the three promissory notes. While the
existence and validity of the "dragnet clause" cannot be
denied, there is a need to respect the existence of the other
security given for PN BD#76/C-345. The foreclosure of the
mortgaged property should only be for the P250,000.00 loan
covered by PN BD#75/C-252, and for any amount not
covered by the security for the second promissory note. As
held in one case, where deeds absolute in form were
executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment
of such note, was in the absence of a special agreement to
the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security. This is
recognition that while the "dragnet clause" subsists, the
security specifically executed for subsequent loans must first
be exhausted before the mortgaged property can be
resorted to.
The security clause involved in the case at bar shows that,
by its terms:
As security for the payment of loan obtained by the
ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00)
Philippine Currency in accordance with the Promissory Note
attached hereto and made an integral part hereof as Annex
"A"
and/or
such
Promissory
Note/s
which
the
ASSIGNOR/PLEDGOR shall hereafter execute in favor of the
ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR hereby
transfers, assigns, conveys, endorses, encumbers and
delivers by way of first pledge unto the ASSIGNEE/PLEDGEE,
its successors and assigns, that certain Membership fee
Certificate Share in Wack Wack Golf and Country Club
Incorporated covered by Stock Certificate No. 217 with Serial
No. 1793 duly issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the name of the
ASSIGNOR."

it is comparable with the security clause in the case of

Prudential, viz.:
That for and in consideration of certain loans, overdraft and
other credit accommodations obtained from the Mortgagee
by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the
payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the Mortgagee may extend to
the Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the Mortgagee,
whether direct or indirect, principal or secondary as appears
in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the
back of this document, and/or appended hereto, together
with all the buildings and improvements now existing or
which may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute
owner free from all liens and incumbrances. . . .
and there is no substantive difference between the terms
utilized in both clauses securing future advances.
To recall, the critical issue resolved in Prudential was whether
the "blanket mortgage" clause applies even to subsequent
advancements for which other securities were intended. We
then declared that the special security for subsequent loans
must first be exhausted in a situation where the creditor
desires to foreclose on the "subsequent" loans that are due.
However, the "dragnet clause" allows the creditor to hold on
to the first security in case of deficiency after foreclosure on
the special security for the subsequent loans.
In Prudential, we disallowed the petitioners attempt at
multiple foreclosures, as it foreclosed on all of the
mortgaged properties serving as individual securities for
each of the three loans. This Court then laid down the rule,
thus:
where deeds absolute in form were executed to secure any
and all kinds of indebtedness that might subsequently
become due, a balance due on a note, after exhausting the
special security given for the payment of such note, was, in
the absence of a special agreement to the contrary, within
the protection of the mortgage, notwithstanding the giving of
the special security. This is recognition that while the
"dragnet clause" subsists, the security specifically executed
for subsequent loans must first be exhausted before the
mortgaged property can be resorted to.
However, this does not prevent the creditor from foreclosing
on the security for the first loan if that loan is past due,
because there is nothing in law that prohibits the exercise of
that right. Hence, in the case at bench, Premiere Bank has
the right to foreclose on the Wack Wack Membership, the
security corresponding to the first promissory note, with the
deed of assignment that originated the "dragnet clause."
This conforms to the doctrine in Prudential, as, in fact,
acknowledged in the decisions penultimate paragraph, viz.:
Petitioner, however, is not without recourse. Both the Court
of Appeals and the trial court found that respondents have
not yet paid the P250,000.00 and gave no credence to their
claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property
could still be properly subjected to foreclosure proceedings
for the unpaid P250,000.00 loan, and as mentioned earlier,
for any deficiency after D/A SFDX#129, security for PN

BD#76/c-345, has been exhausted, subject of course to

defenses which are available to respondents.
In any event, even without this Courts prescription in
Prudential, the release of the Wack Wack Membership as the
pledged security for Promissory Note 714-Y cannot yet be
done as sought by Central Surety. The chain of contracts
concluded between Premiere Bank and Central Surety
reveals that the Wack Wack Membership, which stood as
security for Promissory Note 714-Y, and which also stands as
security for subsequent debts of Central Surety, is a security
in the form of a pledge. Its return to Central Surety upon the
pretext that Central Surety is entitled to pay only the
obligation in Promissory Note No. 714-Y, will result in the
extinguishment of the pledge, even with respect to the
subsequent obligations, because Article 2110 of the Civil
Code provides:
(I)f the thing pledged is returned by the pledgor or owner,
the pledge is extinguished. Any stipulation to the contrary is
void.
This is contrary to the express agreement of the parties,
something which Central Surety wants this Court to undo.
We reiterate that, as a rule, courts cannot intervene to save
parties from disadvantageous provisions of their contracts if
they consented to the same freely and voluntarily.39
Attorneys Fees
The final issue is the propriety of attorneys fees. The trial
court based its award on the supposed malice of Central
Surety in instituting this case against Premiere Bank. We find
no malice on the part of Central Surety; indeed, we are
convinced that Central Surety filed the case in the lower
court in good faith, upon the honest belief that it had the
prerogative to choose to which loan its payments should be
applied.
Malicious prosecution, both in criminal and civil cases,
requires the presence of two elements, to wit: (a) malice and
(b) absence of probable cause. Moreover, there must be
proof that the prosecution was prompted by a sinister design
to vex and humiliate a person; and that it was initiated
deliberately, knowing that the charge was false and
baseless. Hence, the mere filing of what turns out to be an
unsuccessful suit does not render a person liable for
malicious prosecution, for the law could not have meant to
impose a penalty on the right to litigate. 40Malice must be
proved with clear and convincing evidence, which we find
wanting in this case.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The
assailed Decision of the Court of Appeals in CA-G.R. CV No.
85930 dated July 31, 2006, as well as its Resolution dated
January 4, 2007, are REVERSED and SET ASIDE. The Decision
of the Regional Trial Court of Makati City, Branch 132, in Civil
Case No. 00-1536, dated July 12, 2005, is REINSTATED with
the MODIFICATION that the award of attorneys fees to
petitioner is DELETED. No pronouncement as to costs.
SO ORDERED.

ESPINA V. CA JUNE 22, 2000

The case before the Court is an appeal from a decision of the
Court of Appeals[1] reversing that of the Regional Trial Court,
Antipolo, Rizal,[2]affirming in all respects the decision of the
Municipal Trial Court, Antipolo, Rizal, [3] ordering respondent
Rene G. Diaz to vacate the condominium unit owned by

petitioner and to pay back current rentals, attorney's fees

and costs.
The facts, as found by the Court of Appeals, are as follows:
"Mario S. Espina is the registered owner of a Condominium
Unit No. 403, Victoria Valley Condominium, Valley Golf
Subdivision, Antipolo, Rizal. Such ownership is evidenced by
Condominium Certificate of Title No. N-10 (p. 31, Rollo).
"On November 29, 1991, Mario S. Espina, the private
respondent as seller, and Rene G. Diaz, the petitioner as
buyer, executed a Provisional Deed of Sale, whereby the
former sold to the latter the aforesaid condominium unit for
the amount of P100,000.00 to be paid upon the execution of
the contract and the balance to be paid through PCI Bank
postdated checks as follows:
"1...........P400,000.00
..............Check
No.
301245
..............January 15, 1992
"2...........P200,000.00
..............Check
No.
301246
..............February 1, 1992
"3...........P200,000.00
..............Check
No.
301247
..............February 22, 1992
"4...........P200,000.00
..............Check
No.
301248
..............March 14, 1992 haideem
"5...........P200,000.00
..............Check
No.
301249
..............April 4, 1992
"6...........P200,000.00
..............Check
No.
301250
..............April 25, 1992
.............................(pp. 59-61, Rollo).
"Subsequently, in a letter dated January 22, 1992, petitioner
informed private respondent that his checking account with
PCI Bank has been closed and a new checking account with
the same drawee bank is opened for practical purposes. The
letter further stated that the postdated checks issued will be
replaced with new ones in the same drawee bank (p. 63,
Rollo).
"On January 25, 1992, petitioner through Ms. Socorro Diaz,
wife of petitioner, paid private respondent Mario Espina
P200,000.00, acknowledged by him as partial payment for
the condominium unit subject of this controversy (p.64,
Rollo).
"On July 26, 1992, private respondent sent petitioner a
"Notice of Cancellation" of the Provisional Deed of Sale (p.
48, Rollo).
"However, despite the Notice of Cancellation from private
respondent, the latter accepted payment from petitioner per
Metrobank Check No. 395694 dated and encashed on
October 28, 1992 in the amount of P 100,000.00 (p. 64,
Rollo).
"On February 24, 1993, private respondent filed a complaint
docketed as Civil Case No. 2104 for Unlawful Detainer
against petitioner before the Municipal Trial Court of
Antipolo, Branch 1.
"On November 12, 1993, the trial court rendered its decision,
the dispositive portion of which reads:
WHEREFORE, in view of the foregoing consideration,
judgment is hereby rendered ordering the defendant and all
persons claiming rights under him to vacate unit 403 of the
Victoria Golf Valley Condominium, Valley Golf Subdivision,
Antipolo, Rizal; to pay the total arrears of P126,000.00,
covering the period July 1991 up to the filing (sic) complaint,
and to pay P7,000.00 every month thereafter as rentals unit

(sic) he vacates the premises; to pay the amount of

P5,000.00 as and attorney's fees; the amount of P300.00 per
appearance, and costs of suit. Chiefx
However, the plaintiff may refund to the defendant the
balance from (sic) P400,000.00 after deducting all the total
obligations of the defendant as specified in the decision from
receipt of said decision.
SO ORDERED.' (Decision, Annex "B"; p. 27, Rollo)
"From the said decision, petitioner appealed to the Regional
Trial Court Branch 71, Antipolo, Rizal. On April 29, 1994, said
appellate court affirmed in all respects the decision of the
trial court."[4]
On June 14, 1994, petitioner filed with the Court of Appeals a
petition for review.
On July 20, 1994, the Court of Appeals promulgated its
decision reversing the appealed decision and dismissing the
complaint for unlawful detainer with costs against petitioner
Espina.
On August 8, 1994, petitioner filed a motion for
reconsideration of the decision of the Court of Appeals.[5]
On August 19, 1994, the Court of Appeals denied the motion.
[6]

Hence, this appeal via petition for review on certiorari.[7]

The basic issue raised is whether the Court of Appeals erred
in ruling that the provisional deed of sale novated the
existing contract of lease and that petitioner had no cause of
action for ejectment against respondent Diaz.
We resolve the issue in favor of petitioner.
According to respondent Diaz, the provisional deed of sale
that was subsequently executed by the parties novated the
original existing contract of lease. The contention cannot be
sustained. Respondent originally occupied the condominium
unit in question in 1987 as a lessee.[8] While he occupied the
premises as lessee, petitioner agreed to sell the
condominium unit to respondent by installments. [9] The
agreement to sell was provisional as the consideration was
payable in installments. Esmsc
The question is, did the provisional deed of sale novate the
existing lease contract? The answer is no. The novation must
be clearly proved since its existence is not presumed. [10] "In
this light, novation is never presumed; it must be proven as
a fact either by express stipulation of the parties or by
implication derived from an irreconcilable incompatibility
between old and new obligations or contracts." [11] Novation
takes place only if the parties expressly so provide,
otherwise, the original contract remains in force. In other
words, the parties to a contract must expressly agree that
they are abrogating their old contract in favor of a new one.
[12]
Where there is no clear agreement to create a new
contract in place of the existing one, novation cannot be
presumed to take place, unless the terms of the new
contract are fully incompatible with the former agreement on
every point.[13] Thus, a deed of cession of the right to
repurchase a piece of land does not supersede a contract of
lease over the same property. [14] In the provisional deed of
sale in this case, after the initial down payment,
respondent's checks in payment of six installments all
bounced and were dishonored upon presentment for the
reason that the bank account was closed.[15]Consequently, on
July 26, 1992, petitioner terminated the provisional deed of
sale by a notarial notice of cancellation. [16] Nonetheless,
respondent Diaz continued to occupy the premises, as
lessee, but failed to pay the rentals due. On October 28,
1992, respondent made a payment of P100,000.00 that may
be applied either to the back rentals or for the purchase of
the condominium unit. On February 13, 1993, petitioner

gave respondent a notice to vacate the premises and to pay

his back rentals.[17] Failing to do so, respondent's possession
became unlawful and his eviction was proper. Hence, on
February 24, 1993, petitioner filed with the Municipal Trial
Court, Antipolo, Rizal, Branch 01 an action for unlawful
detainer against respondent Diaz.[18]
Now respondent contends that the petitioner's subsequent
acceptance of such payment effectively withdrew the
cancellation of the provisional sale. We do not agree. Unless
the application of payment is expressly indicated, the
payment shall be applied to the obligation most onerous to
the debtor.[19] In this case, the unpaid rentals constituted the
more onerous obligation of the respondent to petitioner. As
the payment did not fully settle the unpaid rentals,
petitioner's cause of action for ejectment survives. Thus, the
Court of Appeals erred in ruling that the payment was
"additional payment" for the purchase of the property.
WHEREFORE, the Court GRANTS the petition for review
on certiorari, and REVERSES the decision of the Court of
Appeals.[20]Consequently, the Court REVIVES the decision of
the Regional Trial Court, Antipolo, Rizal, Branch 71,
[21]
affirming in toto the decision of the Municipal Trial Court,
Antipolo, Rizal, Branch 01.[22]
No costs.
SO ORDERED

1256- 1261 TENDER OF PAYMENT AND

CONSIGNATION
1.
PABUGAIS V. SAHUWANI 423 S 596
2.
LLOBRERA V. FERNANDEZ 488 S 509
3.
BENOS V. LAWILAO 509 S 549
4.
B.E. SAN DIEGO V. ALZUL 06/08/07
5.
CACAYORIN V. ARMED FORCES AND
POLICE 696 S 311
1267- DOCTRINE OF UNFORESEEN EVENTS
1.
PHILIPPINE NATIONAL CONSTRUCTION V.
CA 272 S 183
2.
MAGAT, JR. V. CA 337 S 298

1278-1290 COMPENSATION
1.
BPI V. CA
2.
PNB V. CA
3.
BGV REALTY V. CA
4.
METROPOLITAN BANK V. TONDA
5.
TRINIDAD V. ACAPULCO
6.
INSULAR INVESTMENT V. CAPITAL ONE
7.
FIRST UNITED CONSTRUCTION V.
BAYANIHAN

1291-1304- NOVATION
1.
LICAROS V. GATMAITAN
2.
GARCIA V. LLAMAS
3.
CALIFORNIA BUS LINES V. STATE
INVESTMENTS
4.
AQUINTEY V. TIBONG
5.
RICARZE V. CA
6.
LEDONIO V. CAPITOL DEVELOPMENT
7.
VALENZUELA V. KALAYAAN
8.
TOMIMBANG V. TOMIMBANG
9.
MILLA V. PEOPLE
10.
HEIRS OF SERVANDO V. GONZALES
11.
PNB V. SORIANO
12.
SERFINO V. FAR EAST BANK
13.
PHIL. RECLAMATION V. ROMAGO
14.
ACE FOODS V. MICROPACIFIC
15.
DAVID V. DAVID