Usury Law

23. Reformina v. Tomol [1985] (6% [as per the civil code] not 12% is the legal
interest, CBC 416 only applies to the legal interest of loans or forbearances, case is a
recovery of damages for injury to persons and loss of property, creditor wants more
interest -> no)
FACTS
This is a a Petition for Review on certiorari of the Resolution of CFI-Cebu Judge Tomol
for an action for Recovery of Damages for injury to Person and Loss of Property.
On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in Civil
Case No. R-11279, 2 the dispositive portion of which reads
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:
(g) Plaintiffs Pacita and Francisco Reformina the sum of P131,084.00 which is the value
of the boat F B Pacita Ill together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a
month as the estimated monthly loss suffered by them as a result of the fire of May 6,
1969 up to the time they are actually paid or already the total sum of P370,000.00 as of
June 4, 1972 with legal interest from the filing of the complaint until paid and to pay
attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs.
On appeal to the then Court of Appeals, the trial court's judgment was modified to reads
as follows
WHEREFORE. the judgment appealed from is modified such that defendants-appellants
Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby ordered to pay ...
The two (2) defendants- appellants are also directed to pay P100,000.00 with legal
interests from the filing of the complaint until paid as compensatory and moral damages
and P41,000.00 compensation for the value of the lost boat with legal interest from the
filing of the complaint until fully paid to Pacita F.Reformina and the heirs of
Francisco Reformina. The liability of the two defendants for an the awards is solidary.
Petitioners' motion for the reconsideration of the questioned Resolution having been
denied, they now come before Us through the instant petition praying for the setting aside
of the said Resolution and for a declaration that the judgment in their favor should bear
legal interest at the rate of twelve (12%) percent per annum pursuant to Central Bank
Circular No. 416 dated July 29, 1974.
ISSUE
How much, by way of legal interest, should a judgment debtor pay the judgment creditor?
WON legal interest meant 6% as provided for under Article 2209 of the Civil Code .

What kind of judgment is covered under USURY Law?

RULING
Article 2209 of the Civil Code is applicable in case at bar. It must be noted that the
decision herein sought to be executed is one rendered in an Action for Damages for injury
to persons and loss of property and does not involve any loan, much less forbearances of
any money, goods or credits. As correctly argued by the private respondents, the law
applicable to the said case is Article 2209 of the New Civil Code which reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.
The above provision remains untouched despite the grant of authority to the Central Bank
by Act No. 2655, as amended. To make Central Bank Circular No. 416 applicable to any
case other than those specifically provided for by the Usury Law will make the same of
doubtful constitutionality since the Monetary Board will be exercising legislative
functions which was beyond the intendment of P.D. No. 116.
Central Bank Circular No. 416 which provides
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or forbearance of
any money, goods, or credits and the rate allowed in judgments, in the absence of express
contract as to such rate of interest, shall be twelve (12%) per cent per annum. This
Circular shall take effect immediately. (Italics supplied)
The judgments spoken of and referred to are Judgments in litigations involving loans or
forbearance of any 'money, goods or credits. Any other kind of monetary judgment which
has nothing to do with, nor involving loans or forbearance of any money, goods or credits
does not fall within the coverage of the said law for it is not within the ambit of the
authority granted to the Central Bank.

24. Phil. Rabbit Bus Lines v. Cruz (same as above but opposite parties, debtor wants
less interest -> yes)

25. First Metro Investment v. Este del Sol (usury law still in effect when contract
was made, underwriting agreement was a cloak to hide usurious interest, unrelated
contract)
FACTS
FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal.

Under the agreement, the interest was 16% pa based on the diminishing balance. In case
of default, an acceleration clause was provided and the amount due is subject to 20% onetime penalty on the amount due and such amount shall bear interest at the highest rate
permitted by law. respondent executed a REM, individual continuing suretyship and an
underwriting agreement whereby FMIC shall underwrite the public offering of one
P120,000 common shares of respondents capital stock for one-time underwriting fee of
P200,000. For failure to pay its obligation, FMIC caused the foreclosure of the REM. At
the public auction, FIC was the highest bidder. Petitioner filed to collect for alleged
deficiency balance against respondents since it failed to collect from the sureties, plus
interest at 21% pa. the trial court ruled in favor of FMIC. Respondents appealed before
the CA which held that the fees provided for in the Underwriting and Consultacy
Agreements were mere subterfuges to camouflage the excessively usurious interest
charged. The CA ordered FMIC to reimburse petitioner representing what is ue to
petitioner and what is due to respondent.
ISSUE
Whether or not the interests are lawful
HELD
No. an apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract for the
payment by the borrower for the lenders services which re of little value or which are not
in fact to be rendered. Article 1957 clearly provides: contracts and stipulations, under any
cloak or device whatever, intended to circumvent the law against usury shall be void. The
borrower may recover in accordance with the laws on usury.
26. David v. CA (interest to be computed farther back, implementation of CB414
increased legal interest for 6% to 12%, no interest to be compounded after judicial
demand because there was no stipulated interest in the agreement)
Facts:
A writ of attachment over the real properties owned by Valentin Afable, Jr.. RTC
ordered Afable, Jr. To pay David P66,500 plus interest from July 24, 1974, until fully
paid. RTC amended its decison and ruled that legal rate of interest should be
computed from January 4, 1966, instead of from July 24, 1974.
Afable appealed to the Court of Appeals and then to the Supreme Court. In both
instances, the decision of the lower court was affirmed. Entries of judgment were
made and the record of the case was remanded to Branch 27 for the final execution.
An Alias Writ of Execution was issued by virtue of which respondent Sherif
Melchor P. Pea conducted a public auction. Sherif Pea informed the petitioner that
the total amount of the judgment is P270,940.52.
The amount included a
computation of simple interest. David, however, claimed that the judgment award
should be P3,027,238.50, because the amount due ought to be based on
compounded interest.
Although the auctioned properties were sold to the petitioner, Sherif Pea did
not issue the Certificate of Sale because there was an excess in the bid price in the
amount of P2,941,524.47, which the petitioner failed to pay despite notice. David filed
a Motion praying that respondent Judge Cruz issue an order directing respondent
Sherif Pea to prepare and execute a certificate of sale in his favor. His reason is that
compound interest, which is allowed by Article 2212 of the Civil Code, should apply in
this case.

David claim that in computing the interest due of the P66,500.00, interest should
be computed at 6% on the principal sum of P66,500.00 pursuant to Article 2209 and
then interest on the legal interest should also be computed in accordance with the
language of Article 2212 of the Civil Code.
Issue: Whether or not the amount due should be subject to a simple interest or
compounded interest.
Ruling:
In cases where no interest stipulated, no compounded interest could be further
earned
The Court ruled that Article 2212 contemplates the presence of stipulated or
conventional interest which has accrued when demand was judicially made. In cases
where no interest had been stipulated by the parties, as in the case of Philippine
American Accident Insurance, no accrued conventional interest could further earn
interest upon judicial demand.
In this case, no interest was stipulated by the parties. In the promissory note
denominated Compromise Agreement signed by the Afable, Jr. which was duly
accepted by the David no interest was mentioned. That being the case, the interest
should only be subject to a simple interest.
+++In accordance with CB Circular No. 416 and as construed in Reformina vs. Tomol

(139 SCRA 260), legal interest on P66,500.00 corresponds to 6% per annum for the
period January 4, 1966 to July 28, 1974 and 12% per annum from July 29, 1974 up to
April 26, 1993, amounting to P34,180.92 and P149,582.32, respectively, or a grand total
of P183,763.24.
27. Investors v. Auto World (IPP, contract to sell+purchase of receivables+REM=
mere cloak to hide an usurious loan, after Usury law was lifted Investors granted a
loan to Autoworld, although Que is in pari delicto this is an exception and
Autoworld is entitled to get the whole of the interest and not just the illegal part)

FACTS:
Petitioner Investors Finance Corporation, then known also as FNCB Finance (now doing
business under the name of Citytrust Finance Corporation), is a financing company doing
business with private respondent Autoworld Sales Corporation (AUTOWORLD) since
1975. Anthony Que, president of AUTOWORLD, also held the same position at its
affiliate corporation, private respondent Pio Barretto Realty Corporation (BARRETTO).
Sometime in August 1980 Anthony Que, in behalf of AUTOWORLD, applied for a direct
loan with FNCB. However, since the Usury Law imposed an interest rate ceiling at that
time, FNCB informed Anthony Que that it was not engaged in direct lending;

consequently, AUTOWORLD's request for loan was denied.

But sometime thereafter, FNCB's Assistant Vice President, Mr. Leoncio Araullo,
informed Anthony Que that although it could not grant direct loans it could extend funds
to AUTOWORLD by purchasing any of its outstanding receivables at a discount. After a
series of negotiations the parties agreed to execute an Installment Paper Purchase ("IPP")
transaction to enable AUTOWORLD to acquire the additional capital it needed. The
mechanics of the proposed "IPP" transaction was
(1) First, Pio Barretto (BARRETTO) would execute a Contract to Sell a parcel of
land in favor of AUTOWORLD for P12,999,999.60 payable in sixty (60) equal
monthly installments of P216,666.66. Consequently, BARRETTO would acquire
P12,999,999.60 worth of receivables from AUTOWORLD;
(2) FNCB would then purchase the receivables worth P12,999,999.60 from
BARRETTO at a discounted value of P6,980,000.00 subject to the condition that
such amount would be "flowed back" to AUTOWORLD;
(3) BARRETTO, would in turn, execute a Deed of Assignment (in favor of
FNCB) obliging AUTOWORLD to pay the installments of the P12,999,999.60
purchase price directly to FNCB; and
(4) Lastly, to secure the payment of the receivables under the Deed of
Assignment, BARRETTO would mortgage the property subject of the sale to
FNCB.
On 17 November 1980 FNCB informed AUTOWORLD that its Executive Committee
approved the proposed "IPP" transaction. The lawyers of FNCB then drafted the contracts
needed and furnished Anthony Que with copies thereof.
On 9 February 1981 the parties signed three (3) contracts to implement the "IPP"
transaction:
(1) Contract to Sell whereby BARRETTO sold a parcel of land to
AUTOWORLD, situated in San Miguel, Manila, together with the improvements
thereon, covered by TCT No. 129763 for the price of P12,999,999.60 payable in
sixty (60) consecutive and equal monthly installments of P216,666.66.
(2) Deed of Assignment whereby BARRETTO assigned and sold in favor of
FNCB all its rights, title and interest to all the money and other receivables due
from AUTOWORLD under the Contract to Sell, subject to the condition that the
assignee (FNCB) has the right of recourse against the assignor (BARRETTO) in
the event that the payor (AUTOWORLD) defaulted in the payment of its
obligations.
(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged the
property subject of the Contract to Sell to FNCB as security for payment of its
obligation under the Deed of Assignment.
After the three (3) contracts were concluded AUTOWORLD started paying the monthly
installments to FNCB.
On 18 June 1982 AUTOWORLD transacted with FNCB for the second time obtaining a
loan of P3,000,000.00 with an effective interest rate of 28% per annum. AUTOWORLD
and BARRETTO, as co-makers, then signed a promissory note in favor of FNCB worth
P5,604,480.00 payable in sixty (60) consecutive monthly installments of P93,408.00. To
secure the promissory note, AUTOWORLD mortgaged a parcel of land located in
Sampaloc, Manila, to FNCB. Thereafter, AUTOWORLD began paying the installments.

In December 1982, after paying nineteen (19) monthly installments of P216,666.66 on

the first transaction ("IPP" worth P6,980,000.00) and three (3) monthly installments of
P93,408.00 on the second transaction (loan worth P3,000,000.00), AUTOWORLD
advised FNCB that it intended to preterminate the two (2) transactions by paying their
outstanding balances in full. It then requested FNCB to provide a computation of the
remaining balances. FNCB sent AUTOWORLD its computation requiring it to pay a total
amount of P10,026,736.78, where P6,784,551.24 was the amount to settle the first
transaction while P3,242,165.54 was the amount to settle the second transaction.
On 20 December 1982 AUTOWORLD wrote FNCB that it disagreed with the latter's
computation of its outstanding balances. On 27 December 1982 FNCB replied that it
would only be willing to reconcile its accounting records with AUTOWORLD upon
payment of the amounts demanded. Thus, despite its objections, AUTOWORLD
reluctantly paid FNCB P10,026,736.78 through its UCPB account.
On 5 January 1983 AUTOWORLD asked FNCB for a refund of its overpayments in the
total amount of P3,082,021.84. According to AUTOWORLD, it overpaid P2,586,035.44
to settle the first transaction and P418,262.00 to settle the second transaction.
The parties attempted to reconcile their accounting figures but the subsequent
negotiations broke down prompting AUTOWORLD to file an action before the Regional
Trial Court of Makati to annul the Contract to Sell, the Deed of Assignment and the Real
Estate Mortgage all dated 9 February 1981. It likewise prayed for the nullification of
thePromissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June
1982.
In its complaint, AUTOWORLD alleged that the aforementioned contracts were only
perfected to facilitate a usurious loan and therefore should be annulled
FNCB argued that the contracts dated 9 February 1981 were not executed to hide a
usurious loan. Instead, the parties entered into a legitimate Installment Paper Purchase
("IPP") transaction, or purchase of receivables at a discount, which FNCB could legally
engage in as a financing company. With regard to the second transaction, the existence of
a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was
perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had
effectively lifted the ceiling rates for loans having a period of more than three hundred
sixty-five (365) days.
On 11 July 1988 the Regional Trial Court of Makati ruled in favor of FNCB declaring
that the parties voluntarily and knowingly executed a legitimate "IPP" transaction or the
discounting of receivables. AUTOWORLD was not entitled to any reimbursement since it
was unable to prove the existence of a usurious loan.
The Court of Appeals modified the decision of the trial court and concluded that the
"IPP" transaction, comprising of the three (3) contracts perfected on 9 February 1981,
was merely a scheme employed by the parties to disguise a usurious loan. It ordered the
annulment of the contracts and required FNCB to reimburse AUTOWORLD
P2,586,035.44 as excess interest payments over the 12% ceiling rate. However, with
regard to the second transaction, the appellate court ruled that at the time it was executed
the ceiling rates imposed by the Usury Law had already been lifted thus allowing the
parties to stipulate any rate of interest.
ISSUE:
We stress at the outset that this petition concerns itself only with the first transaction

involving the alleged' "IPP" worth P6,980,000.00, which was implemented through the
three (3) contracts of 9 February 1981. As to the second transaction, which involves the
P3,000,000.00 loan, we agree with the appellate court that it was executed when the
ceiling rates of interest had already been removed, hence the parties were free to fix any
interest rate.
The pivotal issue therefore is whether the three (3) contracts all dated 9 February 1981
were executed to implement a legitimate Installment Paper Purchase ("IPP") transaction
or merely to conceal a usurious loan.
HELD:
The three (3) contracts were executed to conceal a usurious loan.
Generally, the courts only need to rely on the face of written contracts to determine the
intention of the parties. "However, the law will not permit a usurious loan to hide itself
behind a legal form. Parol evidence is admissible to show that a written document though
legal in form was in fact a device to cover usury. If from a construction of the whole
transaction it becomes apparent that there exists a corrupt intention to violate the Usury
Law, the courts should and will permit no scheme, however ingenious, to becloud the
crime of usury." The following circumstances show that such scheme was indeed
employed:
First, petitioner claims that it was never a party to the Contract to Sell between
AUTOWORLD and BARRETTO. As far as it was concerned, it merely purchased
receivables at a discount from BARRETTO as evidenced by the Deed of Assignment
dated 9 February 1981. Whether the Contract to Sell was fictitious or not would have no
effect on its right to claim the receivables of BARRETTO from AUTOWORLD since the
two contracts were entirely separate and distinct from each other.
Curiously however, petitioner admitted that its lawyers were the ones who drafted all the
three (3) contracts involved which were executed on the same day. Also, petitioner was
the one who procured the services of the Asian Appraisal Company to determine the fair
market value of the land to be sold way back in September of 1980 or six (6) months
prior to the sale. If it were true that petitioner was never privy to the Contract to Sell, then
why was it interested in appraising the lot six (6) months prior to the sale? And why did
petitioner's own lawyers prepare the Contract to Sell? Obviously, petitioner actively
participated in the sale to ensure that the appraised lot would serve as adequate collateral
for the usurious loan it gave to AUTOWORLD.
Second, petitioner insists that the 9 February 1981 transaction was a legitimate "IPP"
transaction where it only bought the receivables of BARRETTO from AUTOWORLD
amounting to P12,999,999.60 at a discounted price of P6,980,000.00. However, per
instruction of petitioner in its letter to BARRETTO dated 17 November 1980 the whole
purchase price of the receivables was to be "flowed back" to AUTOWORLD. And in its
subsequent letter of 24 February 1981 petitioner also gave instructions on how
BARRETTO should apply the proceeds worth P6,980,000.00.
It can be seen that out of the nine (9) items of appropriation stated (in the letter), Item
Nos. 2-8 had to be returned to petitioner. Thus, in compliance with the aforesaid letter,
BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to petitioner to settle some
of AUTOWORLD's previous debts to it. Any remaining amount after the application of
the proceeds would then be surrendered to AUTOWORLD in compliance with the letter
of 17 November 1980; none went to BARRETTO.

The foregoing circumstances confirm that the P6,980,000.00 was really an indirect loan
extended to AUTOWORLD so that it could settle its previous debts to petitioner. Had
petitioner entered into a legitimate purchase of receivables, then BARRETTO, as seller,
would have received the whole purchase price, and free to dispose of such proceeds in
any manner it wanted. It would not have been obliged to follow the "Application of
Proceeds" stated in petitioner's letter.
Third, in its 17 November 1980 letter to BARRETTO, petitioner itself designated the
proceeds of the "IPP" transaction as a "loan." In that letter, petitioner stated that the "loan
proceeds" amounting to P6,980,000.00 would be released to BARRETTO only upon
submission of the documents it required. And as previously mentioned, one of the
required documents was a letter agreement between BARRETTO and AUTOWORLD
stipulating that the P6,980,000.00 should be "flowed back" to AUTOWORLD. If it were
a genuine "IPP" transaction then petitioner would not have designated the money to be
released as "loan proceeds" and BARRETTO would have been the end recipient of such
proceeds with no obligation to turn them over to AUTOWORLD.
Fourth, after the interest rate ceilings were lifted on 21 July 1981 petitioner extended on
18 June 1982 a direct loan of P3,000,000.00 to AUTOWORLD. This time however, with
no more ceiling rates to hinder it, petitioner imposed a 28% effective interest rate on the
loan. And no longer having a need to cloak the exorbitant interest rate, the promissory
note evidencing the second transaction glaringly bore the 28% interest rate on its face. We
are therefore of the impression that had there been no interest rate ceilings in 1981,
petitioner would not have resorted to the fictitious "IPP" transaction; instead, it would
have directly loaned the money to AUTOWORLD with an interest rate higher than 12%.
Thus, although the three (3) contracts seemingly show at face value that petitioner only
entered into a legitimate discounting of receivables, the circumstances cited prove that the
P6,980,000.00 was really a usurious loan extended to AUTOWORLD.
Petitioner anchors its defense on Sec. 7 of the Usury Law which states
Provided, finally, That nothing herein contained shall be construed to prevent the
purchase by an innocent purchaser of a negotiable mercantile paper, usurious or
otherwise, for valuable consideration before maturity, when there has been no
intention on the part of said purchaser to evade the provisions of the Act and said
purchase was not a part of the original usurious transaction. In any case however,
the maker of said note shall have the right to recover from said original holder the
whole interest paid by him thereon and, in any case of litigation, also the costs and
such attorney's fees as may be allowed by the court.
Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper
by innocent purchasers. But even the law has anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the law itself made a qualification. It would
recognize legitimate purchase of negotiable mercantile paper, whether usurious or
otherwise, only if the purchaser had no intention of evading the provisions of the Usury
Law and that the purchase was not a part of the original usurious transaction. Otherwise,
the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code
provides
Contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws on usury shall be void. The borrower may recover in
accordance with the laws on usury.

In the case at bar, the attending factors surrounding the execution of the three (3)
contracts on 9 February 1981 clearly establish that the parties intended to transact a
usurious loan. These contracts should therefore be declared void. Having declared the
transaction between the parties as void, we are now tasked to determine how much
reimbursement AUTOWORLD is entitled to. The Court of Appeals, adopting the
computation of AUTOWORLD in its plaintiff-appellant's brief, ruled
According to plaintiff-appellant, defendant-appellee was able to collect
P3,921,217.78 in interests from appellant. This is not denied by the appellee.
Computed at 12% the effective interest should have been P1,545,400.00. Hence,
appellant may recover P2,586,035.44, representing overpayment arising from
usurious interest rate charged by appellee.
While we do not dispute the appellate court's finding that the first transaction was a
usurious loan, we do not agree with the amount of reimbursement awarded to
AUTOWORLD. Indeed, it erred in awarding only the interest paid in excess of the 12%
ceiling. In usurious loans, the creditor can always recover the principal debt. However,
the stipulation on the interest is considered void thus allowing the debtor to claim the
whole interest paid. In a loan of P1,000.00 with interest at 20% per annum or P200.00 per
year, if the borrower pays P200.00, the whole P200.00 would be considered usurious
interest, not just the portion thereof in excess of the interest allowed by law.
In the instant case, AUTOWORLD obtained a loan of P6,980,000.00. Thereafter, it paid
nineteen (19) consecutive installments of P216,666.66 amounting to a total of
P4,116,666.54, and further paid a balance of P6,784,551.24 to settle it. All in all, it
paid the aggregate amount of P10,901,217.78 for a debt of P6,980,000.00. For the
23-month period of the existence of the loan covering the period February 1981 to
January 1982, AUTOWORLD paid a total of P3,921,217.78 in interests. Applying the
12% interest ceiling rate mandated by the Usury Law, AUTOWORLD should have only
paid a total of P1,605,400.00 in interests. Hence, AUTOWORLD is entitled to recover
the whole usurious interest amounting to P3,921,217.78.

28. Mendoza v. CA (restructuring of loan was never accepted, the 2 new promissory
notes are valid and enforceable, foreclosure in light of non-payment is valid, increase
of interest on the PNs is however invalid that was unilaterally imposed by the bank
without the approval of the debtor - violative of mutuality of contracts)
Facts:
PNB extended P500,000 credit line and P1 million letter of credit infavor of
Mendoza. As security for the credit accomodations, he mortgaged real and personal
properties to PNB. The real estate mortgage provided for an escalation clause.
He also executed 3 promissory notes covering the P500,000 credit line in
1979. The said notes also provided for an interest at the rate of 12% per annum until
paid , and that PNB may raise the interest without further notice.
He also executed 11 Application and Agreement for the commercial letter of
credit providing for 9% interest per annum from the date of drafts until the arrival of
payment in New York and that the bank may increase the interest without further
notice. The bank sent a letter to Mendoza, informing him that the interest rates
increased to 14% per annum.
Mendoza made some proposals for the restructuring of his past due accounts
into 5 year term loan and for an additional P2 million letter of credit. However, PNB
did not approve his proposal and reduced the letter of credit to P 1 million only.
Mendoza claimed that he was forced to sign 2 blank promissory notes and
claimed that his proposal for 5 year restructuring of his past due accounts was
approved . He also alleged taht PNB violated their agreement because PNB inserted

21% instead of 18% in the first promissory note and 18% instead of 12% in the
second promissory note. The 2 promissory notes also provided escalation clauses.
The 2 newly executed promissory notes novated the three 1979 promissory
notes and 11 Application and Agreement for Commercial Letter of Credit executed by
Mendoza earlier.
After sometime, pursuant to the escalation clause, the interests in the two
promissory notes were again increased. Due to Mendozas failure to pay the 2
promissory notes, PNB foreclosed the real and personal mortgages. Mendoza filed for
specific performance, nullification of foreclosure and damages.
Issue: Whether or not the interest rates imposed on the 2 newly executed promissory
notes were valid.
Ruling:
The Court upheld the validity of the 2 newly executed promissory notes on the
ground that private transactions are presumed to be fair and regular.
However, it ruled that interest rates imposed on the 2 newly executed
promissory notes are not valid on the ground that Mendoza was not informed
beforehand by PNB of the change in the stipulated interest rates.
It held that unilateral determination and imposition of increased interest rates
by PNB is violative of the principle of mutuality of contract. Contract changes must be
made with the consent of the contractiong parties. The minds of all parties must
meet as to the proposed modification, especially wwhen it afects an important
aspect of the agreement. No one receiving a proposal to change a contract to which
the party is obliged to answer the proposal, and his silence per se cannot be
construed as acceptance.

29. Solangon v. Salazar (there are 3 not just 1 REMs, 2 of the REMs have been
paid and the last must be paid as well, however 72% interest in unconscionable
despite the lack of an interest ceiling, to be replaced with the legal interest of 12%)
Facts:
Petitioner-spouses executed 3 real estate mortgages on a parcel of land situated in
Bulacan, in favor of the same Respondent Salazar to secure payment of loans of
P60 K, P136 K and P230 K payable within 4 months, 1 year, and 4 months in that
order, with 6% monthly interest on the first loan, and legal interests on the others.
This action was initiated by the Petitioner-spouses to prevent the foreclosure of the
mortgaged property.
They alleged that they obtained only one loan from the Respondent which was the
P60 K secured by the first mortgage. Also, Petitioner-spouses opined that the 6%
monthly interest was unconscionable.
The subsequent mortgages were merely continuations of the first one, which is null
and void.
Moreover, the Respondent assured them that he will not foreclose the mortgage as
long as they pay the stipulated interest upon maturity or within a reasonable time
thereafter. Petitioner-spouses substantially paid the loans with interest but were
unable to pay it in full.
On the other hand, the Respondent claimed that the mortgages were executed to
secure 3 separate loans of and that the first two loans were paid, but the last one
was not.
He denied having represented that he will not foreclose the mortgage as long as the
Petitioner-spouses pay interest.

Lower courts ruled in favour of Respondent. Thus, this petition.

Issue:
Whether or not the 6% monthly interest is unconscionable?
Ruling:
Yes. The SC ruled that this is unconscionable.
While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905,
nothing in the said circular grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging
of their assets.
In Medel v. Court of Appeals, the Court decreed that the 5.5% interest or 66% per
annum was not usurious but held that the same must be equitably reduced for
being iniquitous, unconscionable and exorbitant , and hence, contrary to morals
(contra bonos mores), if not against the law.
In the case at bench, Petitioner-spouses stand on a worse situation. They are
required to pay the stipulated interest rate of 6% per month or 72% per annum
which is definitely outrageous and inordinate.
Hence, the interest rate must be reduced equitably. An interest of 12% per annum
is deemed fair and reasonable.

30. Spouses Pascual v. Ramos

FACTS: Petitioners executed a Deed of Absolute Sale with Right to Repurchase with
respondent, in consideration of Php 150,000. The petitioners did not exercise their
right to repurchase the property within the stipulated one-year period; hence,
respondent prayed that the title over the parcels of land be consolidated in his favor.
Petitioners aver that what was really executed between them and the respondent is a
real estate mortgage and that there was no agreement limiting the period within
which to exercise the right to repurchase and that they have even overpaid
respondent.
Respondent ofered in evidence a document denominated as Sinumpaang Salaysay
which had a provision of an interest of 7% per month on the principal loan of Php
150,000. RTC ruled that the transaction was actually a loan and the payment was
secured by a mortgage of the property, and that the petitioners had made payments
which resulted in overpayment as the interest was at 7% per annum. Respondent
filed an MR alleging that the interest stipulated in the Sinumpaang Salaysay was 7%
per month. The RTC ruled in favor of the respondent acknowledging that the correct
interest rate stipulated was 7% per month. However, the RTC declared that the 7%
per month interest is too burdensome and onerous and so the court unilaterally
reduced the interest rate from 7% per month to 5% per month. Petitioners filed an
MR alleging that either 5% or 7% per month is exorbitant, unconscionable,
unreasonable, usurious and inequitable.
ISSUE: WON the interest of 5% month is exorbitant, unconscionable, unreasonable,
usurious and inequitable.
HELD: NO. It is a basic principle in civil law that parties are bound by the stipulations
in the contracts voluntarily entered into by them. Parties are free to stipulate terms
and conditions which they deem convenient provided they are not contrary to law,
morals, good customs, public order, or public policy.
The interest rate of 7% per month was voluntarily agreed upon by RAMOS and the
PASCUALs. There is nothing from the records and, in fact, there is no allegation

showing that petitioners were victims of fraud when they entered into the agreement
with RAMOS. Neither is there a showing that in their contractual relations with
RAMOS, the PASCUALs were at a disadvantage on account of their moral dependence,
ignorance, mental weakness, tender age or other handicap, which would entitle them
to the vigilant protection of the courts as mandated by Article 24 of the Civil Code.
With the suspension of the Usury Law and the removal of interest ceiling, the parties
are free to stipulate the interest to be imposed on loans. Absent any evidence of
fraud, undue influence, or any vice of consent exercised by RAMOS on the PASCUALs,
the interest agreed upon is binding upon them. This Court is not in a position to
impose upon parties contractual stipulations diferent from what they have agreed
upon

31. Eastern Shipping v. Court of Appeals

FACTS:
- 2 Fiber drums of Riboflavin were shipped from Japan for delivery vessel owned
by Eastern Shipping (P) and that the shipment was insured by Mercantile
Insurance (R)
- Upon arrival in Manila, it was discharged unto the custody of Metro Port, which it
stated in its survey that 1 drum was in bad order.
- It was then received by Allied Brokerage wherein it stated in its survey that one
drum was opened and without seal
- Allied then delivered it to the consignees W/H, which it excepted that 1 drum
contained spillages while the rest was adulterated/fake
- R then filed claims against P for the losses sustained by the consignee (which R
subrogated).
- LC ruled in favor of R and ordered P to pay damages, however, it failed to state
when the interest rate should commence from date of filing of complaint at
12% or from date of judgment of TC at 6%
ISSUE: When should the interest rate commence and at what rate
SC: 6% from the date of decision and 12% from date of finality of judgment until
payment
- This case laid down the rules on the interest rates:
- A) when an obligation regardless of its source, is breached, the contravenor can
be held liable for damages
- B) with regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof,
shall be as follows:
- If it consists of payment of money (loan/forbearance)
o Interest due imposed = as stipulated in writing and the
o Interest due = earn legal interest from the time it is judicially demanded
o No stipulation = 12% per annum from date of default (judicial/extra
judicial)
- If it is not loan/forbearance
o Interest on amount of damages = imposed by discretion of court at 6%
o No interest shall be ordered on unliquidated claims/damages until
demand can be established with reasonable certainty
o When demand is established with reasonable certainty, interest shall
begin to run from the time the claim is made (judicially/extrajudicially)
o But if it cannot be reasonably established at the time demand was made
= interest to run from date of judgment of the court
- If judgment becomes Final and Executory
o Rate of legal interest = 12%
o From finality to satisfaction
o Why? It is already considered as forbearance

32. Eastern Assurance v. Court of Appeals

Facts:
1) On April 9, 1981, private respondent Vicente Tan insured his building in
Dumaguete City against fire with petitioner Eastern Assurance and Surety
Corporation (EASCO) for P250,000.00.
2) On June 26, 1981, the building was destroyed by fire. As his claim for indemnity
was refused, private respondent filed a complaint for breach of contract with
damages against petitioner. The RTC Court, decided in favour of Vicente Tan. In
its ruling, the RTC court imposed the rate of interest at 12% per annum, and
decided that EASCO to pay immediately to Vicente Tan the unpaid balance of
interest of the principal amount of P250,000.00 equivalent to 6% per annum from
June 26, 1981 to September 30,1994.
3) Petitioner EASCO appealed to the Court of Appeals, which, on July 30, 1993,
affirmed the decision of the trial court. The CA, on the authority of prior case,
Eastern Shipping Lines, Inc. v. Court of Appeals, that the interest rate on the
amount due should be 6% per annum from June 26, 1981 to August 24, 1993, and
12% per annum beginning August 25, 1993 until the money judgment is paid.
4) Thereafter, petitioner EASCO tendered payment of the money judgment in the
amount of P250,000.00 plus interest of 6% per annum from June 26, 1981 to July
30, 1993.
5) However, private respondent refused to accept payment on the ground that the
applicable legal rate of interest was 12% per annum. Subsequently, private
respondent brought the matter to the Insurance Commission.
6) Then in, 1995, the parties agreed before the hearing officer of the commission that
the interest should be computed from June 26, 1981 to September 30, 1994.
Petitioner would file with the trial court a motion to fix the legal rate of interest
attaching thereto a check in the amount of P250,000.00 with 6% interest per
annum.
7) In its appeal EASCO to the SC, it contended that the CA wrongfully applied the
aforecited paragraph 3 of the suggested rules of thumb for future guidance [as
formulated in Eastern Shipping Lines, Inc. v. Court of Appeals, and unlawfully
ignored or disregarded the agreed cut-off date for the payment of the legal rate.
Issue: When the judgment of the court awarding a sum of money becomes final
and executory what is the rate to be imposed?
Held: Petitioner's contentions are without merit.
The prior Eastern Shipping Lines, Inc. v. Court of Appeals, was held:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts, is breached, the contravener can be held liable for
damages. The provisions under "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
Par. 3: When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph

2, above, shall be 12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit.
Unquestionably, this case falls under the rule stated in paragraph 3. The question is
whether this rule can be applied to this case.
The prior Eastern Shipping Lines, case. did not lay down any new rules because it was
just a a comprehensive summary of existing rules on the computation of legal interest.
As to the "cut-off date" for the payment of legal interest:
The trial court's finding on this point is binding. Hence, the payment of 12% legal interest
per annum should commence from August 25, 1993, the date the decision of the trial
court became final, up to September 30, 1994, the agreed "cut-off-date" for the payment
of legal interest. The decision of the CA is affirmed.
33. Rodzssen Supply v. Far East (hydralulic loaders, letter of credit, Far east paid
afer LoC already expired, rodzenssen did not act immedialy and kept the products
for 3 years, rodzsen sould pay)
It is only fair then that the importers marginal deposit (if one was made, as in this
case), should be set off against his debt, for while the importer earns no interest on his
marginal deposit, the bank, apart from being able to use said deposit for its own
purposes, also earns interest on the money it loaned to the importer.
Facts: Southeast Timber Co. (TOMCO) applied for, and was granted by the Philippine
Commercial and Industrial Bank (PCIB), a domestic letter of credit for P 80,000 in favor
of its supplier, Oregon Industries, Inc., to pay for one Skagit Yarder with accessories.
PCIB paid to Oregon Industries the cost of the machinery against a bill of exchange for P
80,000, with recourse, presentment and notice of dishonor waived, and with date of
maturity on January 4, 1964. After making the required marginal deposit of P28,000,
TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging receipt of
the merchandise in trust for the bank, with the obligation to hold the same in storage as
property of PCIB, with a right to sell the same for cash provided that the entire proceeds
thereof are turned over to the bank, to be applied against acceptance(s) and any other
indebtedness of TOMCO, Inc.
In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the
trust receipt, petitioner Ramon Abad signed an undertaking entitled, Deed of Continuing
Guaranty appearing on the back of the trust receipt, whereby he promised to pay the
obligation jointly and severally with TOMCO, Inc. Except for TOMCOs P28,000
marginal deposit in the bank, no payment has been made to PCIB by either TOMCO, Inc.
or its surety, Abad, on the P80,000 letter of credit. Consequently, PCIB filed a collection
suit against Abad and TOMCO. TOMCO did not deny its liability to PCIB under the

letter of credit but it alleged that inasmuch as it made a marginal deposit of P28,000, this
amount should have been deducted from its principal obligation, leaving a balance of
P52,000 only, on which the bank should have computed the interest, bank charges, and
attorneys fees.
Issue: Whether or not the marginal deposit should be included in computing the liability
of TOMCO and Abad.
Held: It is only fair then that the importers marginal deposit (if one was made, as in this
case), should be set off against his debt, for while the importer earns no interest on his
marginal deposit, the bank, apart from being able to use said deposit for its own purposes,
also earns interest on the money it loaned to the importer. It would be onerous to compute
interest and other charges on the face value of the letter of credit which the bank issued,
without first crediting or setting off the marginal deposit which the importer paid to the
bank. Compensation is proper and should take effect by operation of law because the
requisites in Article 1279 of the Civil Code are present and should extinguish both debts
to the concurrent amount (Art. 1290, Civil Code).
The marginal deposit requirement is a Central Bank measure to cut off excess currency
liquidity which would create inflationary pressure. It is a collateral security given by the
debtor, and is supposed to be returned to him upon his compliance with his secured
obligation. Consequently, the bank pays no interest on the marginal deposit, unlike an
ordinary bank deposit which earns interest in the bank. As a matter of fact, the marginal
deposit requirement for letters of credit has been discontinued, except in those cases
where the applicant for a letter of credit is not known to the bank or does not maintain a
good credit standing therein.
34. Plantilla v. Baliwag
Facts:
In a civil case, lower court rendered a decision ordering:
o Spouses Orga and Plantilla to reinstate Suiza as share tenant
o That they pay Suiza unrealized shares from the harvests of coconut fruits
from August until reinstated the amount of P1,000 with legal interest until
fully paid.
The decision, however, did not state the interest to be charged.
A writ of execution was issued addressed to Sherif Baliwag.
Baliwag demanded payment from the spouses representing the share of Suiza the
amount of 480k, representing the coconut harvest from Aug 1979 to Jan 1998 at
P1,000 with 8 harvests per year with an interest rate of 12% per annum or a total

of 222% plus attorneys fees.

Col. Plantilla, administrator of the spouses, filed an administrative complaint against
Baliwag charging him of serious irregularities in implementation of the writ of
execution alleging that dispositive portion of the decision did not contain 8
harvest per year and Baliwag took it upon himself to specify the number of
harvests.
Issue: Whether or not Sherif is guilty of irregularities?
Held:
Yes, Baliwag is guilty of malfeasance, not irregularities. The determination of the
amount due under the writ properly pertained to the Judge. Yet, respondent assumed
the task. For doing so instead of pointing out to the court the deficiency of the writ,
he should be sanctioned. He should not have arrogated unto himself judicial functions
that were to be performed only by the judge.
The computation of the amount due under the writ is not the duty of the sherif. Such
amount should have already been specifically stated in the writ if execution issued by
the court under Section 3 Rule 39 of the 1997 Rules of Court. All that the sherif
should do upon receipt of that writ is the ministerial duty of enforcing it.

35. PNB v. CA
FACTS:
- Province of Isabela issued several checks drawn against its account with PNB (P)
in favor of Ibarrola (R), as payments for the purchase of medicines.
- The checks were delivered to Rs agents who turned them over to R, except 23
checks amounting to P98k.
- Due to failure to receive full amount, R filed case against P
- LC, CA and SC ordered PNB to pay however, all 3 courts failed to specify the
legal rate of interest 6% or 12%
ISSUE: WoN the rate to be used is 6%
SC: YES!
- This case does not involve a loan, forbearance of money or judgment involving a
loan or forbearance of money as it arose from a contract of sale whereby R did
not receive full payment for her merchandise.
- When an obligation arises from a contract of purchase and sale and not from a
contract of loan or mutuum, the applicable rate is 6% per annum as provided
in Art. 2209 of the NCC
- 6% from filing of complaint until full payment before finality of judgment
- 12% from finality of judgment

36. RCBC v. Alfa RTW Manufacturing (obligation arising from a letter of credit-trust
receipt transaction, parties stipulated interest rates, stipulations are law between
parties which the law cannot deviate from, computation of interest is a
mathematical formula, an exact science, 18M nor 3M)
TOTAL AMOUNT DUE = principal + interest + service charge + penalty + interest on
interest
Facts:Alfa on separate instances was granted by RCBC 4 letters of credit to facilitate
the purchase of raw materials for their garments business. Alfa executed 4 trust
receipts and made comprehensive surety agreements wherein the signatory officers
of Alfa agreed in joint/several capacity to pay RCBC in case the company defaulted.
RCBC filed a case versus Alfa for a sum of money. The CA awarded only P3M
(minimum amount) to RCBC instead of P18M as stipulated in their contract.

Issue:W/N the CA can deviate from the provisions of the contract between the
parties?
Ruling: No. Contracting parties may establish agreements terms, deemed advisable
provided they are not contrary to law/public policy. A contract is a law between the
parties. In this case its valid because it was not excessive under the Usury Law.

WHEREFORE, the petition is hereby GRANTED. The assailed decision of the Court of
Appeals is MODIFIED in the sense that the award to petitioner RCBC of P3,060,406.25
is SET ASIDE and substituted with an amount to be computed by the trial court, upon
finality of this Decision, in accordance with the formula indicated above.
37. Nacar v. Gallery Frames (illegal dismissal, employer-petitioner takes on the risk
of paying a higher amount in appealing judgment, legal rate of interest after finality
of decision went to 6% from 12% on July, 1, 2013, backwages and separation pay to
be computed from date of dismissal to finality of the decision of the SC)
Civil Law Torts and Damages Actual and Compensatory Damages Legal Rate of
Interest is now 6%
Labor Law Labor Relations Illegal Dismissal Computation of Monetary Benefits
Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey, Jr.
Nacar alleged that he was dismissed without cause by Gallery Frames on January 24,
1997. On October 15, 1998, the Labor Arbiter (LA) found Gallery Frames guilty of
illegal dismissal hence the Arbiter awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court
affirmed the decision of the Labor Arbiter and the decision became final on May 27,
2002.
After the finality of the SC decision, Nacar filed a motion before the LA for
recomputation as he alleged that his backwages should be computed from the time of his
illegal dismissal (January 24, 1997) until the finality of the SC decision (May 27, 2002)
with interest. The LA denied the motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was illegally dismissed )January 24,
1997) until the decision of the LA (October 15, 1998). The LA reasoned that the said date
should be the reckoning point because Nacar did not appeal hence as to him, that decision
became final and executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it comes to illegal dismissal cases
(referring to cases where the dismissed employee wins, or loses but wins on appeal). The
first part is the ruling that the employee was illegally dismissed. This is immediately final
even if the employer appeals but will be reversed if employer wins on appeal. The
second part is the ruling on the award of backwages and/or separation pay. For
backwages, it will be computed from the date of illegal dismissal until the date of the
decision of the Labor Arbiter. But if the employer appeals, then the end date shall be
extended until the day when the appellate courts decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on appeal, will increase this is
just but a risk that the employer cannot avoid when it continued to seek recourses against
the Labor Arbiters decision. This is also in accordance with Article 279 of the Labor

Code.
Anent the issue of award interest in the form of actual or compensatory damages, the
Supreme Court ruled that the old case of Eastern Shipping Lines vs CA is already
modified by the promulgation of the Bangko Sentral ng Pilipinas Monetary Board
Resolution No. 796 which lowered the legal rate of interest from 12% to 6%. Specifically,
the rules on interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon extra-judicial demand or
upon judicial demand whichever is appropriate and subject to the provisions of Article
1169 of the Civil Code)
b.2. rate of interest shall be 6% per annum
2. Non-Monetary Obligations (such as the case at bar)
a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of
judicial or extra-judicial demand (Art. 1169, Civil Code)
b. If unliquidated, no interest
Except: When later on established with certainty. Interest shall still be 6% per annum
demandable from the date of judgment because such on such date, it is already deemed
that the amount of damages is already ascertained.
3. Compounded Interest
- This is applicable to both monetary and non-monetary obligations
- 6% per annum computed against award of damages (interest) granted by the court. To
be computed from the date when the courts decision becomes final and executory until
the award is fully satisfied by the losing party.
4. The 6% per annum rate of legal interest shall be applied prospectively:
- Final and executory judgments awarding damages prior to July 1, 2013 shall apply the
12% rate;
- Final and executory judgments awarding damages on or after July 1, 2013 shall apply
the 12% rate for unpaid obligations until June 30, 2013; unpaid obligations with respect
to said judgments on or after July 1, 2013 shall still incur the 6% rate.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the
Court of Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009
are REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24,
1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332 became
final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed

from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from July 1, 2013
until their full satisfaction.