CREDIT TRANSACTION

[G.R. No. 114398. October 24, 1997]

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS
and THE PEOPLE OF THE PHILIPPINES, represented by the
Solicitor General, respondents.
DECISION
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional
Trial Court (RTC), Branch 93, Quezon City, in an information which reads
as follows:
That on or between the month of May 19, 1988 and August, 1988 in
Quezon City, Philippines and within the jurisdiction of this Honorable
Court, the said accused, with intent of gain, with unfaithfulness, and abuse
of confidence, did then and there, willfully, unlawfully and feloniously
defraud one ISIDORA ROSALES, in the following manner, to wit: on the
date and in the place aforementioned, said accused received in trust from
the offended party cash money amounting to P536,650.00, Philippine
Currency, with the express obligation involving the duty to act as
complainants agent in purchasing local cigarettes (Philip Morris and
Marlboro cigarettes), to resell them to several stores, to give her
commission corresponding to 40% of the profits; and to return the
aforesaid amount of offended party, but said accused, far from complying
her aforesaid obligation, and once in possession thereof, misapplied,
misappropriated and converted the same to her personal use and benefit,
despite repeated demands made upon her, accused failed and refused
and still fails and refuses to deliver and/or return the same to the damage
and prejudice of the said ISIDORA ROSALES, in the aforementioned
amount and in such other amount as may be awarded under the provision
of the Civil Code.
CONTRARY TO LAW.
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan
went to the house of complainant Isidora Rosales (Rosales) and asked her
to join them in the business of buying and selling cigarettes. Convinced of
the feasibility of the venture, Rosales readily agreed. Under their
agreement, Rosales would give the money needed to buy the cigarettes
while Liwanag and Tabligan would act as her agents, with a corresponding

40% commission to her if the goods are sold; otherwise the money would
be returned to Rosales. Consequently, Rosales gave several cash
advances to Liwanag and Tabligan amounting to P633,650.00.
During the first two months, Liwanag and Tabligan made periodic
visits to Rosales to report on the progress of the transactions. The visits,
however, suddenly stopped, and all efforts by Rosales to obtain
information regarding their business proved futile.
Alarmed by this development and believing that the amounts she
advanced were being misappropriated, Rosales filed a case of estafa
against Liwanag.
After trial on the merits, the trial court rendered a decision dated
January 9, 1991, finding Liwanag guilty as charged. The dispositive
portion of the decision reads thus:
WHEREFORE, the Court holds, that the prosecution has established the
guilt of the accused, beyond reasonable doubt, and therefore, imposes
upon the accused, Carmen Liwanag, an Indeterminate Penalty of SIX (6)
YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF
PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8)
MONTHS OF PRISION MAYOR AS MAXIMUM, AND TO PAY THE
COSTS.
The accused is likewise ordered to reimburse the private complainant the
sum of P526,650.00, without subsidiary imprisonment, in case of
insolvency.

Page |1

Her motion for reconsideration having been denied in the resolution

of March 16, 1994, Liwanag filed the instant petition, submitting the
following assignment of errors:
1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN
AFFIRMING THE CONVICTION OF THE ACCUSED-PETITIONER FOR
THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT
EXIST (sic) BETWEEN THE ACCUSED-PETITIONER AND
COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT OF A
PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF
THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE
AND NOT CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT
ACQUITTING THE ACCUSED-PETITIONER ON GROUNDS OF
REASONABLE DOUBT BY APPLYING THE EQUIPOISE RULE.
Liwanag advances the theory that the intention of the parties was to
enter into a contract of partnership, wherein Rosales would contribute the
funds while she would buy and sell the cigarettes, and later divide the
profits between them.[1] She also argues that the transaction can also be
interpreted as a simple loan, with Rosales lending to her the amount
stated on an installment basis.[2]
The Court of Appeals correctly rejected these pretenses.

SO ORDERED.

While factual findings of the Court of Appeals are conclusive on the

parties and not reviewable by the Supreme Court, and carry more weight
when these affirm the factual findings of the trial court, [3] we deem it more
expedient to resolve the instant petition on its merits.

Said decision was affirmed with modification by the Court of Appeals

in a decision dated November 29, 1993, the decretal portion of which
reads:

Estafa is a crime committed by a person who defrauds another

causing him to suffer damages, by means of unfaithfulness or abuse of
confidence, or of false pretenses of fraudulent acts. [4]

WHEREFORE, in view of the foregoing, the judgment appealed from is

hereby affirmed with the correction of the nomenclature of the penalty
which should be: SIX (6) YEARS, EIGHT (8) MONTHS and TWENTY ONE
(21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and
EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other
respects, the decision is AFFIRMED.
SO ORDERED.

From the foregoing, the elements of estafa are present, as follows:

(1) that the accused defrauded another by abuse of confidence or deceit;
and (2) that damage or prejudice capable of pecuniary estimation is
caused to the offended party or third party, [5] and it is essential that there
be a fiduciary relation between them either in the form of a trust,
commission or administration.[6]
The receipt signed by Liwanag states thus:
May 19, 1988 Quezon City

CREDIT TRANSACTION
Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED
TWENTY SIX THOUSAND AND SIX HUNDRED FIFTY PESOS
(P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip &
Marlboro) to be sold to customers. In the event the said cigarrets (sic) are
not sold, the proceeds of the sale or the said products (shall) be returned
to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or the said
items on or before August 30, 1988.
(SGD & Thumbedmarked) (sic)
CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.
Paterno R. Canlas Law Offices for plaintiff-appellant.

computed as constituting the interest or discount for the first eight years, in
the total sum P180,288.47. On August 20, 1970, the defendant-appellee,
explaining that there had been a mistake in computation, paid to the
appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. 3

CRUZ, J.:

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee

for the sum of P98,828.03, with interest, claiming this had been illegally
deducted from him in violation of the Usury Law. 4 He also prayed for
moral damages and attorney's fees. In its answer, the defendant-appellee
admitted the factual allegations of the complaint but argued that the
amount deducted was not usurious interest but a given to it for paying the
rentals in advance for eight years. 5Judgment on the pleadings was
rendered for the defendant. 6

This is an appeal by the plaintiff-appellant from a decision rendered by the

then Court of First Instance of Rizal on a pure question of law. 1
The judgment appealed from was rendered on the pleadings, the parties
having agreed during the pretrial conference on the factual antecedents.

Signed in the presence of:

(Sgd) Illegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. It indicates that
the money delivered to Liwanag was for a specific purpose, that is, for the
purchase of cigarettes, and in the event the cigarettes cannot be sold, the
money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed
entered into by and between the parties, we have ruled that when money
or property have been received by a partner for a specific purpose (such
as that obtaining in the instant case) and he later misappropriated it, such
partner is guilty of estafa.[7]
Neither can the transaction be considered a loan, since in a contract
of loan once the money is received by the debtor, ownership over the
same is transferred.[8] Being the owner, the borrower can dispose of it for
whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not
dispose of the money as she pleased because it was only delivered to her
for a single purpose, namely, for the purchase of cigarettes, and if this was
not possible then to return the money to Rosales. Since in this case there
was no transfer of ownership of the money delivered, Liwanag is liable for
conversion under Art. 315, par. 1(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the
Court of Appeals dated November 29, 1993, is AFFIRMED. Costs against
petitioner.
SO ORDERED.

Page |2

The facts are as follows: On December 5, 1969, the plaintiff-appellant and

ESSO Standard Eastern. Inc., (later substituted by Petrophil Corporation)
entered into a "Lease Agreement" whereby the former leased to the latter
a portion of his property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:
3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40
sqm. per month on 400 sqm. and are to be expropriated later on
(sic) or P560 per month and Fl.40 per sqm. per month on 1,693
sqm. or P2,370.21 per month or a total of P2,930.20 per month
2,093 sqm. more or less, payable yearly in advance within the
1st twenty days of each year; provided, a financial aid in the sum
of P15,000 to clear the leased premises of existing
improvements thereon is paid in this manner; P10,000 upon
execution of this lease and P5,000 upon delivery of leased
premises free and clear of improvements thereon within 30 days
from the date of execution of this agreement. The portion on the
side of the leased premises with an area of 365 sqrm. more or
less, will be occupied by LESSEE without rental during the
lifetime of this lease. PROVIDED FINALLY, that the Lessor is
paid 8 years advance rental based on P2,930.70 per month
discounted at 12% interest per annum or a total net amount of
P130,288.47 before registration of lease. Leased premises shall
be delivered within 30 days after 1st partial payment of financial
aid. 2
On December 31, 1969, pursuant to the said contract, the defendantappellee paid to the plaintfff-appellant advance rentals for the first eight
years, subtracting therefrom the amount of P101,010.73, the amount it

Plaintiff-appellant now prays for a reversal of that judgment, insisting that

the lower court erred in the computation of the interest collected out of the
rentals paid for the first eight years; that such interest was excessive and
violative of the Usury Law; and that he had neither agreed to nor accepted
the defendant-appellant's computation of the total amount to be deducted
for the eight years advance rentals. 7
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of
his complaint, which read:
6. The interest collected by defendant out of the rentals for the
first eight years was excessive and beyond that allowable by
law, because the total interest on the said amount is only
P33,755.90 at P4,219.4880 per yearly rental; and considering
that the interest should be computed excluding the first year
rental because at the time the amount of P281, 199.20 was paid
it was already due under the lease contract hence no interest
should be collected from the rental for the first year, the amount
of P29,536.42 only as the total interest should have been
deducted by defendant from the sum of P281,299.20.
The defendant maintains that the correct amount of the discount is
P98,828.03 and that the same is not excessive and above that allowed by
law.
As its title plainly indicates, the contract between the parties is one of
lease and not of loan. It is clearly denominated a "LEASE AGREEMENT."
Nowhere in the contract is there any showing that the parties intended a

CREDIT TRANSACTION
loan rather than a lease. The provision for the payment of rentals in
advance cannot be construed as a repayment of a loan because there
was no grant or forbearance of money as to constitute an indebtedness on
the part of the lessor. On the contrary, the defendant-appellee was
discharging its obligation in advance by paying the eight years rentals, and
it was for this advance payment that it was getting a rebate or discount.
The provision for a discount is not unusual in lease contracts. As to its
validity, it is settled that the parties may establish such stipulations,
clauses, terms and condition as they may want to include; and as long as
such agreements are not contrary to law, morals, good customs, public
policy or public order, they shall have the force of law between them. 8
There is no usury in this case because no money was given by the
defendant-appellee to the plaintiff-appellant, nor did it allow him to use its
money already in his possession. 9 There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the
defendant-appellee to deduct from the total payments because they were
being made in advance for eight years. The discount was in effect a
reduction of the rentals which the lessor had the right to determine, and
any reduction thereof, by any amount, would not contravene the Usury
Law.
The difference between a discount and a loan or forbearance is that the
former does not have to be repaid. The loan or forbearance is subject to
repayment and is therefore governed by the laws on usury. 10
To constitute usury, "there must be loan or forbearance; the loan must be
of money or something circulating as money; it must be repayable
absolutely and in all events; and something must be exacted for the use of
the money in excess of and in addition to interest allowed by law." 11
It has been held that the elements of usury are (1) a loan, express or
implied; (2) an understanding between the parties that the money lent
shall or may be returned; that for such loan a greater rate or interest that is
allowed by law shall be paid, or agreed to be paid, as the case may be;
and (4) a corrupt intent to take more than the legal rate for the use of
money loaned. Unless these four things concur in every transaction, it is
safe to affirm that no case of usury can be declared. 12
Concerning the computation of the deductible discount, the trial court
declared:

As above-quoted, the 'Lease Agreement' expressly provides that

the lessee (defendant) shag pay the lessor (plaintiff) eight (8)
years in advance rentals based on P2,930.20 per month
discounted at 12% interest per annum. Thus, the total rental for
one-year period is P35,162.40 (P2,930.20 multiplied by 12
months) and that the interest therefrom is P4,219.4880
(P35,162.40 multiplied by 12%). So, therefore, the total interest
for the first eight (8) years should be only P33,755.90
(P4,129.4880 multiplied by eight (8) years and not P98,828.03
as the defendant claimed it to be.
The afore-quoted manner of computation made by plaintiff is
patently erroneous. It is most seriously misleading. He just
computed the annual discount to be at P4,129.4880 and then
simply multiplied it by eight (8) years. He did not take into
consideration the naked fact that the rentals due on the eight
year were paid in advance by seven (7) years, the rentals due
on the seventh year were paid in advance by six (6) years, those
due on the sixth year by five (5) years, those due on the fifth
year by four (4) years, those due on the fourth year by three (3)
years, those due on the third year by two (2) years, and those
due on the second year by one (1) year, so much so that the
total number of years by which the annual rental of P4,129.4880
was paid in advance is twenty-eight (28), resulting in a total
amount of P118,145.44 (P4,129.48 multiplied by 28 years) as
the discount. However, defendant was most fair to plaintiff. It did
not simply multiply the annual rental discount by 28 years. It
computed the total discount with the principal diminishing month
to month as shown by Annex 'A' of its memorandum. This is why
the total discount amount to only P 8,828.03.
The allegation of plaintiff that defendant made the computation
in a compounded manner is erroneous. Also after making its
own computations and after examining closely defendant's
Annex 'A' of its memorandum, the court finds that defendant did
not charge 12% discount on the rentals due for the first year so
much so that the computation conforms with the provision of the
Lease Agreement to the effect that the rentals shall be 'payable
yearly in advance within the 1st 20 days of each year. '
We do not agree. The above computation appears to be too much
technical mumbo-jumbo and could not have been the intention of the
parties to the transaction. Had it been so, then it should have been clearly

Page |3

stipulated in the contract. Contracts should be interpreted according to

their literal meaning and should not be interpreted beyond their obvious
intendment. 13
The plaintfff-appellant simply understood that for every year of advance
payment there would be a deduction of 12% and this amount would be the
same for each of the eight years. There is no showing that the intricate
computation applied by the trial court was explained to him by the
defendant-appellee or that he knowingly accepted it.
The lower court, following the defendant-appellee's formula, declared that
the plaintiff-appellant had actually agreed to a 12% reduction for advance
rentals for all of twenty eight years. That is absurd. It is not normal for a
person to agree to a reduction corresponding to twenty eight years
advance rentals when all he is receiving in advance rentals is for only
eight years.
The deduction shall be for only eight years because that was plainly what
the parties intended at the time they signed the lease agreement.
"Simplistic" it may be, as the Solicitor General describes it, but that is how
the lessor understood the arrangement. In fact, the Court will reject his
subsequent modification that the interest should be limited to only seven
years because the first year rental was not being paid in advance. The
agreement was for auniform deduction for the advance rentals for each of
the eight years, and neither of the parties can deviate from it now.
On the annual rental of P35,168.40, the deducted 12% discount was
P4,220.21; and for eight years, the total rental was P281,347.20 from
which was deducted the total discount of P33,761.68, leaving a difference
of P247,585.52. Subtracting from this amount, the sum of P182,471.17
already paid will leave a balance of P65,114.35 still due the plaintiffappellant.
The above computation is based on the more reasonable interpretation of
the contract as a whole rather on the single stipulation invoked by the
respondent for the flat reduction of P130,288.47.
WHEREFORE, the decision of the trial court is hereby modified, and the
defendant-appellee Petrophil Corporation is ordered to pay plaintiffappellant the amount of Sixty Five Thousand One Hundred Fourteen
pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal
rate until fully paid, plus Ten Thousand Pesos (P10,000.00) as attorney's
fees. Costs against the defendant-appellee. SO ORDERED.

CREDIT TRANSACTION
G.R. No. 84719
January 25, 1991
YONG
CHAN
KIM, petitioner,
vs.
PEOPLE OF THE PHILIPPINES, HON. EDGAR D. GUSTILO, Presiding
Judge, RTC, 6th Judicial Region, Branch 28 Iloilo City and Court of
Appeals (13th Division) respondents.
Remedios C. Balbin and Manuel C. Cases, Jr. for petitioner.
Hector P. Teodosio for private respondent.
PADILLA, J.:
This petition seeks the review on certiorari of the following:
1. The decision dated 3 September 1986 of the 15th Municipal
Circuit Trial Court (Guimbal-Igbaras-Tigbauan-Tubungan) in
Guimbal, Iloilo, in Criminal Case No. 628, 1 and the affirming
decision of the Regional Trial Court, Branch XXVIII, Iloilo City, in
Criminal Case No. 20958, promulgated on 30 July 1987; 2
2. The decision of the Court of Appeals, dated 29 April 1988, 3
dismissing petitioner's appeal/petition for review for having been filed out
of time, and the resolution, dated 19 August 1988, denying petitioner's
motion for reconsideration. 4
The antecedent facts are as follows:
Petitioner Yong Chan Kim was employed as a Researcher at the
Aquaculture Department of the Southeast Asian Fisheries Development
Center (SEAFDEC) with head station at Tigbauan, Province of Iloilo. As
Head of the Economics Unit of the Research Division, he conducted
prawn surveys which required him to travel to various selected provinces
in the country where there are potentials for prawn culture.
On 15 June 1982, petitioner was issued Travel Order No. 2222 which
covered his travels to different places in Luzon from 16 June to 21 July
1982, a period of thirty five (35) days. Under this travel order, he received
P6,438.00 as cash advance to defray his travel expenses.
Within the same period, petitioner was issued another travel order, T.O.
2268, requiring him to travel from the Head Station at Tigbauan, Iloilo to

Roxas City from 30 June to 4 July 1982, a period of five (5) days. For this
travel order, petitioner received a cash advance of P495.00.
On 14 January 1983, petitioner presented both travel orders for liquidation,
submitting Travel Expense Reports to the Accounting Section. When the
Travel Expense Reports were audited, it was discovered that there was an
overlap of four (4) days (30 June to 3 July 1982) in the two (2) travel
orders for which petitioner collected per diems twice. In sum, the total
amount in the form of per diems and allowances charged and collected by
petitioner under Travel Order No. 2222, when he did not actually and
physically travel as represented by his liquidation papers, was P1,230.00.
Petitioner was required to comment on the internal auditor's report
regarding the alleged anomalous claim for per diems. In his reply,
petitioner denied the alleged anomaly, claiming that he made make-up
trips to compensate for the trips he failed to undertake under T.O. 2222
because he was recalled to the head office and given another assignment.

Page |4

Costs against the accused.5

Criminal Case No. 631 was subsequently dismissed for failure to
prosecute.
Petitioner appealed from the decision of the Municipal Circuit Trial Court in
Criminal Case No. 628. On 30 July 1987, the Regional Trial Court in Iloilo
City in Criminal Case No. 20958 affirmed in toto the trial court's decision.6
The decision of the Regional Trial Court was received by petitioner on 10
August 1987. On 11 August 1987, petitioner, thru counsel, filed a notice of
appeal with the Regional Trial Court which ordered the elevation of the
records of the case to the then Intermediate Appellate Court on the
following day, 12 August 1987. The records of the case were received by
the Intermediate Appellate Court on 8 October 1987, and the appeal was
docketed as CA-G.R. No. 05035.

In September 1983, two (2) complaints for Estafa were filed against the
petitioner before the Municipal Circuit Trial Court at Guimbal, Iloilo,
docketed as Criminal Case Nos. 628 and 631.

On 30 October 1987, petitioner filed with the appellate court a petition for
review. As earlier stated, on 29 April 1988, the Court of Appeals dismissed
the petition for having been filed out of time. Petitioner's motion for
reconsideration was denied for lack of merit.

After trial in Criminal Case No. 628, the Municipal Circuit Trial Court
rendered a decision, the dispositive part of which reads as follows:

Hence, the present recourse.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the court

finds the accused, Yong Chan Kim, guilty beyond reasonable
doubt for the crime of Estafa penalized under paragraph l(b) of
Article 315, Revised Penal Code. Records disclose there is no
aggravating circumstance proven by the prosecution. Neither
there is any mitigating circumstance proven by the accused.
Considering the amount subject of the present complaint, the
imposable penalty should be in the medium period of arresto
mayor in its maximum period toprision correccional in its
minimum period in accordance with Article 315, No. 3, Revised
Penal Code. Consonantly, the Court hereby sentences the
accused to suffer an imprisonment ranging from four (4) months
as the minimum to one (1) year and six (6) months as the
maximum in accordance with the Indeterminate Sentence Law
and to reimburse the amount of P1,230.00 to SEAFDEC.
The surety bond of the accused shall remain valid until final
judgment in accordance herewith.

On 19 October 1988, the Court resolved to require the respondents to

comment on the petition for review. The Solicitor General filed his
Comment on 20 January 1989, after several grants of extensions of time
to file the same.
In his Comment, the Solicitor General prayed for the dismissal of the
instant petition on the ground that, as provided for under Section 22, Batas
Pambansa 129, Section 22 of the Interim Rules and Guidelines, and
Section 3, Rule 123 of the 1985 Rules of Criminal Procedure, the
petitioner should have filed a petition for review with the then Intermediate
Appellate Court instead of a notice of appeal with the Regional Trial Court,
in perfecting his appeal from the RTC to the Intermediate Appellate Court,
since the RTC judge was rendered in the exercise of its appellate
jurisdiction over municipal trial courts. The failure of petitioner to file the
proper petition rendered the decision of the Regional Trial Court final and
executory, according to the Solicitor General.

CREDIT TRANSACTION
Petitioner's counsel submitted a Reply (erroneously termed
Comment) 7 wherein she contended that the peculiar circumstances of a
case, such as this, should be considered in order that the principle barring
a petitioner's right of review can be made flexible in the interest of justice
and equity.
In our Resolution of 29 May 1989, we resolved to deny the petition for
failure of petitioner to sufficiently show that the Court of Appeals had
committed any reversible error in its questioned judgment which had
dismissed petitioner's petition for review for having been filed out of time. 8

meritorious cause, simply because he had chosen an appeal

route, to be sure, recognized by law but made inapplicable to his
case, under altered rules of procedure. While the Court of
Appeals can not be faulted and, in fact, it has to be lauded for
correctly applying the rules of procedure in appeals to the Court
of Appeals from decisions of the RTC rendered in the exercise of
its appellate jurisdiction, yet, this Court, as the ultimate bulwark
of human rights and individual liberty, will not allow substantial
justice to be sacrified at the altar of procedural rigor. 10

Petitioner filed a motion for reconsideration maintaining that his petition for
review did not limit itself to the issue upon which the appellate court's
decision of 29 April 1988 was based, but rather it delved into the
substance and merits of the case. 9

In the same resolution, the parties were required to file their respective
memoranda, and in compliance with said resolution, petitioner filed his
memorandum on 25 October 1989, while private respondent SEAFDEC
filed its required memorandum on 10 April 1990. On the other hand, the
Solicitor General filed on 13 March 1990 a Recommendation for Acquittal
in lieu of the required memorandum.

On 10 August 1990, we resolved to set aside our resolution dismissing this

case and gave due course to the petition. In the said resolution, we stated:

Two (2) issues are raised by petitioner to wit:

In several cases decided by this Court, it had set aside

technicalities in the Rules in order to give way to justice and
equity. In the present case, we note that the petitioner, in filing
his Notice of Appeal the very next day after receiving the
decision of the court a quo lost no time in showing his intention
to appeal, although the procedure taken was not correct. The
Court can overlook the wrong pleading filed, if strict compliance
with the rules would mean sacrificing justice to technicality. The
imminence of a person being deprived unjustly of his liberty due
to procedural lapse of counsel is a strong and compelling reason
to warrant suspension of the Rules. Hence, we shall consider
the petition for review filed in the Court of Appeals as a
Supplement to the Notice of Appeal. As the Court declared in a
recent decision, '. . . there is nothing sacred about the procedure
of pleadings. This Court may go beyond the pleadings when the
interest of justice so warrants. It has the prerogative to suspend
its rules for the same purpose. . . . Technicality, when it deserts
its proper office as an aid to justice and becomes its great
hindrance and chief enemy, deserves scant consideration from
courts. [Alonzo v. Villamor, et al., 16 Phil. 315]
Conscience cannot rest in allowing a man to go straight to jail,
closing the door to his every entreaty for a full opportunity to be
heard, even as he has made a prima facie showing of a

I. WHETHER OR NOT THE DECISION (sic) OF THE

MUNICIPAL CIRCUIT TRIAL COURT (GUIMBAL, ILOILO) AND
THE REGIONAL TRIAL COURT, BRANCH 28 (ILOILO CITY)
ARE SUPPORTED BY THE FACTS AND EVIDENCE OR
CONTRARY TO LAW AND THAT THE TWO COURTS A
QUO HAVE ACTED WITH GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OF JURISDICTION OR HAVE ACTED
WITHOUT OR IN EXCESS OF JURISDICTION.
II. WHETHER OR NOT THE DECISION OF THE HONORABLE
COURT OF APPEALS IS CONTRARY TO LAW, ESTABLISHED
JURISPRUDENCE, EQUITY AND DUE PROCESS.
The second issue has been resolved in our Resolution dated 10 August
1990, when we granted petitioner's second motion for reconsideration. We
shall now proceed to the first issue.

Page |5

which was covered by T.O. 2268. The dispute arose when petitioner
allegedly failed to return P1,230.00 out of the cash advance which he
received under T.O. 2222. For the alleged failure of petitioner to return the
amount of P1,230.00, he was charged with the crime of Estafa under
Article 315, par. 1(b) of the Revised Penal Code, which reads as follows:
Art. 315. Swindling (Estafa). Any person who shall defraud
another by any of the means mentioned herein below shall be
punished by:
xxx

xxx

xxx

1. With unfaithfulness or abuse of confidence, namely:

(a) x x x

xxx

xxx

(b) By misappropriating or converting, to the prejudice

of another, money, goods, or any other personal
property received by the offender in trust or on
commission, or for administration, or under any other
obligation involving the duty to make delivery of; or to
return, the same, even though such obligation be
fatally or partially guaranteed by a bond; or by denying
having received such money, goods, or other property.
In order that a person can be convicted under the abovequoted provision,
it must be proven that he had the obligation to deliver or return the same
money, good or personal property that he had received. 11
Was petitioner under obligation to return the same money (cash advance)
which he had received? We belive not. Executive Order No. 10, dated 12
February 1980 provides as follows:
B. Cash Advance for Travel

We find merit in the petition.

xxx

xxx

xxx

It is undisputed that petitioner received a cash advance from private

respondent SEAFDEC to defray his travel expenses under T.O. 2222. It is
likewise admitted that within the period covered by T.O. 2222, petitioner
was recalled to the head station in Iloilo and given another assignment

4. All cash advances must be liquidated within 30 days after date

of projected return of the person. Otherwise, corresponding
salary deduction shall be made immediately following the
expiration day.

CREDIT TRANSACTION
Liquidation simply means the settling of an indebtedness. An employee,
such as herein petitioner, who liquidates a cash advance is in fact paying
back his debt in the form of a loan of money advanced to him by his
employer, asper diems and allowances. Similarly, as stated in the assailed
decision of the lower court, "if the amount of the cash advance he received
is less than the amount he spent for actual travel . . . he has the right to
demand reimbursement from his employer the amount he spent coming
from his personal funds. 12 In other words, the money advanced by either
party is actually a loan to the other. Hence, petitioner was under no legal
obligation to return the same cash or money, i.e., the bills or coins, which
he received from the private respondent. 13
Article 1933 and Article 1953 of the Civil Code define the nature of a
simple loan.
Art. 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the
contract is called acommodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind
and quality shall be paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and quality.
The ruling of the trial judge that ownership of the cash advanced to the
petitioner by private respondent was not transferred to the latter is
erroneous. Ownership of the money was transferred to the petitioner. Even
the prosecution witness, Virgilio Hierro, testified thus:
Q When you gave cash advance to the accused in this Travel
Order No. 2222 subject to liquidation, who owns the funds,

accused or SEAFDEC? How do you consider the funds in the

possession of the accused at the time when there is an actual
transfer of cash? . . .
A The one drawing cash advance already owns the money but
subject to liquidation. If he will not liquidate, be is obliged to
return the amount.

Page |6

Revised Penal Code and the affirming decision of the Regional Trial Court,
Branch XXVIII, Iloilo City, in Criminal Case No. 20958, promulgated on 30
July 1987 are both hereby SET ASIDE. Petitioner is ACQUITTED of
criminal charge filed against him.
SO ORDERED.
Melencio-Herrera, Paras, Sarmiento and Regalado JJ., concur.

Qxxx

xxx

xxx

So why do you treat the itinerary of travel temporary when in fact

as of that time the accused owned already the cash advance.
You said the cash advance given to the accused is his own
money. In other words, at the time you departed with the money
it belongs already to the accused?
A Yes, but subject for liquidation. He will be only entitled for that
credence if he liquidates.
Q If other words, it is a transfer of ownership subject to a
suspensive condition that he liquidates the amount of cash
advance upon return to station and completion of the travel?
A Yes, sir.
(pp. 26-28, tsn, May 8, 1985). 14
Since ownership of the money (cash advance) was transferred to
petitioner, no fiduciary relationship was created. Absent this fiduciary
relationship between petitioner and private respondent, which is an
essential element of the crime of estafa by misappropriation or conversion,
petitioner could not have committed estafa. 15
Additionally, it has been the policy of private respondent that all cash
advances not liquidated are to be deducted correspondingly from the
salary of the employee concerned. The evidence shows that the
corresponding salary deduction was made in the case of petitioner vis-avis the cash advance in question.
WHEREFORE, the decision dated 3 September 1986 of the 15th
Municipal Circuit Trial Court in Guimbal, Iloilo in Criminal Case No. 628,
finding petitioner guilty of estafa under Article 315, par. 1 (b) of the

POLO S. PANTALEON,
Petitioner,
-

versus -

CREDIT TRANSACTION
AMERICAN EXPRESS INTERNATIONAL, INC.,
Respondent.
x----------------------------------------------------------------------------------------x
RESOLUTION

BRION, J.:
We resolve the motion for reconsideration filed by respondent American
Express International, Inc. (AMEX) dated June 8, 2009,[1] seeking to
reverse our Decision dated May 8, 2009 where we ruled that AMEX was
guilty of culpable delay in fulfilling its obligation to its cardholder petitioner
Polo Pantaleon. Based on this conclusion, we held AMEX liable for moral
and exemplary damages, as well as attorneys fees and costs of litigation. [2]
FACTUAL ANTECEDENTS
The established antecedents of the case are narrated below.
AMEX is a resident foreign corporation engaged in the business of
providing credit services through the operation of a charge card system.
Pantaleon has been an AMEX cardholder since 1980.[3]
In October 1991, Pantaleon, together with his wife (Julialinda), daughter
(Regina), and son (Adrian Roberto), went on a guided European tour.
On October 25, 1991, the tour group arrived in Amsterdam. Due to their
late arrival, they postponed the tour of the city for the following day. [4]
The next day, the group began their sightseeing at around 8:50
a.m. with a trip to the Coster Diamond House (Coster). To have enough
time for take a guided city tour of Amsterdam before their departure
scheduled on that day, the tour group planned to leave Coster by 9:30
a.m. at the latest.
While at Coster, Mrs. Pantaleon decided to purchase some
diamond pieces worth a total of US$13,826.00. Pantaleon presented his
American Express credit card to the sales clerk to pay for this
purchase. He did this at around 9:15 a.m. The sales clerk swiped the

credit card and asked Pantaleon to sign the charge slip, which was then
electronically referred to AMEXs Amsterdam office at 9:20 a.m.[5]
At around 9:40 a.m., Coster had not received approval from AMEX for the
purchase so Pantaleon asked the store clerk to cancel the sale. The store
manager, however, convinced Pantaleon to wait a few more minutes.
Subsequently, the store manager informed Pantaleon that AMEX was
asking for bank references; Pantaleon responded by giving the names of
his Philippine depository banks.
At around 10 a.m., or 45 minutes after Pantaleon presented his credit
card, AMEX still had not approved the purchase. Since the city tour could
not begin until the Pantaleons were onboard the tour bus, Coster decided
to release at around 10:05 a.m. the purchased items to Pantaleon even
without AMEXs approval.
When the Pantaleons finally returned to the tour bus, they found their
travel companions visibly irritated. This irritation intensified when the tour
guide announced that they would have to cancel the tour because of lack
of time as they all had to be in Calais, Belgium by 3 p.m. to catch the ferry
to London.[6]
From the records, it appears that after Pantaleons purchase was
transmitted for approval to AMEXs Amsterdam office at 9:20 a.m.; was
referred to AMEXs Manilaoffice at 9:33 a.m.; and was approved by
the Manila office at 10:19 a.m. At 10:38 a.m., AMEXs Manila office finally
transmitted the Approval Code to AMEXsAmsterdam office. In all, it took
AMEX a total of 78 minutes to approve Pantaleons purchase and to
transmit the approval to the jewelry store.[7]
After the trip to Europe, the Pantaleon family proceeded to the United
States. Again, Pantaleon experienced delay in securing approval for
purchases using his American Express credit card on two separate
occasions. He experienced the first delay when he wanted to purchase
golf equipment in the amount of US$1,475.00 at the Richard Metz Golf
Studio in New York on October 30, 1991. Another delay occurred when he
wanted to purchase childrens shoes worth US$87.00 at the Quiency
Market in Boston on November 3, 1991.

Page |7

Upon return to Manila, Pantaleon sent AMEX a letter demanding an

apology for the humiliation and inconvenience he and his family
experienced due to the delays in obtaining approval for his credit card
purchases. AMEX responded by explaining that the delay in Amsterdam
was due to the amount involved the charged purchase of US$13,826.00
deviated
from Pantaleons
established
charge
purchase
pattern. Dissatisfied with this explanation, Pantaleon filed an action for
damages against the credit card company with the Makati City Regional
Trial Court (RTC).
On August 5, 1996, the RTC found AMEX guilty of delay, and
awarded Pantaleon P500,000.00 as moral damages, P300,000.00 as
exemplary damages,P100,000.00 as attorneys fees, and P85,233.01 as
litigation expenses.
On appeal, the CA reversed the awards. [8] While the CA
recognized that delay in the nature of mora accipiendi or creditors default
attended AMEXs approval of Pantaleons purchases, it disagreed with the
RTCs finding that AMEX had breached its contract, noting that the delay
was not attended by bad faith, malice or gross negligence. The appellate
court found that AMEX exercised diligent efforts to effect the approval of
Pantaleons purchases; the purchase at Coster posed particularly a
problem because it was at variance with Pantaleons established charge
pattern. As there was no proof that AMEX breached its contract, or that it
acted in a wanton, fraudulent or malevolent manner, the appellate court
ruled that AMEX could not be held liable for any form of damages.
Pantaleon questioned this decision via a petition for review
on certiorari with this Court.
In our May 8, 2009 decision, we reversed the appellate courts
decision and held that AMEX was guilty of mora solvendi, or debtors
default. AMEX, as debtor, had an obligation as the credit provider to act on
Pantaleons purchase requests, whether to approve or disapprove them,
with timely dispatch. Based on the evidence on record, we found that
AMEX failed to timely act on Pantaleons purchases.
Based on the testimony of AMEXs credit authorizer Edgardo
Jaurique, the approval time for credit card charges would be three to four
seconds under regular circumstances. In Pantaleons case, it took AMEX
78 minutes to approve the Amsterdam purchase. We attributed this delay
to AMEXs Manila credit authorizer, Edgardo Jaurique, who had to go over
Pantaleons past credit history, his payment record and his credit and bank

CREDIT TRANSACTION
references before he approved the purchase. Finding this delay
unwarranted, we reinstated the RTC decision and awarded Pantaleon
moral and exemplary damages, as well as attorneys fees and costs of
litigation.
THE MOTION FOR RECONSIDERATION
In its motion for reconsideration, AMEX argues that this Court erred when
it found AMEX guilty of culpable delay in complying with its obligation to
act with timely dispatch on Pantaleons purchases. While AMEX admits
that it normally takes seconds to approve charge purchases, it
emphasizes that Pantaleon experienced delay inAmsterdam because his
transaction was not a normal one. To recall, Pantaleon sought to charge in
a single transaction jewelry items purchased from Coster in the total
amount of US$13,826.00 or P383,746.16. While the total amount of
Pantaleons previous purchases using his AMEX credit card did exceed
US$13,826.00, AMEX points out that these purchases were made in a
span of more than 10 years, not in a single transaction.

consequences of delay; thus, even if AMEX had a justifiable reason for the
delay, this reason would not relieve it from the liability arising from its
failure to timely act on Pantaleons purchase.
In response to AMEXs assertion that the delay was in keeping
with its duty to perform its obligation with extraordinary diligence,
Pantaleon claims that this duty includes the timely or prompt performance
of its obligation.
As to AMEXs contention that moral or exemplary damages
cannot be awarded absent a finding of malice, Pantaleon argues that evil
motive or design is not always necessary to support a finding of bad faith;
gross negligence or wanton disregard of contractual obligations is
sufficient basis for the award of moral and exemplary damages.
OUR RULING
We GRANT the motion for reconsideration.

Because this was the biggest single transaction that Pantaleon ever made
using his AMEX credit card, AMEX argues that the transaction necessarily
required the credit authorizer to carefully review Pantaleons credit history
and bank references. AMEX maintains that it did this not only to ensure
Pantaleons protection (to minimize the possibility that a third party was
fraudulently using his credit card), but also to protect itself from the risk
that Pantaleon might not be able to pay for his purchases on credit. This
careful review, according to AMEX, is also in keeping with the
extraordinary degree of diligence required of banks in handling its
transactions. AMEX concluded that in these lights, the thorough review of
Pantaleons credit record was motivated by legitimate concerns and could
not be evidence of any ill will, fraud, or negligence by AMEX.
AMEX further points out that the proximate cause of Pantaleons
humiliation and embarrassment was his own decision to proceed with the
purchase despite his awareness that the tour group was waiting for him
and his wife. Pantaleon could have prevented the humiliation had he
cancelled the sale when he noticed that the credit approval for the Coster
purchase was unusually delayed.
In his Comment dated February 24, 2010, Pantaleon maintains
that AMEX was guilty of mora solvendi, or delay on the part of the debtor,
in complying with its obligation to him. Based on jurisprudence, a just
cause for delay does not relieve the debtor in delay from the

Brief historical
background
A credit card is defined as any card, plate, coupon book, or other credit
device existing for the purpose of obtaining money, goods, property, labor
or services or anything of value on credit. [9] It traces its roots to the charge
card first introduced by the Diners Club in New York City in 1950.
[10]
American Express followed suit by introducing its own charge card to
the American market in 1958.[11]

Page |8

The bank credit card system involves a tripartite relationship

between the issuer bank, the cardholder, and merchants participating in
the system. The issuer bank establishes an account on behalf of the
person to whom the card is issued, and the two parties enter into an
agreement which governs their relationship. This agreement provides that
the bank will pay for cardholders account the amount of merchandise or
services purchased through the use of the credit card and will also make
cash loans available to the cardholder. It also states that the cardholder
shall be liable to the bank for advances and payments made by the bank
and that the cardholders obligation to pay the bank shall not be affected or
impaired by any dispute, claim, or demand by the cardholder with respect
to any merchandise or service purchased.

The merchants participating in the system

agree to honor the banks credit cards. The bank
irrevocably agrees to honor and pay the sales slips
presented by the merchant if the merchant performs
his undertakings such as checking the list of revoked
cards before accepting the card. x x x.
These slips are forwarded to the member
bank which originally issued the card. The cardholder
receives a statement from the bank periodically and
may then decide whether to make payment to the bank
in full within a specified period, free of interest, or to
defer payment and ultimately incur an interest charge.

We adopted a similar view in CIR v. American Express

In the Philippines, the now defunct Pacific Bank was responsible
for bringing the first credit card into the country in the 1970s. [12] However, it
was only in the early 2000s that credit card use gained wide acceptance in
the country, as evidenced by the surge in the number of credit card
holders then.[13]
Nature of Credit Card Transactions
To better understand the dynamics involved in credit card
transactions, we turn to the United States case of Harris Trust & Savings
Bank v. McCray[14] which explains:

International, Inc. (Philippine branch),[15] where we also recognized that

credit card issuers are not limited to banks. We said:
Under RA 8484, the credit card that is issued
by banks in general, or by non-banks in particular,
refers to any card x x x or other credit device existing
for the purpose of obtaining x x x goods x x x or
services x x x on credit; and is being used usually on a
revolving basis. This means that the consumer-credit
arrangement that exists between the issuer and the
holder of the credit card enables the latter to procure

CREDIT TRANSACTION
goods or services on a continuing basis as long as the
outstanding balance does not exceed a specified limit.
The card holder is, therefore, given the power to
obtain present control of goods or service on a
promise to pay for them in the future.
Business establishments may extend credit sales
through the use of the credit card facilities of a nonbank credit card company to avoid the risk of
uncollectible accounts from their customers. Under
this system, the establishments do not deposit in their
bank accounts the credit card drafts that arise from the
credit sales. Instead, they merely record their
receivables from the credit card company and
periodically send the drafts evidencing those
receivables to the latter.
The credit card company, in turn, sends checks
as payment to these business establishments, but it
does not redeem the drafts at full price. The
agreement between them usually provides for
discounts to be taken by the company upon its
redemption of the drafts. At the end of each month, it
then bills its credit card holders for their respective
drafts redeemed during the previous month. If the
holders fail to pay the amounts owed, the company
sustains the loss.

Simply put, every credit card transaction involves three

contracts, namely: (a) the sales contract between the credit card holder
and the merchant or the business establishment which accepted the credit
card; (b) the loan agreement between the credit card issuer and the credit
card holder; and lastly, (c) the promise to pay between the credit card
issuer and the merchant or business establishment.[16]
Credit card issuer cardholder relationship
When a credit card company gives the holder the privilege of charging
items at establishments associated with the issuer, [17] a necessary question
in a legal analysis is when does this relationship begin? There are two
diverging views on the matter. In City Stores Co. v. Henderson,
[18]
another U.S. decision, held that:

The issuance of a credit card is but an offer

to extend a line of open account credit. It is unilateral
and supported by no consideration. The offer may be
withdrawn at any time, without prior notice, for any
reason or, indeed, for no reason at all, and its
withdrawal breaches no duty for there is no duty to
continue it and violates no rights.
Thus, under this view, each credit card transaction is considered a
separate offer and acceptance.
Novack v. Cities Service Oil Co. [19] echoed this view, with the
court ruling that the mere issuance of a credit card did not create a
contractual relationship with the cardholder.
On the other end of the spectrum is Gray v. American Express
Company[20] which recognized the card membership agreement itself as a
binding contract between the credit card issuer and the card holder. Unlike
in the Novack and the City Stores cases, however, the cardholder
in Gray paid an annual fee for the privilege of being an American Express
cardholder.
In our jurisdiction, we generally adhere to the Gray ruling, recognizing the
relationship between the credit card issuer and the credit card holder as a
contractual one that is governed by the terms and conditions found in the
card membership agreement.[21] This contract provides the rights and
liabilities of a credit card company to its cardholders and vice versa.
We note that a card membership agreement is a contract of adhesion as
its terms are prepared solely by the credit card issuer, with the cardholder
merely affixing his signature signifying his adhesion to these terms. [22] This
circumstance, however, does not render the agreement void; we have
uniformly held that contracts of adhesion are as binding as ordinary
contracts, the reason being that the party who adheres to the contract is
free to reject it entirely.[23] The only effect is that the terms of the contract
are construed strictly against the party who drafted it. [24]
On AMEXs obligations to Pantaleon
We begin by identifying the two privileges that Pantaleon assumes he is
entitled to with the issuance of his AMEX credit card, and on which he

Page |9

anchors his claims. First, Pantaleon presumes that since his credit card
has no pre-set spending limit, AMEX has the obligation to approve all his
charge requests. Conversely, even if AMEX has no such obligation, at the
very least it is obliged to act on his charge requests within a specific period
of time.
i.
agreements

Use of credit card a mere offer to enter into loan

Although we recognize the existence of a relationship between

the credit card issuer and the credit card holder upon the acceptance by
the cardholder of the terms of the card membership agreement
(customarily signified by the act of the cardholder in signing the back of
the credit card), we have to distinguish this contractual relationship from
the creditor-debtor relationship which only arises after the credit card
issuer has approved the cardholders purchase request.The first relates
merely to an agreement providing for credit facility to the cardholder. The
latter involves the actual credit on loan agreement involving three
contracts, namely: the sales contract between the credit card holder and
the merchant or the business establishment which accepted the credit
card; the loan agreement between the credit card issuer and the credit
card holder; and the promise to pay between the credit card issuer and the
merchant or business establishment.
From the loan agreement perspective, the contractual
relationship begins to exist only upon the meeting of the offer [25] and
acceptance of the parties involved. In more concrete terms, when
cardholders use their credit cards to pay for their purchases, they merely
offer to enter into loan agreements with the credit card company. Only
after the latter approves the purchase requests that the parties enter into
binding loan contracts, in keeping with Article 1319 of the Civil Code,
which provides:
Article 1319. Consent is manifested by the meeting of
the offer and the acceptance upon the thing and the cause which
are to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
This view finds support in the reservation found in the card membership
agreement itself, particularly paragraph 10, which clearly states that
AMEX reserve[s] the right to deny authorization for any requested
Charge. By so providing, AMEX made its position clear that it has no

CREDIT TRANSACTION
obligation to approve any and all charge requests made by its card
holders.
ii. AMEX not guilty of culpable delay
Since AMEX has no obligation to approve the purchase requests of its
credit cardholders, Pantaleon cannot claim that AMEX defaulted in its
obligation. Article 1169 of the Civil Code, which provides the requisites to
hold a debtor guilty of culpable delay, states:

Article 1169. Those obliged to deliver or to do

something incur in delay from the time the obligee
judicially or extrajudicially demands from them the
fulfillment of their obligation. x x x.

The three requisites for a finding of default are: (a) that the
obligation is demandable and liquidated; (b) the debtor delays
performance; and (c) the creditor judicially or extrajudicially requires the
debtors performance.[26]
Based on the above, the first requisite is no longer met because
AMEX, by the express terms of the credit card agreement, is not obligated
to approve Pantaleons purchase request. Without a demandable
obligation, there can be no finding of default.
Apart from the lack of any demandable obligation, we also find
that Pantaleon failed to make the demand required by Article 1169 of the
Civil Code.
As previously established, the use of a credit card to pay for a
purchase is only an offer to the credit card company to enter a loan
agreement with the credit card holder. Before the credit card issuer
accepts this offer, no obligation relating to the loan agreement exists
between them. On the other hand, a demand is defined as the assertion of
a legal right; xxx an asking with authority, claiming or challenging as due.
[27]
A demand presupposes the existence of an obligation between the
parties.

Thus, every time that Pantaleon used his AMEX credit card to
pay for his purchases, what the stores transmitted to AMEX were his offers
to execute loan contracts. These obviously could not be classified as the
demand required by law to make the debtor in default, given that no
obligation could arise on the part of AMEX until after AMEX transmitted its
acceptance of Pantaleons offers. Pantaleons act of insisting on and
waiting for the charge purchases to be approved by AMEX [28] is not the
demand contemplated by Article 1169 of the Civil Code.
For failing to comply with the requisites of Article 1169,
Pantaleons charge that AMEX is guilty of culpable delay in approving his
purchase requests must fail.
iii. On AMEXs obligation to act on the offer within a specific
period of time
Even assuming that AMEX had the right to review his credit card
history before it approved his purchase requests, Pantaleon insists that
AMEX had an obligation to act on his purchase requests, either to approve
or deny, in a matter of seconds or in timely dispatch. Pantaleon impresses
upon us the existence of this obligation by emphasizing two points: (a) his
card has no pre-set spending limit; and (b) in his twelve years of using his
AMEX card, AMEX had always approved his charges in a matter of
seconds.
Pantaleons assertions fail to convince us.
We originally held that AMEX was in culpable delay when it
acted on the Coster transaction, as well as the two other transactions in
the United States which took AMEX approximately 15 to 20 minutes to
approve. This conclusion appears valid and reasonable at first glance,
comparing the time it took to finally get the Coster purchase approved (a
total of 78 minutes), to AMEXs normal approval time of three to four
seconds (based on the testimony of Edgardo Jaurigue, as well as
Pantaleons previous experience). We come to a different result, however,
after a closer look at the factual and legal circumstances of the case.
AMEXs credit authorizer, Edgardo Jaurigue, explained that
having no pre-set spending limit in a credit card simply means that the
charges made by the cardholder are approved based on his ability to pay,
as demonstrated by his past spending, payment patterns, and personal
resources.[29] Nevertheless, every time Pantaleon charges a purchase on
his credit card, the credit card company still has to determine whether it

P a g e | 10

will allow this charge, based on his past credit history. This right to review
a card holders credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEXs right to deny
authorization for any requested charge.
As for Pantaleons previous experiences with AMEX (i.e., that in
the past 12 years, AMEX has always approved his charge requests in
three or four seconds), this record does not establish that Pantaleon had a
legally enforceable obligation to expect AMEX to act on his charge
requests within a matter of seconds. For one, Pantaleon failed to present
any evidence to support his assertion that AMEX acted on purchase
requests in a matter of three or four seconds as an established practice.
More importantly, even if Pantaleon did prove that AMEX, as a matter of
practice or custom, acted on its customers purchase requests in a matter
of seconds, this would still not be enough to establish a legally
demandable right; as a general rule, a practice or custom is not a source
of a legally demandable or enforceable right.[30]
We next examine the credit card membership agreement, the
contract that primarily governs the relationship between AMEX and
Pantaleon. Significantly, there is no provision in this agreement that
obligates AMEX to act on all cardholder purchase requests within a
specifically defined period of time. Thus, regardless of whether the
obligation is worded was to act in a matter of seconds or to act in timely
dispatch, the fact remains that no obligation exists on the part of AMEX to
act within a specific period of time. Even Pantaleon admits in his testimony
that he could not recall any provision in the Agreement that guaranteed
AMEXs approval of his charge requests within a matter of minutes. [31]
Nor can Pantaleon look to the law or government issuances as
the source of AMEXs alleged obligation to act upon his credit card
purchases within a matter of seconds. As the following survey of Philippine
law on credit card transactions demonstrates, the State does not require
credit card companies to act upon its cardholders purchase requests
within a specific period of time.
Republic Act No. 8484 (RA 8484), or the Access Devices
Regulation Act of 1998, approved on February 11, 1998, is the controlling
legislation
that regulates the issuance and use of access devices, [32] including credit
cards. The more salient portions of this law include the imposition of the
obligation on a credit card company to disclose certain important financial

CREDIT TRANSACTION
information[33] to credit card applicants, as well as a definition of the acts
that constitute access device fraud.
As financial institutions engaged in the business of providing
credit, credit card companies fall under the supervisory powers of the
Bangko Sentral ng Pilipinas (BSP).[34] BSP Circular No. 398 dated August
21, 2003 embodies the BSPs policy when it comes to credit cards
The Bangko Sentral ng Pilipinas (BSP) shall
foster the development of consumer credit through
innovative products such as credit cards under
conditions of fair and sound consumer credit practices.
The BSP likewise encourages competition and
transparency to ensure more efficient delivery of
services and fair dealings with customers. (Emphasis
supplied)
Based on this Circular, x x x [b]efore issuing credit
cards, banks and/or their subsidiary credit card companies must
exercise proper diligence by ascertaining that applicants
possess good credit standing and are financially capable of
fulfilling their credit commitments. [35] As the above-quoted policy
expressly states, the general intent is to foster fair and sound
consumer credit practices.

Other than BSP Circular No. 398, a related circular is BSP

Circular No. 454, issued on September 24, 2004, but this circular merely
enumerates the unfair collection practices of credit card companies a
matter not relevant to the issue at hand.
In light of the foregoing, we find and so hold that AMEX is
neither contractually bound nor legally obligated to act on its cardholders
purchase requests within any specific period of time, much less a period of
a matter of seconds that Pantaleon uses as his standard. The standard
therefore is implicit and, as in all contracts, must be based on fairness and
reasonableness, read in relation to the Civil Code provisions on human
relations, as will be discussed below.
AMEX acted with good faith

Thus far, we have already established that: (a) AMEX had

neither a contractual nor a legal obligation to act upon Pantaleons
purchases within a specific period of time; and (b) AMEX has a right to
review a cardholders credit card history. Our recognition of these
entitlements, however, does not give AMEX an unlimited right to put off
action on cardholders purchase requests for indefinite periods of time. In
acting on cardholders purchase requests, AMEX must take care not to
abuse its rights and cause injury to its clients and/or third persons. We cite
in this regard Article 19, in conjunction with Article 21, of the Civil Code,
which provide:
Article 19. Every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give
everyone his due and observe honesty and good faith.
Article 21. Any person who willfully causes loss or
injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the
latter for the damage.
Article 19 pervades the entire legal system and ensures that a
person suffering damage in the course of anothers exercise of right or
performance of duty, should find himself without relief. [36] It sets the
standard for the conduct of all persons, whether artificial or natural, and
requires that everyone, in the exercise of rights and the performance of
obligations, must: (a) act with justice, (b) give everyone his due, and (c)
observe honesty and good faith. It is not because a person invokes his
rights that he can do anything, even to the prejudice and disadvantage of
another.[37]
While Article 19 enumerates the standards of conduct, Article 21
provides the remedy for the person injured by the willful act, an action for
damages. We explained how these two provisions correlate with each
other in GF Equity, Inc. v. Valenzona:[38]
[Article 19], known to contain what is
commonly referred to as the principle of abuse of
rights, sets certain standards which must be observed
not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the
following: to act with justice; to give everyone his due;
and to observe honesty and good faith. The law,
therefore, recognizes a primordial limitation on all

P a g e | 11

rights; that in their exercise, the norms of human

conduct set forth in Article 19 must be observed. A
right, though by itself legal because recognized or
granted by law as such, may nevertheless become the
source of some illegality. When a right is exercised in a
manner which does not conform with the norms
enshrined in Article 19 and results in damage to
another, a legal wrong is thereby committed for which
the wrongdoer must be held responsible.But while
Article 19 lays down a rule of conduct for the
government of human relations and for the
maintenance of social order, it does not provide a
remedy for its violation. Generally, an action for
damages under either Article 20 or Article 21 would be
proper.
In the context of a credit card relationship, although there is neither a
contractual stipulation nor a specific law requiring the credit card issuer to
act on the credit card holders offer within a definite period of time, these
principles provide the standard by which to judge AMEXs actions.
According to Pantaleon, even if AMEX did have a right to review his
charge purchases, it abused this right when it unreasonably delayed the
processing of the Coster charge purchase, as well as his purchase
requests at the Richard Metz Golf Studio and Kids Unlimited Store; AMEX
should have known that its failure to act immediately on charge referrals
would entail inconvenience and result in humiliation, embarrassment,
anxiety and distress to its cardholders who would be required to wait
before closing their transactions.[39]

It is an elementary rule in our jurisdiction that good faith is

presumed and that the burden of proving bad faith rests upon the party
alleging it.[40] Although it took AMEX some time before it approved
Pantaleons three charge requests, we find no evidence to suggest that it
acted with deliberate intent to cause Pantaleon any loss or injury, or acted
in a manner that was contrary to morals, good customs or public
policy. We give credence to AMEXs claim that its review procedure was
done to ensure Pantaleons own protection as a cardholder and to prevent
the possibility that the credit card was being fraudulently used by a third
person.

CREDIT TRANSACTION
Pantaleon countered that this review procedure is primarily
intended to protect AMEXs interests, to make sure that the cardholder
making the purchase has enough means to pay for the credit extended.
Even if this were the case, however, we do not find any taint of bad faith in
such motive. It is but natural for AMEX to want to ensure that it will extend
credit only to people who will have sufficient means to pay for their
purchases. AMEX, after all, is running a business, not a charity, and it
would simply be ludicrous to suggest that it would not want to earn profit
for its services. Thus, so long as AMEX exercises its rights, performs its
obligations, and generally acts with good faith, with no intent to cause
harm, even if it may occasionally inconvenience others, it cannot be held
liable for damages.
We also cannot turn a blind eye to the circumstances
surrounding the Coster transaction which, in our opinion, justified the wait.
In Edgardo Jaurigues own words:
Q 21: With reference to the transaction at the Coster Diamond
House covered by Exhibit H, also Exhibit 4 for the defendant, the
approval came at 2:19 a.m. after the request was relayed at 1:33
a.m., can you explain why the approval came after about 46
minutes, more or less?
A21: Because we have to make certain
considerations and evaluations of [Pantaleons] past
spending pattern with [AMEX] at that time before
approving plaintiffs request because [Pantaleon] was
at that time making his very first single charge
purchase of US$13,826 [this is below the
US$16,112.58 actually billed and paid for by the
plaintiff because the difference was already
automatically approved by [AMEX] office in
Netherland[s] and the record of [Pantaleons] past
spending with [AMEX] at that time does not favorably
support his ability to pay for such purchase. In fact, if
the foregoing internal policy of [AMEX] had been
strictly followed, the transaction would not have been
approved at all considering that the past spending
pattern of the plaintiff with [AMEX] at that time does
not support his ability to pay for such purchase.[41]
xxxx

Q: Why did it take so long?

A: It took time to review the account on credit, so, if there is any
delinquencies [sic] of the cardmember. There are factors on
deciding the charge itself which are standard measures in
approving the authorization. Now in the case of Mr. Pantaleon
although his account is single charge purchase of US$13,826.
[sic] this is below the US$16,000. plus actually billed x x x we
would have already declined the charge outright and asked him
his bank account to support his charge. But due to the length of
his membership as cardholder we had to make a decision on
hand.[42]
As Edgardo Jaurigue clarified, the reason why
Pantaleon had to wait for AMEXs approval was because he had
to go over Pantaleons credit card history for the past twelve
months.[43] It would certainly be unjust for us to penalize AMEX
for merely exercising its right to review Pantaleons credit history
meticulously.
Finally, we said in Garciano v. Court of Appeals that the right to
recover [moral damages] under Article 21 is based on equity, and he who
comes to court to demand equity, must come with clean hands. Article 21
should be construed as granting the right to recover damages to injured
persons who are not themselves at fault.[44] As will be discussed below,
Pantaleon is not a blameless party in all this.
Pantaleons action was the proximate cause for his injury
Pantaleon mainly anchors his claim for moral and exemplary
damages on the embarrassment and humiliation that he felt when the
European tour group had to wait for him and his wife for approximately 35
minutes, and eventually had to cancel the Amsterdam city tour. After
thoroughly reviewing the records of this case, we have come to the
conclusion that Pantaleon is the proximate cause for this embarrassment
and humiliation.

As borne by the records, Pantaleon knew even before entering

Coster that the tour group would have to leave the store by 9:30 a.m. to
have enough time to take the city tour of Amsterdam before they left the

P a g e | 12

country. After 9:30 a.m., Pantaleons son, who had boarded the bus ahead
of his family, returned to the store to inform his family that they were the
only ones not on the bus and that the entire tour group was waiting for
them. Significantly, Pantaleon tried to cancel the sale at 9:40 a.m. because
he did not want to cause any inconvenience to the tour group. However,
when Costers sale manager asked him to wait a few more minutes for the
credit card approval, he agreed, despite the knowledge that he had
already caused a 10-minute delay and that the city tour could not start
without him.
In Nikko Hotel Manila Garden v. Reyes,[45] we ruled that a
person who knowingly and voluntarily exposes himself to danger cannot
claim damages for the resulting injury:
The doctrine of volenti non fit injuria (to which a person
assents is not esteemed in law as injury) refers to self-inflicted
injury or to the consent to injury which precludes the recovery of
damages by one who has knowingly and voluntarily exposed
himself to danger, even if he is not negligent in doing so.
This doctrine, in our view, is wholly applicable to this
case. Pantaleon himself testified that the most basic rule when
travelling in a tour group is that you must never be a cause of
any delay because the schedule is very strict.[46] When
Pantaleon made up his mind to push through with his purchase,
he must have known that the group would become annoyed and
irritated with him. This was the natural, foreseeable
consequence of his decision to make them all wait.
We do not discount the fact that Pantaleon and his family did feel
humiliated and embarrassed when they had to wait for AMEX to approve
the Coster purchase in Amsterdam. We have to acknowledge, however,
that Pantaleon was not a helpless victim in this scenario at any time, he
could have cancelled the sale so that the group could go on with the city
tour. But he did not.
More importantly, AMEX did not violate any legal duty to
Pantaleon under the circumstances under the principle of damnum
absque injuria, or damages without legal wrong, loss without injury. [47] As
we held in BPI Express Card v. CA:[48]
We do not dispute the findings of the lower
court that private respondent suffered damages as a

CREDIT TRANSACTION
result of the cancellation of his credit card. However,
there is a material distinction between damages and
injury. Injury is the illegal invasion of a legal right;
damage is the loss, hurt, or harm which results from
the injury; and damages are the recompense or
compensation
awarded
for
the
damage
suffered. Thus, there can be damage without injury in
those instances in which the loss or harm was not the
result of a violation of a legal duty. In such cases, the
consequences must be borne by the injured person
alone, the law affords no remedy for damages
resulting from an act which does not amount to a legal
injury or wrong. These situations are often
called damnum absque injuria.

As previously discussed, it took AMEX some time to approve

Pantaleons purchase requests because it had legitimate concerns on the
amount being charged; no malicious intent was ever established here. In
the absence of any other damages, the award of exemplary damages
clearly lacks legal basis.

In other words, in order that a plaintiff may

maintain an action for the injuries of which he
complains, he must establish that such injuries
resulted from a breach of duty which the defendant
owed to the plaintiff - a concurrence of injury to the
plaintiff and legal responsibility by the person causing
it. The underlying basis for the award of tort damages
is the premise that an individual was injured in
contemplation of law. Thus, there must first be a
breach of some duty and the imposition of liability for
that breach before damages may be awarded; and the
breach of such duty should be the proximate cause of
the injury.

Lastly, although we affirm the result of the CA decision, we do

so for the reasons stated in this Resolution and not for those found in the
CA decision.

Pantaleon is not entitled to damages

Because AMEX neither breached its contract with Pantaleon,
nor acted with culpable delay or the willful intent to cause harm, we find
the award of moral damages to Pantaleon unwarranted.
Similarly, we find no basis to award exemplary damages. In
contracts, exemplary damages can only be awarded if a defendant acted
in a wanton, fraudulent, reckless, oppressive or malevolent manner. [49] The
plaintiff must also show that he is entitled to moral, temperate, or
compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded. [50]

Neither do we find any basis for the award of attorneys fees and
costs of litigation. No premium should be placed on the right to litigate and
not every winning party is entitled to an automatic grant of attorney's fees.
[51]
To be entitled to attorneys fees and litigation costs, a party must show
that he falls under one of the instances enumerated in Article 2208 of the
Civil Code.[52] This, Pantaleon failed to do. Since we eliminated the award
of moral and exemplary damages, so must we delete the award for
attorney's fees and litigation expenses.

WHEREFORE, premises considered, we SET ASIDE our May

8, 2009 Decision and GRANT the present motion for reconsideration. The
Court
of
Appeals
Decision
dated August
18,
2006 is
hereby AFFIRMED. No costs.
SO ORDERED.

P a g e | 13

[G.R. No. 119178. June 20, 1997]

LINA LIM LAO, petitioner, vs. COURT OF APPEALS and PEOPLE OF
THE PHILIPPINES, respondents.
DECISION
PANGANIBAN, J.:
May an employee who, as part of her regular duties, signs blank
corporate checks -- with the name of the payee and the amount drawn to
be filled later by another signatory -- and, therefore, does so without actual
knowledge of whether such checks are funded, be held criminally liable for
violation of Batas Pambansa Bilang 22 (B.P. 22), when checks so signed
are dishonored due to insufficiency of funds? Does a notice of dishonor
sent to the main office of the corporation constitute a valid notice to the
said employee who holds office in a separate branch and who had no
actual knowledge thereof? In other words, is constructive knowledge of the
corporation, but not of the signatory-employee, sufficient?
These are the questions raised in the petition filed on March 21,
1995
assailing
the
Decision[1] of
Respondent
Court
of
[2]
Appeals promulgated on December 9, 1994 in CA-G.R. CR No. 14240
dismissing the appeal of petitioner and affirming the decision dated
September 26, 1990 in Criminal Case Nos. 84-26967 to 84-26969 of the
Regional Trial Court of Manila, Branch 33. The dispositive portion of the
said RTC decision affirmed by the respondent appellate court reads: [3]
WHEREFORE, after a careful consideration of the evidence presented by
the prosecution and that of the defense, the Court renders judgment as
follows:
In Criminal Case No. 84-26969 where no evidence was presented by the
prosecution notwithstanding the fact that there was an agreement that the
cases be tried jointly and also the fact that the accused Lina Lim Lao was
already arraigned, for failure of the prosecution to adduce evidence
against the accused, the Court hereby declares her innocent of the crime
charged and she is hereby acquitted with cost de oficio.
For Criminal Case No. 84-26967, the Court finds the accused Lina Lim
Lao guilty beyond reasonable doubt of the crime charged and is hereby
sentenced to suffer the penalty of ONE (1) YEAR imprisonment and to pay

CREDIT TRANSACTION
a fine of P150,000.00 without subsidiary imprisonment in case of
insolvency.
For Criminal Case No. 84-26968, the Court finds the accused Lina Lim
Lao guilty beyond reasonable doubt of the crime charged and is hereby
sentenced to suffer the penalty of ONE (1) YEAR imprisonment and to pay
a fine of P150,000.00 without subsidiary imprisonment in case of of (sic)
insolvency.

Society of the Divine Word through Mrs. Rosemarie Lachenal, a trader for
Premiere. Father Palijo was authorized to invest donations to the society
and had been investing the societys money with Premiere (TSN, June 23,
1987, pp. 5, 9-10). Father Palijo had invested a total of P514,484.04, as
evidenced by the Confirmation of Sale No. 82-6994 (Exh A) dated July 8,
1993. Father Palijo was also issued Traders Royal Bank (TRB) checks in
payment of interest, as follows:
Check Date Amount

For the two cases the accused is ordered to pay the cost of suit.
299961 Oct. 7, 1993 (sic) P150,000.00 (Exh. B)
The cash bond put up by the accused for her provisional liberty in Criminal
Case No. 84-26969 where she is declared acquitted is hereby ordered
cancelled (sic).

299962 Oct. 7, 1983 P150,000.00 (Exh. C)

323835 Oct. 7, 1983 P 26,010.73

With reference to the accused Teodulo Asprec who has remained at large,
in order that the cases as against him may not remain pending in the
docket for an indefinite period, let the same be archived without prejudice
to its subsequent prosecution as soon as said accused is finally
apprehended.
Let a warrant issue for the arrest of the accused Teodulo Asprec which
warrant need not be returned to this Court until the accused is finally
arrested.
SO ORDERED.

The Facts
Version of the Prosecution
The facts are not disputed. We thus lift them from the assailed
Decision, as follows:
Appellant (and now Petitioner Lina Lim Lao) was a junior officer of
Premiere Investment House (Premiere) in its Binondo Branch. As such
officer, she was authorized to sign checks for and in behalf of the
corporation (TSN, August 16, 1990, p. 6). In the course of the business,
she met complainant Father Artelijo Pelijo, the provincial treasurer of the

All the checks were issued in favor of Artelijo A. Palijo and signed by
appellant (herein petitioner) and Teodulo Asprec, who was the head of
operations. Further evidence of the transaction was the acknowledgment
of postdated checks dated July 8, 1983 (Exh . D) and the cash
disbursement voucher (Exh. F, TSN, supra, at pp. 11-16).
When Father Palijo presented the checks for encashment, the same were
dishonored for the reason Drawn Against Insufficient Funds (DAIF). Father
Palijo immediately made demands on premiere to pay him the necessary
amounts. He first went to the Binondo Branch but was referred to the
Cubao Main Branch where he was able to talk with the President, Mr.
Cario. For his efforts, he was paid P5,000.00. Since no other payments
followed, Father Palijo wrote Premiere a formal letter of
demand. Subsequently, Premiere was placed under receivership (TSN,
supra, at pp. 16-19).[4]
Thereafter, on January 24, 1984, Private Complainant Palijo filed an
affidavit-complaint against Petitioner Lina Lim Lao and Teodulo Asprec for
violation of B.P. 22. After preliminary investigation,[5] three Informations
charging Lao and Asprec with the offense defined in the first paragraph of
Section 1, B.P. 22 were filed by Assistant Fiscal Felix S. Caballes before
the trial court on May 11, 1984,[6] worded as follows:
1. In Criminal Case No. 84-26967:

P a g e | 14

That on or about October 7, 1983 in the City of Manila, Philippines, the

said accused did then and there wilfully and unlawfully draw and issue to
Artelijo A. Palijo to apply on account or for value a Traders Royal Bank
Check No. 299962 for P150,000.00 payable to Fr. Artelijo A. Palijo dated
October 7, 1983 well knowing that at the time of issue he/she did not have
sufficient funds in or credit with the drawee bank for full payment of the
said check upon its presentment as in fact the said check, when presented
within ninety (90) days from the date thereof, was dishonored by the
drawee bank for the reason: Insufficient Funds; that despite notice of such
dishonor, said accused failed to pay said Artelijo A. Palijo the amount of
the said check or to make arrangement for full payment of the same within
five (5) banking days from receipt of said notice.
CONTRARY TO LAW.
2. In Criminal Case No. 84-26968:
That on or about October 7, 1983 in the City of Manila, Philippines, the
said accused did then and there wilfully and unlawfully draw and issue to
Artelijo A. Palijo to apply on account or for value a Traders Royal Bank
Check No. 299961 for P150,000.00 payable to Fr. Artelijo A. Palijo dated
October 7, 83 well knowing that at the time of issue he/she did not have
sufficient funds in or credit with the drawee bank for full payment of the
said check upon its presentment as in fact the said check, when presented
within ninety (90) days from the date thereof, was dishonored by the
drawee bank for the reason: Insuficient Funds; that despite notice of such
dishonor, said accused failed to pay said Artelijo A. Palijo the amount of
the said check or to make arrangement for full payment of the same within
five (5) banking days from receipt of said notice.
CONTRARY TO LAW.
3. And finally in Criminal Case No. 84-26969:
That on or about July 8, 1983 in the City of Manila, Philippines, the said
accused did then and there wilfully and unlawfully draw and issue to
Artelijo A. Palijo to apply on account for value a Traders Royal Bank Check
No. 323835 for P26,010.03 payable to Fr. Artelijo A. Palijo dated October
7, 1983 well knowing that at the time of issue he/she did not have
sufficient funds in or credit with the drawee bank for full payment of the
said check upon its presentment as in fact the said check, when presented
within ninety (90) days from the date thereof, was dishonored by the
drawee bank for the reason: Insufficient Funds; that despite notice of such

CREDIT TRANSACTION
dishonor, said accused failed to pay said Artelijo A. Palijo the amount of
the said check or to make arrangement for full payment of the same within
five (5) banking days from receipt of said notice.
CONTRARY TO LAW.
Upon being arraigned, petitioner assisted by counsel pleaded not
guilty. Asprec was not arrested; he has remained at large since the trial,
and even now on appeal.
After due trial, the Regional Trial Court convicted Petitioner Lina Lim
Lao in Criminal Case Nos. 84-26967 and 84-26968 but acquitted her in
Criminal Case No. 84-26969.[7]On appeal, the Court of Appeals affirmed
the decision of the trial court.

Version of the Defense

Petitioner aptly summarized her version of the facts of the case thus:
Petitioner Lina Lim Lao was, in 1983, an employee of Premiere Financing
Corporation (hereinafter referred to as the Corporation), a corporation
engaged in investment management, with principal business office at
Miami, Cubao, Quezon City. She was a junior officer at the corporation
who was, however, assigned not at its main branch but at the corporations
extension office in (Binondo) Manila. (Ocampo, T.S.N., 16 August 1990, p.
14)
In the regular course of her duties as a junior officer, she was required to
co-sign checks drawn against the account of the corporation. The other
co-signor was her head of office, Mr. Teodulo Asprec. Since part of her
duties required her to be mostly in the field and out of the office, it was
normal procedure for her to sign the checks in blank, that is, without the
names of the payees, the amounts and the dates of maturity. It was
likewise Mr. Asprec, as head of office, who alone decided to whom the
checks were to be ultimately issued and delivered. (Lao, T.S.N., 28
September 1989, pp. 9-11, 17, 19.)
In signing the checks as part of her duties as junior officer of the
corporation, petitioner had no knowledge of the actual funds available in
the corporate account. (Lao, T.S.N., 28 September 1989, p. 21) The
power, duty and responsibility of monitoring and assessing the balances

P a g e | 15

against the checks issued, and funding the checks thus issued, devolved
on the corporations Treasury Department in its main office in Cubao,
Quezon City, headed then by the Treasurer, Ms. Veronilyn
Ocampo. (Ocampo, T.S.N., 19 July 1990, p. 4; Lao, T.S.N., 28 September
1989, pp. 21-23) All bank statements regarding the corporate checking
account were likewise sent to the main branch in Cubao, Quezon City, and
not in Binondo, Manila, where petitioner was holding office.(Ocampo,
T.S.N., 19 July 1990, p. 24; Marqueses, T.S.N., 22 November 1988, p. 8)

had access to information as to account balances and which alone was

responsible for funding the issued checks. (Ocampo, T.S.N., 19 July 1990,
p. 4; Lao, T.S.N., 28 September 1990, p. 23) All statements of account
were sent to the Treasury Department located at the main office in Cubao,
Quezon City. Petitioner was holding office at the extension in Binondo
Manila. (Lao, T.S.N., 28 September 1989, p. 24-25) Petitioner Lina Lim
Lao did not have knowledge of the insufficiency of the funds in the
corporate account against which the checks were drawn.

The foregoing circumstances attended the issuance of the checks subject

of the instant prosecution.

When the checks were subsequently dishonored, private complainant sent

a notice of said dishonor to Premier Financing Corporation at its head
office in Cubao, Quezon City. (Please refer to Exh. E; Palijo, T.S.N., 23
June 1987, p. 51) Private complainant did not send notice of dishonor to
petitioner. (Palijo, T.S.N., 24 July 1987, p. 10) He did not follow up his
investment with petitioner. (Id.) Private complainant never contacted,
never informed, and never talked with, petitioner after the checks had
bounced. (Id., at p. 29) Petitioner never had notice of the dishonor of the
checks subject of the instant prosecution.

The checks were issued to guarantee payment of investments placed by

private complainant Palijo with Premiere Financing Corporation. In his
transactions
with
the
corporation,
private
complainant
dealt exclusively with one Rosemarie Lachenal, a trader connected with
the corporation, and he never knew nor in any way dealt with petitioner
Lina Lim Lao at any time before or during the issuance of the delivery of
the checks. (Palijo, T.S.N., 23 June 1987, pp. 28-29, 32-34; Lao, T.S.N.,
15 May 1990, p. 6; Ocampo, T.S.N., p. 5) Petitioner Lina Lim Lao was not
in any way involved in the transaction which led to the issuance of the
checks.
When the checks were co-signed by petitioner, they were signed in
advance and in blank, delivered to the Head of Operations, Mr. Teodulo
Asprec, who subsequently filled in the names of the payee, the amounts
and the corresponding dates of maturity. After Mr. Asprec signed the
checks, they were delivered to private complainant Palijo. (Lao, T.S.N., 28
September 1989, pp. 8-11, 17, 19; note also that the trial court in its
decision fully accepted the testimony of petitioner [Decision of the
Regional Trial Court, p. 12], and that the Court of Appeals affirmed said
decision in toto)
Petitioner Lina Lim Lao was not in any way involved in the completion, and
the subsequent delivery of the check to private complainant Palijo.
At the time petitioner signed the checks, she had no knowledge of the
sufficiency or insufficiency of the funds of the corporate account. (Lao,
T.S.N., 28 September 1989, p. 21) It was not within her powers, duties or
responsibilities to monitor and assess the balances against the issuance;
much less was it within her (duties and responsibilities) to make sure that
the checks were funded.Premiere Financing Corporation had a Treasury
Department headed by a Treasurer, Ms. Veronilyn Ocampo, which alone

The Treasurer of Premiere Financing Corporation, Ms. Veronilyn Ocampo

testified that it was the head office in Cubao, Quezon City, which received
notice of dishonor of the bounced checks.(Ocampo, T.S.N., 19 July 1990,
pp. 7-8) The dishonor of the check came in the wake of the assassination
of the late Sen. Benigno Aquino, as a consequence of which event a
majority of the corporations clients pre-terminated their investments. A
period of extreme illiquidity and financial distress followed, which ultimately
led to the corporations being placed under receivership by the Securities
and Exchange Commission. (Ocampo, T.S.N., 16 August 1990, p. 8, 19;
Lao, T.S.N., 28 September 1989, pp. 25-26; Please refer also to Exhibit 1,
the order of receivership issued by the Securities and Exchange
Commission) Despite the Treasury Departments and (Ms. Ocampos)
knowledge of the dishonor of the checks, however, the main office in
Cubao, Quezon City never informed petitioner Lina Lim Lao or anybody in
the Binondo office for that matter. (Ocampo, T.S.N., 16 August 1990, pp. 910) In her testimony, she justified her omission by saying that the checks
were actually the responsibility of the main office (Ocampo, T.S.N., 19 July
1990, p. 6) and that, at that time of panic withdrawals and massive pretermination of clients investments, it was futile to inform the Binondo office
since the main office was strapped for cash and in deep financial
distress. (Id., at pp. 7-9) Moreover, the confusion which came in the wake
of the Aquino assassination and the consequent panic withdrawals caused
them to lose direct communication with the Binondo office. (Ocampo,
T.S.N., 16 August 1990, p. 9-10)

CREDIT TRANSACTION
As a result of the financial crisis and distress, the Securities and Exchange
Commission placed Premier Financing Corporation under receivership,
appointing a rehabilitation receiver for the purpose of settling claims
against the corporation. (Exh. 1) As he himself admits, private complainant
filed a claim for the payment of the bounced check before and even after
the corporation had been placed under receivership. (Palijo, T.S.N., 24
July 1987, p. 10-17) A check was prepared by the receiver in favor of the
private complainant but the same was not claimed by him. (Lao, T.S.N., 15
May 1990, p. 18)
Private complainant then filed the instant criminal action. On 26
September 1990, the Regional Trial Court of Manila, Branch 33, rendered
a decision convicting petitioner, and sentencing the latter to suffer the
aggregate penalty of two (2) years and to pay a fine in the total amount
of P300,000.00. On appeal, the Court of Appeals affirmed said
decision. Hence, this petition for review.[8]
The Issue
In the main, petitioner contends that the public respondent
committed a reversible error in concluding that lack of actual knowledge of
insufficiency of funds was not a defense in a prosecution for violation of
B.P. 22. Additionally, the petitioner argues that the notice of dishonor sent
to the main office of the corporation, and not to petitioner herself who
holds office in that corporations branch office, does not constitute the
notice mandated in Section 2 of BP 22; thus, there can be no prima
facie presumption that she had knowledge of the insufficiency of funds.
The Courts Ruling
The petition is meritorious.
Strict Interpretation of Penal Statutes
It is well-settled in this jurisdiction that penal statutes are strictly
construed against the state and liberally for the accused, so much so that
the scope of a penal statute cannot be extended by good intention,
implication, or even equity consideration. Thus, for Petitioner Lina Lim
Laos acts to be penalized under the Bouncing Checks Law or B.P. 22, they
must come clearly within both the spirit and the letter of the statute. [9]
The salient portions of B.P. 22 read:

P a g e | 16

SECTION 1. Checks without sufficient funds. -- Any person who makes or

draws and issues any check to apply on account or for value, knowing at
the time of issue that he does not have sufficient funds in or credit with the
drawee bank for the payment of such check in full upon its presentment,
which check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit or would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the
bank to stop payment, shall be punished by imprisonment of not less than
thirty days but not more than one (1) year or by a fine of not less than but
not more than double the amount of the check which fine shall in no case
exceed Two hundred thousand pesos, or both such fine and imprisonment
at the discretion of the court.

Justice Luis B. Reyes, an eminent authority in criminal law, also

enumerated the elements of the offense defined in the first paragraph of
Section 1 of B.P. 22, thus:

The same penalty shall be imposed upon any person who having sufficient
funds in or credit with the drawee bank when he makes or draws and
issues a check, shall fail to keep sufficient funds or to maintain a credit or
to cover the full amount of the check if presented within a period of ninety
(90) days from the date appearing thereon, for which reason it is
dishonored by the drawee bank.

4. That the check is subsequently dishonored by the drawee

bank for insufficiency of funds or credit, or would have
been dishonored for the same reason had not the
drawer, without any valid reason, ordered the bank to stop
payment.[11]

1. That a person makes or draws and issues any check.

2. That the check is made or drawn and issued to apply on
account or for value.
3. That the person who makes or draws and issues the
check knows at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for the
payment of such check in full upon its presentment.

Crux of the Petition

Where the check is drawn by a corporation, company or entity, the person
or persons who actually signed the check in behalf of such drawer shall be
liable under this Act.
SECTION 2. Evidence of knowledge of insufficient funds. -- The making,
drawing and issuance of a check payment of which is refused by the
drawee because of insufficient funds in or credit with such bank, when
presented within ninety (90) days from the date of the check, shall
be prima facie evidence of knowledge of such insufficiency of funds or
credit unless such maker or drawer pays the holder thereof the amount
due thereon, or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
This Court listed the elements of the offense penalized under B.P.
22, as follows: (1) the making, drawing and issuance of any check to apply
to account or for value; (2) the knowledge of the maker, drawer or issuer
that at the time of issue he does not have sufficient funds in or credit with
the drawee bank for the payment of such check in full upon its
presentment; and (3) subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for the same reason
had not the drawer, without any valid cause, ordered the bank to stop
payment.[10]

Petitioner raised as defense before the Court of Appeals her lack of

actual knowledge of the insufficiency of funds at the time of the issuance
of the checks, and lack of personal notice of dishonor to her. The
respondent appellate court, however, affirmed the RTC decision,
reasoning that the makers knowledge of the insufficiency of funds is legally
presumed from the dishonor of his checks for insufficiency of
funds. (People vs. Laggui, 171 SCRA 305; Nieras vs. Hon. Auxencio C.
Dacuycuy, 181 SCRA 1)[12] The Court of Appeals also stated that her
alleged lack of knowledge or intent to issue a bum check would not
exculpate her from any responsibility under B.P. Blg. 22, since the act of
making and issuing a worthless check is a malum prohibitum.[13] In the
words of the Solicitor General, (s)uch alleged lack of knowledge is not
material for petitioners liability under B.P.Blg. 22. [14]

Lack of Actual Knowledge of Insufficiency of Funds

Knowledge of insufficiency of funds or credit in the drawee bank for
the payment of a check upon its presentment is an essential element of
the offense.[15] There is a prima facie presumption of the existence of this
element from the fact of drawing, issuing or making a check, the payment

CREDIT TRANSACTION
of which was subsequently refused for insufficiency of funds.It is important
to stress, however, that this is not a conclusive presumption that
forecloses or precludes the presentation of evidence to the contrary.
In the present case, the fact alone that petitioner was a signatory to
the checks that were subsequently dishonored merely engenders
the prima facie presumption that she knew of the insufficiency of funds, but
it does not render her automatically guilty under B.P. 22. The prosecution
has a duty to prove all the elements of the crime, including the acts that
give rise to the prima facie presumption; petitioner, on the other hand, has
a right to rebut the prima facie presumption.[16] Therefore, if such
knowledge of insufficiency of funds is proven to be actually absent or nonexistent, the accused should not be held liable for the offense defined
under the first paragraph of Section 1 of B.P. 22. Although the offense
charged is a malum prohibitum, the prosecution is not thereby excused
from its responsibility of proving beyond reasonable doubt all the elements
of the offense, one of which is knowledge of the insufficiency of funds.
After a thorough review of the case at bar, the Court finds that
Petitioner Lina Lim Lao did not have actual knowledge of the insufficiency
of funds in the corporate accounts at the time she affixed her signature to
the checks involved in this case, at the time the same were issued, and
even at the time the checks were subsequently dishonored by the drawee
bank.
The scope of petitioners duties and responsibilities did not
encompass the funding of the corporations checks; her duties were limited
to the marketing department of the Binondo branch. [17] Under the
organizational structure of Premiere Financing Corporation, funding of
checks was the sole responsibility of the Treasury Department. Veronilyn
Ocampo, former Treasurer of Premiere, testified thus:
Q Will you please tell us whose (sic) responsible for the
funding of checks in Premiere?
A The one in charge is the Treasury Division up to the
Treasury Disbursement and then they give it directly to
Jose Cabacan, President of Premiere.[18]
Furthermore, the Regional Trial Court itself found that,
since Petitioner Lina Lim Lao was often out in the field taking charge of the
marketing department of the Binondo branch, she signed the checks in
blank as to name of the payee and the amount to be drawn, and without
knowledge of the transaction for which they were issued.[19] As a matter of
company practice, her signature was required in addition to that of Teodulo

Asprec, who alone placed the name of the payee and the amount to be
drawn thereon.
Petitioner did not have any knowledge either of the identity of the
payee or the transaction which gave rise to the issuance of the checks. It
was her co-signatory, Teodulo Asprec, who alone filled in the blanks,
completed and issued the checks. That Petitioner Lina Lim Lao did not
have any knowledge or connection with the checks payee, Artelijo Palijo,
is clearly evident even from the latters testimony.
Since Petitioner Lina Lim Lao signed the checks without knowledge
of the insufficiency of funds, knowledge she was not expected or obliged
to possess under the organizational structure of the corporation, she may
not be held liable under B.P. 22. For in the final analysis, penal statutes
such as B.P. 22 must be construed with such strictness as to carefully
safeguard the rights of the defendant x x x.[22] The element of knowledge of
insufficiency of funds having been proven to be absent, petitioner is
therefore entitled to an acquittal.
This position finds support in Dingle vs. Intermediate Appellate
Court where we stressed that knowledge of insufficiency of funds at the
time of the issuance of the check was an essential requisite for the offense
penalized under B.P. 22. In that case, the spouses Paz and Nestor Dingle
owned a family business known as PMD Enterprises. Nestor transacted
the sale of 400 tons of silica sand to the buyer Ernesto Ang who paid for
the same. Nestor failed to deliver. Thus, he issued to Ernesto two checks,
signed by him and his wife as authorized signatories for PMD Enterprises,
to represent the value of the undelivered silica sand. These checks were
dishonored for having been drawn against insufficient funds. Nestor
thereafter issued to Ernesto another check, signed by him and his wife
Paz, which was likewise subsequently dishonored. No payment was ever
made; hence, the spouses were charged with a violation of B.P. 22 before
the trial court which found them both guilty. Paz appealed the judgment to
the then Intermediate Appellate Court which modified the same by
reducing the penalty of imprisonment to thirty days. Not satisfied, Paz filed
an appeal to this Court insisting on her innocence and contending that she
did not incur any criminal liability under B.P. 22 because she had no
knowledge of the dishonor of the checks issued by her husband and, for
that matter, even the transaction of her husband with Ang. The Court ruled
in Dingle as follows:
[23]

The Solicitor General in his Memorandum recommended that petitioner be

acquitted of the instant charge because from the testimony of the sole
prosecution witness Ernesto Ang, it was established that he dealt
exclusively with Nestor Dingle. Nowhere in his testimony is the name of

P a g e | 17

Paz Dingle ever mentioned in connection with the transaction and with the
issuance of the check. In fact, Ang categorically stated that it was Nestor
Dingle who received his two (2) letters of demand. This lends credence to
the testimony of Paz Dingle that she signed the questioned checks in
blank together with her husband without any knowledge of its issuance,
much less of the transaction and the fact of dishonor.
In the case of Florentino Lozano vs. Hon. Martinez, promulgated
December 18, 1986, it was held that an essential element of the offense
is knowledge on the part of the maker or drawer of the check of the
insufficiency of his funds.
WHEREFORE, on reasonable doubt, the assailed decision of the
Intermediate Appellate Court (now the Court of Appeals) is hereby SET
ASIDE and a new one is hereby rendered ACQUITTING petitioner on
reasonable doubt."[24]
In rejecting the defense of herein petitioner and ruling that
knowledge of the insufficiency of funds is legally presumed from the
dishonor of the checks for insufficiency of funds, Respondent Court of
Appeals cited People vs. Laggui[25] and Nierras vs. Dacuycuy.[26] These,
however, are inapplicable here. The accused in both cases issued
personal -- not corporate -- checks and did not aver lack of knowledge of
insufficiency of funds or absence of personal notice of the checks
dishonor. Furthermore, in People vs. Laggui[27]the Court ruled mainly on
the adequacy of an information which alleged lack of knowledge of
insufficiency of funds at the time the check was issued and not at the time
of its presentment. On the other hand, the Court in Nierras vs.
Dacuycuy[28] held mainly that an accused may be charged under B.P. 22
and Article 315 of the Revised Penal Code for the same act of issuing a
bouncing check.
The statement in the two cases -- that mere issuance of a
dishonored check gives rise to the presumption of knowledge on the part
of the drawer that he issued the same without funds -- does not support
the CA Decision. As observed earlier, there is here only a prima
facie presumption which does not preclude the presentation of contrary
evidence. On the contrary, People vs. Laggui clearly spells out as an
element of the offense the fact that the drawer must have knowledge of
the insufficiency of funds in, or of credit with, the drawee bank for the
payment of the same in full on presentment; hence, it even supports the
petitioners position.
Lack of Adequate Notice of Dishonor

CREDIT TRANSACTION
There is another equally cogent reason for the acquittal of the
accused. There can be no prima facie evidence of knowledge of
insufficiency of funds in the instant case because no notice of dishonor
was actually sent to or received by the petitioner.
The notice of dishonor may be sent by the offended party or the
drawee bank. The trial court itself found absent a personal notice of
dishonor to Petitioner Lina Lim Lao by the drawee bank based on the
unrebutted testimony of Ocampo (t)hat the checks bounced when
presented with the drawee bank but she did not inform anymore the
Binondo branch and Lina Lim Lao as there was no need to inform them as
the corporation was in distress. [29] The Court of Appeals affirmed this
factual finding. Pursuant to prevailing jurisprudence, this finding is binding
on this Court.[30]
Indeed, this factual matter is borne by the records. The records
show that the notice of dishonor was addressed to Premiere Financing
Corporation and sent to its main office in Cubao, Quezon
City. Furthermore, the same had not been transmitted to Premieres
Binondo Office where petitioner had been holding office.
Likewise no notice of dishonor from the offended party was actually
sent to or received by Petitioner Lao. Her testimony on this point is as
follows:
Because no notice of dishonor was actually sent to and received by
the petitioner, the prima facie presumption that she knew about the
insufficiency of funds cannot apply.Section 2 of B.P. 22 clearly provides
that this presumption arises not from the mere fact of drawing, making and
issuing a bum check; there must also be a showing that, within five
banking days from receipt of the notice of dishonor, such maker or drawer
failed to pay the holder of the check the amount due thereon or to make
arrangement for its payment in full by the drawee of such check.
It has been observed that the State, under this statute, actually
offers the violator a compromise by allowing him to perform some act
which operates to preempt the criminal action, and if he opts to perform it
the action is abated. This was also compared to certain laws [32] allowing
illegal possessors of firearms a certain period of time to surrender the
illegally possessed firearms to the Government, without incurring any
criminal liability.[33] In this light, the full payment of the amount appearing in
the check within five banking days from notice of dishonor is a complete
defense.[34] The absence of a notice of dishonor necessarily deprives an
accused an opportunity to preclude a criminal prosecution.Accordingly,
procedural due process clearly enjoins that a notice of dishonor be
actually served on petitioner. Petitioner has a right to demand -- and the

basic postulates of fairness require -- that the notice of dishonor be

actually sent to and received by her to afford her the opportunity to avert
prosecution under B.P. 22.
In this light, the postulate of Respondent Court of Appeals that
(d)emand on the Corporation constitutes demand on appellant (herein
petitioner),[35] is erroneous. Premiere has no obligation to forward the
notice addressed to it to the employee concerned, especially because the
corporation itself incurs no criminal liability under B.P. 22 for the issuance
of a bouncing check. Responsibility under B.P. 22 is personal to the
accused; hence, personal knowledge of the notice of dishonor is
necessary. Consequently, constructive notice to the corporation is not
enough to satisfy due process. Moreover, it is petitioner, as an officer of
the corporation, who is the latters agent for purposes of receiving notices
and other documents, and not the other way around. It is but axiomatic
that notice to the corporation, which has a personality distinct and
separate from the petitioner, does not constitute notice to the latter.
Epilogue
In granting this appeal, the Court is not unaware of B.P. 22s intent to
inculcate public respect for and trust in checks which, although not legal
tender, are deemed convenient substitutes for currency. B.P. 22 was
intended by the legislature to enhance commercial and financial
transactions in the Philippines by penalizing makers and issuers of
worthless checks. The public interest behind B.P. 22 is thus clearly
palpable from its intended purpose.[36]
At the same time, this Court deeply cherishes and is in fact bound by
duty to protect our peoples constitutional rights to due process and to be
presumed innocent until the contrary is proven. [37] These rights must be
read into any interpretation and application of B.P. 22. Verily, the public
policy to uphold civil liberties embodied in the Bill of Rights necessarily
outweighs the public policy to build confidence in the issuance of
checks. The first is a basic human right while the second is only
proprietary in nature.[38] Important to remember also is B.P. 22s
requirements that the check issuer must know at the time of issue that he
does not have sufficient funds in or credit with the drawee bank and that
he must receive notice that such check has not been paid by the
drawee. Hence, B.P. 22 must not be applied in a manner which
contravenes an accuseds constitutional and statutory rights.
There is also a social justice dimension in this case. Lina Lim Lao is
only a minor employee who had nothing to do with the issuance, funding
and delivery of checks. Why she was required by her employer to
countersign checks escapes us. Her signature is completely unnecessary

P a g e | 18

for it serves no fathomable purpose at all in protecting the employer from

unauthorized disbursements. Because of the pendency of this case, Lina
Lim Lao stood in jeopardy -- for over a decade -- of losing her liberty and
suffering the wrenching pain and loneliness of imprisonment, not to
mention the stigma of prosecution on her career and family life as a young
mother, as well as the expenses, effort and aches in defending her
innocence. Upon the other hand, the senior official -- Teodulo Asprec -who appears responsible for the issuance, funding and delivery of the
worthless checks has escaped criminal prosecution simply because he
could not be located by the authorities. The case against him has been
archived while the awesome prosecutory might of the government and the
knuckled ire of the private complainant were all focused on poor
petitioner. Thus, this Court exhorts the prosecutors and the police
authorities concerned to exert their best to arrest and prosecute Asprec so
that justice in its pristine essence can be achieved in all fairness to the
complainant, Fr. Artelijo Palijo, and the People of the Philippines. By this
Decision, the Court enjoins the Secretary of Justice and the Secretary of
Interior and Local Government to see that essential justice is done and the
real culprit(s) duly-prosecuted and punished.
WHEREFORE, the questioned Decision of the Court of Appeals
affirming that of the Regional Trial Court, is hereby REVERSED and SET
ASIDE. Petitioner Lina Lim Lao isACQUITTED. The Clerk of Court is
hereby ORDERED to furnish the Secretary of Justice and the Secretary of
Interior and Local Government with copies of this Decision. No costs.

CREDIT TRANSACTION
G.R. No. L-47120 October 15, 1990
SPOUSES
LORETO
CLARAVALL
and
VICTORIA
CLARAVALL petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SPOUSES FRANCISCO
RAMIREZ and CAROLINA RAMIREZ,respondents.
Emerito M. Salva & Associates for petitioners.
De Castro & Cagampang Law Offices for private respondents.
BIDIN, J.:
This is a petition for review on certiorari of: (a) the decision of respondent
Court of Appeals * promulgated on April 22, 1976 affirming the decision of
the Court of first Instance of Isabela, Branch I, in Civil Case No. 2043: (b)
its, re-solution dated June 22, 1977 setting aside its resolution of
December 14, 1976 and reaffirming its decision; and (c) its resolution of
September 29, 1977 denying petitioners' motion for reconsideration dated
July 27, 1977, all in CA-G.R. No. 46364-R, entitled "Spouses Loreto
Claravall and Victoria H. Claravall v. Spouses Francisco Ramirez, Jr. and
Carolina P. Ramirez."
The dispositive portion of the decision of the Court of First Instance of
Isabela, Branch I (Record on Appeal, p. 74) affirmed in toto by respondent
court in its decision (Rollo, p.124) reads as follows:
WHEREFORE, the court renders judgment (a)
dismissing the complaint of the plaintiffs Claravall as
against the defendant Ramirez with costs against the
plaintiffs; (b) declaring the document Exh. "A", same
as Exh. "I" and Exh. "B", same as Exh. "5" as
essentially an absolute sale, and an option to
repurchase, respectively; (c) declaring the defendants
herein as the owners in fee simple of the said property,
described under paragraph 2 of the complaint and
covered by TCT 28717; (d) no attorney's fee and no
damages awarded; (e) dismissing the complaint of
reconveyance filed by the intervenor as against the
plaintiffs, it appearing that the property sought to be
reconveyed had already passed to third and innocent
purchasers for valuable consideration. Sec. 38, Act
496; (f) dismissing the complaint Of intervention as
against the defendant Ramirez. With costs against the
intervenor (g) ordering the Register of Deeds to cancel

the lis pendens and any other encumbrances over

TCT-28717.
The facts of the case as found by the Court of Appeals are as follows:
Between the years 1952 to 1960, appellant Loreto
Claravall and Victoria H. Claravall obtained loans from
the Development Bank of the Philippines (DBP) in the
amount of P52,000.00 for the construction of a
commercial building on their property situated in the
Municipality of Ilagan Isabela. To secure the loan, a
mortgage was executed upon said property in favor of
the DBP. Claravall was unable to pay the amortization
over said loan and the DBP threatened to foreclose
the mortgage. However, Claravall was able to pay
DBP by executing a deed of sale over the property in
question with a 5-year option to repurchase the same
with a certain Juan Ang-ngan
On December 29, 1965, Claravall exercised the said
right to repurchase the property from Ang-angan by
obtaining a loan from spouses Francisco and Carolina
Ramirez in the amount of P75,000.00. A deed of sale
dated December 29, 1965 was executed over the
same property by the Claravalls in favor of Ramirez.
On that same day of December 29, 1965, another
instrument was entered into by Claravall and Ramirez
which granted Claravall an option to repurchase the
property in question within a period of two (2) years
from December 29, 1965 but not earlier nor later than
the month of December, 1967, for the sum of
P10,000.00 payable at the time of repurchase.
At the expiration of the 2-year period, appellant
Claravall failed to redeem the property in question and
because of this they brought suit against Francisco
and Carolina Ramirez to compel the latter to sell the
property in question back to them Claravall as per the
second contract (Exhibit B) executed on December 29,
1967. (Rollo, pp. 122-124)

P a g e | 19

Pending trial of the case, a complaint in intervention was filed by one

Domingo G. Herman alleging that he is a brother of plaintiff Victoria H.
Claravall (one of the petitioners herein) and owner of of the entire
property as his inheritance from their deceased parents and that plaintiff
Victoria H. Claravall obtained a certificate of title by means of fraud. He
prays that the contract between plaintiffs and defendants be declared null
and void with respect to his legitimate share of the property in question
(Record on Appeal, p. 53).
The lower court rendered judgment in favor of defendants, the Ramirez
spouses, (private respondents herein) which was affirmed in toto by
respondent court in its decision promulgated on April 22, 1976 (Rollo, p.
122).
On June 4, 1976, petitioners as plaintiffs-appellants filed with respondent
court a motion for reconsideration of its decision on the grounds that
respondent court: (1) should have declared that the transaction between
plaintiffs-appellants and defendants-appellees is one of equitable
mortgage, or at the very least, one of sale with pacto de retro; and (2)
should not have decided the appeal by merely resolving the first and
second assignments of errors, leaving the two remaining assigned errors
unresolved which could have altered the result of the assailed decision
(Rollo, p. 132).
Finding the motion meritorious, respondent court in a resolution dated
December 14, 1976 ordered the remand of the records of the case to the
court of origin for further proceedings, particularly to receive the
testimonies of Juan dela Rosa, Maximo Amurao, Cornelio Lim, Juan Angangan and Mrs. Claravall based on its finding that appellants' former
counsel had taken a course of action jeopardizing the substantial rights of
the spouses Loreto and Victoria Claravall (Rollo, p. 207).
Feeling aggrieved by said resolution of the case, defendants-appellees on
January 6, 1977, moved for the reconsideration of the resolution of
December 14, 1976 on the ground that the resolution is contrary to law
and the facts (Rollo, p. 211) and then on January 18, 1977 filed a
supplemental motion for reconsideration (Rollo, p. 218). On January 24,
1977, private defendants-appellees also filed a motion for leave to submit
affidavits as integral part of their motion for reconsideration (Rollo, P. 223)
which affidavits were admitted by respondent court on February 10, 1977
(Rollo, p. 231).

CREDIT TRANSACTION
On January 27, 1977, Associate Justice Samuel F. Reyes inhibited himself
from further participation in the disposition of the case "in view of certain
'influences' that have lately made themselves felt, especially because the
case arose from Isabela, my home province" (Rollo, p. 232).

RECONSIDERATION FILED BY RESPONDENT RAMIREZES BEYOND

THE FIFTEEN-DAY PERIOD PROVIDED IN THE RULES;

On June 22, 1977, respondent Court promulgated its questioned

resolution setting aside its previous resolution dated December 14, 1976
and reaffirming its decision promulgated on April 22, 1976 (Rollo, p. 257).

RESPONDENT COURT GRAVELY ERRED IN G G RESPONDENT

RAMIREZES MOTION FOR LEAVE TO SUBMIT AFFIDAVITS AS PART
OF THEIR MOTION FOR RECONSIDERATION AND IN HAVING
ADMITTED SAID APPENDED AFFIDAVITS DESPITE THE FACT THAT
THE SAME WERE FILED BEYOND THE FIFTEEN-DAY PERIOD FIXED
BY THE RULES AND ON THE FURTHER GROUND THAT THE
SUBMISSION OF SAID AFFIDAVITS WHICH ARE HEARSAY WAS
IMPROPER AT THAT STAGES OF THE APPEAL;

The subsequent motion for reconsideration of the resolution of respondent

Court dated June 22, 1977 filed by petitioners on July 27, 1977 (Rollo, p.
269) was denied by respondent Court on September 29,1977 (Rollo, p.
314).

P a g e | 20

BY PETITIONER WOULD NOT PROVE THE COMPLAINT MERELY ON

THE STRENGTH OF THE HEARSAY AFFIDAVIT OF ATTY. MINA WHO
SOUGHT TO REFUTE HIS INCOMPETENCE OR NEGLIGENCE AND
JUSTIFY HIS NON-PRESENTATION OF PETITIONERS' WITNESSES;
X
RESPONDENT GRAVELY ERRED IN HOLDING THAT THE ONLY
ALLEGATION GIVEN IN THE COMPLAINT TO SUSTAIN THE PRAYER
OF DECLARING EXHIBITS "A" AND "B" AS EQUITABLE MORTGAGE
IS THAT PETITIONERS NEVER PARTED WITH THE PROPERTY IN
QUESTION
XI

Hence, this petition filed with the Court on November 26, 1977 (Rollo, p.
11).
Petitioners assigned the following errors:
I
RESPONDENT COURT GRAVELY ERRED IN SETTING ASIDE ITS
RESOLUTION DATED DECEMBER 14, 1976;
II

VI
RESPONDENT COURT GRAVELY ERRED IN DEPARTING FROM OR
CHANGING ITS PREVIOUS FINDING THAT THE IRRESPONSIBILITY
OR NEGLIGENCE OF PRIOR COUNSEL (ATTY. MINA) GREATLY
JEOPARDIZED PETITIONERS' CAUSE AND THAT PETITIONERS
WERE DENIED DUE PROCESS OF LAW BY THE FAILURE OF SAID
PRIOR COUNSEL TO PRESENT PETITIONERS' EVIDENCE;

XII
VII

RESPONDENT COURT GRAVELY ERRED IN NOT HOLDING THAT

RESPONDENT RAMIREZES WERE ESTOPPED FROM FILING THEIR
MOTION FOR RECONSIDERATION DATED JANUARY 6, 1977;

RESPONDENT COURT GRAVELY ERRED IN HAVING GIVEN

EMPHASIS AND CREDENCE TO AND INVOKED AS SOLID SUPPORT
OF ITS CONCLUSION THE AFFIDAVIT OF ATTY. ALEJANDRO MINA
WHEN IT SET ASIDE ITS RESOLUTION OF DECEMBER 14, 1976;

III

VIII

RESPONDENT COURT GRAVELY ERRED IN HAVING ENTERTAINED

AND ACTED UPON THE MOTION FOR RECONSIDERATION OF
RESPONDENT RAMIREZES DESPITE THE FACT THAT SAID MOTION
FOR RECONSIDERATION WAS PRO FORMA;

RESPONDENT COURT GRAVELY ERRED IN HAVING FOUND THAT

ATTY. ALEJANDRO MINA DID NOT COMMIT A GRAVE MISTAKE
WHEN HE HANDLED PETITIONERS' CASE BASED MERELY ON THE
PRINCIPLE THAT THE FINDING OF THE LOWER COURT IN THIS
RESPECT SHOULD BE ENTITLED TO GREAT WEIGHT;

IV
RESPONDENT COURT GRAVELY ERRED IN CONSIDERING,
ENTERTAINING AND PASSING UPON THE ISSUES FOR

RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT NONE

OF THE CIRCUMSTANCES ENUMERATED IN ART. 1602 OF THE
CIVIL CODE WAS EVER ALLEGED IN THE COMPLAINT SO AS TO
ENABLE PETITIONERS TO PROVE THAT THE TRANSACTION
BETWEEN PETITIONERS AND RESPONDENT RAMIREZES
EMBODIED IN EXHS. "A" AND "B" AN EQUITABLE MORTGAGE;

RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT

PETITIONERS NEVER TRIED TO REPURCHASE THE PROPERTY IN
QUESTION SIMPLY BECAUSE THE COMPLAINT PRAYED THAT
EXHS. "A" AND "B" BE DECLARED AS EQUITABLE MORTGAGE;
XIII

IX
RESPONDENT COURT GRAVELY ERRED IN HAVING STATED THAT
THE TESTIMONY OF THE WITNESSES SOUGHT TO BE PRESENTED

RESPONDENT COURT GRAVELY ERRED IN RENDERING ITS

DECISION ON APRIL 22, 1976 IN FAVOR OF RESPONDENT
RAMIREZES;
XIV
RESPONDENT COURT GRAVELY ERRED IN CONCLUDING THAT
THE DOCUMENTS EXHIBIT'S "A" AND "B" WERE SEPARATE AND
DISTINCT;

CREDIT TRANSACTION

XV
RESPONDENT COURT GRAVELY ERRED IN DENYING PETITIONERS'
MOTION FOR RECONSIDERATION DATED JULY 27, 1977;
XVI
RESPONDENT COURT CORRECTLY IMPUTED NEGLIGENCE OR
INDIFFERENCE TO ATTY. TEOFILO LEONIN, RESPONDENT
RAMIREZES' FORMER COUNSEL, BUT RESPONDENT COURT
GRAVELY ERRED IN RELIEVING RESPONDENT RAMIREZES FROM
THE CONSEQUENCES OF ATTY. LEONIN'S NEGLIGENCE AND
INACTION SINCE RESPONDENT RAMIREZES THEMSELVES NEVER
ASSAILED THE FAILURE OF ATTY. LEONIN TO APPEAR DURING THE
ORAL ARGUMENTS AND TO REFUTE THE ARGUMENTS CONTAINED
IN PETITIONERS' MOTION FOR RECONSIDERATION AND
MEMORANDUM;
XVII

RAFAEL CLIMACO AS HIS REPLACEMENT, BASED MERELY ON

UNEXPLAINED PRESSURES UPON THE FORMER, GIVES RISE TO
SUSPICION IN ONE'S MIND THAT THE RESOLUTION OF JUNE 22,
1977 WAS NOT FAIRLY REACHED.
The main issue in this case is whether or not the Deed of Absolute Sale
and Option to Repurchase executed by the parties must be treated as an
equitable mortgage and not the absolute sale it purports to be.
The issue must be answered in the affirmative.
Articles 1602 and 1604 of the Civil Code state:
ART. 1602. The contract shall be presumed to be an equitable
mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is unusually
inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;

RESPONDENT COURT GRAVELY ERRED IN HOLDING THAT THE

AFFIDAVITS WERE SUBMITTED BY ANOTHER LAWYER AND NOT BY
ATTY. LEONIN, WHEN THE PLEADING ITSELF SHOWED THAT THE
MOTION FOR LEAVE TO SUBMIT AFFIDAVITS WAS SIGNED BY A
LAWYER IN BEHALF OF ATTY. LEONIN HIMSELF WHO FILED
PIECEMEAL MOTIONS FOR RECONSIDERATION;

(3) When upon or after the expiration of the right to repurchase

another instrument extending the period of redemption or granting
a new period is executed;

XVIII

(5) When the vendor binds himself to pay the taxes on the thing
sold;

THE CONCURRENCE OF HON. EMILIO GANCAYCO AND HON. MAMA

BUSRAN IN REVERSING THE RESOLUTION OF DECEMBER 14, 1976
WHICH THEY ALSO PREVIOUSLY CONCURRED IN, SPELLS
CIRCUMSTANCES GENERATING SUSPICION ON HOW RESPONDENT
COURT ARRIVED AT COMPLETE REVERSAL OF ITS RESOLUTION OF
DECEMBER 14, 1976; and
XIX
THE SUDDEN AND UNEXPLAINED INHIBITION OF HON. SAMUEL F.
REYES FROM THE DIVISION AND THE APPOINTMENT OF HON.

(4) When the purchaser retains for himself a part of the purchase
price;

(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation. In
any of the foregoing case, any money, fruits, or other benefit to be
received by the vendees as rent or otherwise shall be considered
as interest which shall be subject to the usury laws.
ART. 1604. The provisions of Article 1602 shall also apply to a
contract purporting to be an absolute sale.

P a g e | 21

Under Article 1604 a contract purporting to be an absolute sale shall be

presumed to be an equitable mortgage, should any of the conditions in
Article 1602 be present. Otherwise stated, the presence of only one
circumstance defined in Article 1602 is sufficient for a contract of sale with
right to repurchase to be presumed an equitable mortgage.
The records show that this case involves a series of transactions
patterned after the earlier contract with Juan Ang-angan which was
indisputably a loan, although the contract executed to secure the loan was
an absolute deed of sale instead of a mortgage. Thus, it will be recalled,
that petitioner first mortgaged subject property with the Development Bank
of the Philippines as security for a loan of P52,000. To avert foreclosure of
the mortgage, petitioners borrowed P52,000.00 from Juan Ang-angan with
12% interest, executing a deed of absolute sale in favor of Juan Angangan with Tight to collect the rentals from the lessees thereof. Later, the
loan from Ang-ngan was again liquidated and the property repurchased by
borrowing the amount of P75,000.00 from private respondents. As in their
transaction with Ang-angan, they executed a Deed of Absolute Sale in
favor of private respondents to secure the loan with rights to collect rentals
of the property. On the same date, December 29, 1965, three documents
were executed, namely: (1) a Deed of Absolute Sale from Ang-angan in
favor of petitioners, (2) a Deed of Absolute Sale from petitioners in favor of
private respondents and (3) an Option to Repurchase within a period of
two (2) years in favor of petitioners.
The consideration of the Deed of Absolute Sale executed by petitioners in
favor of private respondent was the P75,000.00 borrowed by the former
from the latter while the Option to Repurchase had a stated consideration
of P10,000.00 "payable at the time of repurchase" or two (2) years after
execution of the contract.
Before the expiration of the two-year period, that is December 31, 1967, it
appears that petitioners were again negotiating for a loan of P100,000.00
from Mr. and Mrs. Maximino Amurao in order to pay private respondents
the amount of P85,000.00. This time, petitioners failed to redeem their
property, thereby necessitating the filing of an action in Court to compel
private respondents to sell the property in question back to them.
It appears obvious that petitioners were holding on to their property
despite financial difficulties to the extent that they had to incur bigger and
bigger loans in order to be able to pay the usurious interest involved. In
this regard, this Court has already laid down the rule that a pacto de retro
sale may be deemed an equitable mortgage when executed due to urgent

CREDIT TRANSACTION
necessity for money of the apparent vendor (Labasan v. Lacuesta, 86
SCRA 16 [1978]).

but is a right reserved by the vendor in the same instrument of sale as one
of the stipulations of the contract.

Another circumstance that supports the presumption that the transaction

between the parties was one of equitable mortgage is the inadequacy of
the consideration for the supposed sale considering that the property
involved is a parcel of land containing an area of 2,344 sq. m. with a threestorey commercial building made of concrete walling and G.I. roofing
constructed thereon. For the construction of the said commercial building,
petitioners were able to obtain a loan in 1952 from the Development Bank
of the Philippines in the amount of P52,000.00 with the above-described
commercial property as collateral (Rollo, p. 19). The property is located in
the heart of Ilagan's commercial district. There is merit in petitioners'
submission that if they were able to borrow with it as collateral,
P52,000.00 from the DBP in 1952, the fair market value of the 2,344 sq.
m. commercial lot and building at the time of the purported sale to private
respondents on December 29, 1965 or thirteen (13) years later could have
easily be within the range of P300,000.00. Hence, the alleged purchase
price of P75,000.00 is, indeed, not only unusually inadequate but shocking
to the conscience (Rollo, p. 141).

However, under similar circumstances, as in the case at bar, this Court in

a much later case (Capulong vs. Court of Appeals, 130 SCRA 248 [1984],
ruled otherwise, holding that respondent Court of Appeals

A third circumstance is the fact that on the date of expiration of the period
to repurchase the property, private respondents, specifically Carolina
Ramirez instead of accepting the repurchase price of the property on the
pretext that she would not want to transact business with petitioners in the
absence of her husband, executed a note extending the period of
redemption to January 2, 1968 (Rollo, p. 333). It is well-settled that
extension of the period of redemption is indicative of equitable mortgage
(Reyes v. de Leon, 20 SCRA 369 [1967]; Bundalian v. Court of Appeals,
129 SCRA 645 [19841).
From the foregoing transactions, it is evident that petitioners and private
respondents entered into a contract of equitable mortgage and not a deed
of absolute sale as the latter insisted.
But respondent Court of Appeals held the view that the two (2) contracts
entered into by the petitioners and private respondents herein were
separate and distinct and cannot be construed as an equitable mortgage
and/or a sale with pacto de retro. Among others, respondent Court based
its ruling on the doctrine laid down in the case of Villarica v. Court of
Appeals (26 SCRA 189 [1968]), to the effect that the right of repurchase is
not a right granted the vendor by the vendee in a subsequent instrument,

Thus, this Court held:

There is one important factor that differentiates the
Villarica case from the instant petition. The document
granting the vendors therein an option to buy back the
property was executed six (6) days after the execution
of the deed of sale whereas in the instant case the
option to buy was embodied in a document executed
at the same time that the questioned deed of sale was
executed. The option to buy in the Villarica case was
interpreted to be only an afterthought. On the other
hand, the intent of the parties to circumvent the
provision discouraging pacto de retro sales is very
apparent in the instant case. The two contracts, the
deed of sale and the documents embodying the option
to repurchase were prepared, signed and notarized on
the same day. The respondent court should have seen
through a transparent effort to make it appear that the
two transactions were not intimately related but distinct
and separate as in the Villarica case. This should have
put the Court on guard considering the other
circumstances of the case from which no other
conclusion could be derived except that the deed of
absolute sale and the document giving the right to
repurchase were, in fact, only one transaction of sale
pacto de retro which must be construed as an
equitable mortgage. (Capulong v. Court of
Appeals, supra).
As previously stated, the Deed of Absolute Sale and the Option to
Repurchase in the instant case were executed by the parties and
notarized on the same date, that is December 29, 1965 by the same
notary public, Julian dela Rosa, as Document No. 171 and Document No.
172, respectively Brief for the Petitioners Appellants, p. 157). That the two
documents are intimately related is also shown by the fact that in the
Option to Repurchase, the consideration agreed upon for the repurchase

P a g e | 22

of the properties is stated as P75,000.00 which is the same amount stated

as consideration in the Deed of Absolute Sale. It is also expressly stated in
the Option to Repurchase that as consideration for the execution thereof,
the sum of P10,000.00 payable at the time of repurchase was agreed
upon and all expenses incidental to the sale and repurchase shall be
chargeable to the account of petitioners, same to be added to the
consideration therein covenanted (Record on Appeal, p. 33).
Still further, this Court ruled that even if no usury was involved, a contract
of loan with mortgage made to appear in paper as an absolute sale with a
companion option to buy, is null and void (Capulong v. C.A., supra).
WHEREFORE, the decision of respondent Court promulgated on April 22,
1976 and its resolution of June 22, 1977 are hereby Reversed and Set
Aside. The deed of absolute sale between the parties with the option to
repurchase is declared as an equitable mortgage and, petitioners are
declared entitled to redeem the mortgaged property which shall be
effected upon payment of their mortgage debt to private respondents in
the total amount of P85,000.00 with legal rate of interest from December
31, 1967, the time the loan matured until it is fully paid.
SO ORDERED.

CREDIT TRANSACTION
EN BANC
[A.M. No. RTJ-89-380 : December 19, 1990.]
192 SCRA 434
EFREN JAVIER and PEDRO JAVIER, Complainants, vs. JUDGE
SALVADOR P. DE GUZMAN, JR., Respondent.
DECISION
PER CURIAM:
Disbarment proceedings on the ground of "dishonorable conduct" were
instituted on 8 August 1989 before the Committee on Bar Discipline of the
Integrated Bar by complainants Efren Javier (son) and Pedro Javier
(father) against respondent Salvador P. de Guzman, Jr., as a member of
the Bar and as Presiding Judge of the Regional Trial Court, Makati, Metro
Manila. However, pursuant to Supreme Court Circular No. 3-89, dated 9
February 1989, requiring that complaints filed in the IBP against Justices
and Judges of the lower Courts be promptly referred to the Supreme Court
for appropriate action, the Complaint was eventually transmitted to this
Court.
After the Comment by Respondent Judge and the Reply by Complainants
were filed, the Court referred the case to Mme. Justice Lorna L. de la
Fuente of the Court of Appeals for investigation, report and
recommendation.
The Report and Recommendation was submitted to the Court on 20
September 1990.: nad
Complainants allege that, on 7 December 1987, Efren Javier, and his
mother, Lolita Javier, borrowed P200,000.00 from Respondent Judge with
interest orally agreed upon at ten per cent (10%) monthly. They tendered
to the latter UCPB Check No. BNE 012872, dated 7 January 1988, in the
amount of P220,000.00. The drawer of the check was actually Donato
Belen, a brother-in-law of Efren, as the Javiers had no personal checking
account. The following day, Respondent required them to sign a
Memorandum of Agreement, which they did. Two of the conditions
imposed were interest at the rate of twenty per cent (20%) per month,
compounded monthly, and should they fail to pay the loan and its interest
upon maturity on 7 January 1988 and the check is deposited and
dishonored, an appropriate charge for violation of Batas Pambansa Blg.

22 may be filed at Respondent's option. When the Javiers defaulted on

due date because of business reverses, partial payments in the total
amount of P177,000.00 were made to Respondent between 6 January
1988 and 16 June 1988. Meanwhile, the check, which was deposited by
Respondent on 14 April 1988, was dishonored by the drawee bank.
On 8 September 1988, Respondent instituted suit for a "Sum of Money
and Damages with Prayer for the Issuance of a Writ of Preliminary
Attachment" in the Regional Trial Court of Makati, Metro Manila, against
the spouses Pedro and Lolita Javier, and their son, Efren, for the recovery
of the "sum of P220,000.00 with 20% interest/penalty a month
compounded monthly from January 7, 1988 until fully paid," computed at
P622,871.67 (Annex B, Complaint). Judgment on the pleadings was
rendered on 3 February 1989 ordering the Javiers to pay Respondent
Judge the "sum of P608,871.67 with 20% interest/penalty a month
compounded monthly beginning September 8, 1988 until fully paid" and
the "sum equal to 10% of the amounts due and recoverable as
reimbursement of attorney's fees and litigation expenses" (Order, RTC
Rollo, p. 107). In the meantime, an Order granting execution pending
appeal was issued by the Trial Court on 14 April 1989 (Ibid., pp. 216-217).
The Javiers appealed to the Court of Appeals where the case still pends.
Still later, Respondent filed in Manila two (2) criminal complaints, the first,
for violation of B.P. Blg. 22 against Efren, who, however, was acquitted,
and the second, for Estafa against Complainants and Lolita Javier, which
complaint was dismissed (Rollo, p. 194).
On 21 March 1989, Respondent further filed an administrative charge
against Complainant father, Pedro, with the Bureau of Internal Revenue
where the latter was employed. Earlier, an administrative charge against
Pedro had also been filed with the Civil Service Commission on 3 March
1989 accusing Pedro in both instances, of having committed estafa
against him and his wife, of dishonesty and of conduct unbecoming of a
government official.
Feeling harassed, Complainants filed this administrative charge against
Respondent Judge on four counts of "dishonorable conduct," as follows:
1. Respondent had loaned money to Complainants at usurious
interest as can be gleaned from the fact that after receiving
P177,000.00 in installments, he still seeks to recover the
amount of P622,817.67;
2. Respondent took advantage of his position as Regional Trial
Court Judge of Makati, Metro Manila, by filing a collection
case against Complainants and Lolita Javier before the
same Court and making false and fraudulent manifestations

P a g e | 23

that Complainants had failed to pay any amount as of 8

September 1988;
3. Respondent resorted to harassment by filing a criminal
complaint for violation of B.P. Blg. 22 against Complainant,
Efren, despite knowledge that the latter was not the drawer
of the UCPB check; and
4. Respondent failed to reveal the true facts of the case, in
violation of Articles 182 and 183 of the Revised Penal Code
penalizing "False testimony," when he filed the
administrative charges with the Bureau of Internal Revenue
and the Civil Service Commission against Complainant
Pedro notwithstanding knowledge of the fact that Pedro
was not involved in the transaction in question.: nad
In his Comment, Respondent denied that he lent any money to the Javiers
alleging that it was his wife who had asked her first cousin, Mrs. Hedy
Laca, to make available the amount of P200,000.00. The real lender,
therefore, was the latter. When the Javiers failed to repay the loan, they
were compelled to pay back the amount to Mrs. Laca. Respondent,
therefore, became the creditor of the Javiers "by force of circumstances."
Respondent also stressed that the rate of interest of twenty per cent (20%)
per month, compounded monthly, was not usurious for the reason that
said rate was designed more as a penalty in order to force the Javiers to
pay back the loan as soon as possible. He contends that under the
circumstances, the filing of several complaints against the Javiers was the
more "civilized thing to do." And as to the filing of the case in Makati, he
reasons out that it was upon prior consultation with the Executive Judge.
With regard to the administrative charges, which he had filed against
Complainant Pedro, Respondent maintains that the latter was not really an
innocent party to the whole transaction, but the "prime mover."
With "dishonorable conduct" defined by the Investigating Justice and by
the parties as conduct not in keeping with any of the rules embodied in the
Code of Professional Responsibility for lawyers and the Code of Judicial
Ethics, Justice de la Fuente concluded that there were valid grounds to
sustain the first three (3) charges, for the commission of which
Respondent Judge was recommended to be reprimanded, with warning of
a severer penalty in case of repetition. The fourth charge was
recommended to be dismissed (Report, p. 4).
Anent the first charge, that is, whether or not Respondent was, in fact, the
lender and had charged a usurious rate of interest, the Investigating
Justice found that Respondent's disclaimer cannot prevail over the

CREDIT TRANSACTION
Agreement between the parties, which clearly point to the Respondent as
the lender. He is mentioned in said Agreement as the "Third Party," the
"First Party" being Lolita Javier, and the "Second Party" being Efren. The
UCPB postdated check was also made out in Respondent's name. The
foregoing refutes Respondent's contention that he became the lender only
"by force of circumstances" after the Javiers had failed to repay their
indebtedness. Further, it was Respondent who made collections on the
loan and it was to him that payments were made. Additionally, it was
Respondent who filed the civil case for collection of the loan as well as the
administrative cases against complainant Pedro.
As to the usurious rate of interest, while that issue was considered by
Justice de la Fuente as irrelevant since the Usury Law is now legally
inexistent pursuant to Central Bank Circular No. 905 and the interest now
legally chargeable depends upon the agreement of lender and borrower
(Liam Law v. Olympic Sawmill Co., G.R. No. L-30771, May 28, 1984, 129
SCRA 439), she found that the interest charged on the loan was
exorbitant. To quote:
"The Memorandum of Agreement (pls. see fifth whereas clause)
stipulates that for the period from December 7, 1987, when the
sum of P200,000.00 was lent to the Javiers, to December 22,
1987, on which date the loan fell due with extension up to
January 7, 1988' or for a period of from 15 to 30 days the
interest shall be `at the rate of Ten Percent (10%) for the period
of time', in other words, the interest rate is 10% a month. This
explains why the postdated check required under the Agreement
to be issued by Efren Javier to respondent is for P220,000.00,
the additional P20,000.00 being the amount earned on the sum
of P200,000.00 over a period of, at most, 30 days. Then, as
further stipulated in the Agreement (par. 2), if the loan and
interest due thereon shall not have been paid by January 7,
1988, the Javiers shall pay to respondent 'a sum equal to
Twenty Percent (20%) a month compounded monthly over the
initial principal plus the initial interest on the total sum of
P220,000.00, until the full amount is paid.' The result of this
stipulation is that despite the fact, established by the evidence
and admitted by respondent, that as of June 16, 1988 the total
payments made by the Javiers on the loan of P200,000.00 had
amounted to P177,000.00 or only P23,000.00 short of
P200,000.00, the amount originally invested by respondent
he sought to collect in his suit filed in September 1988 against
the Javiers the relatively and staggeringly huge amount of
P622,871.67 (pls. see Motion for Judgment on the Pleadings,
CC No. 88-1872, Annex C to Complaint, p. 12 Record). The

foregoing figures speak for themselves; they show clearly the

exorbitance and shocking harshness of the imposition in
question.- nad
Nor can such unconscionability be excused on the ground, as respondent
interposes, that the 20% interest compounded monthly is intended not as
interest but as penalty. However it may be termed, the fact remains that
the said amount is being collected by respondent as a charge for the use
of his money by the Javiers, and this charge is blatantly out of proportion
to the amount of the money which respondent loaned to the Javiers."
Our review of the evidence shows that the foregoing conclusions are
warranted.
As to the second charge that Respondent took advantage of his
position as Makati Regional Trial Court Judge by filing the collection case
against Complainants in said Court we quote with approval Justice de
la Fuente's observations thereon:
". . . The civil case was filed by respondent with the Makati RTC
on September 8, 1988; and respondent admits that he was
'detailed indefinitely to Branch 142 of the same Court on June
30, 1988 and assumed office thereat on July 5, 1988.' Instead of
filing the suit in Quezon City where the Javiers reside or in
Manila where respondent resides, respondent taking
advantage of what he calls the waiver of venue stipulation in the
Memorandum of Agreement (which states that 'in case of
litigation, venue shall be in any court in Metro Manila, at the
option of the Third Party,' i.e., the respondent) chose to file
the case in Makati.
"True, considering the abovecited stipulation, it might be said
that respondent was acting in the legal exercise of the option
granted to him in the Agreement. Nonetheless, the undersigned
submits that in thus acting, respondent had fallen short of what
is expected of him as a Judge and officer of the court among
whose duties it is to see to it that public confidence in the honor,
dignity, integrity and independence of the judiciary is not eroded,
pursuant to Canons 3 and 25 of the Canons of Judicial Ethics,
supra. It is reasonably to be expected, considering the peculiar
Filipino psyche, personality and culture of which a Judge like
respondent is presumably aware that the public, particularly
respondent's adversary in this case, would naturally be
apprehensive that respondent might exert influence to favor
himself, to the detriment of his said adversary. And so it turned
out, this was precisely the substance of complainant's second

P a g e | 24

charge. Indeed, instead of promoting public confidence in the

dignity, honor, integrity and independence of the Judiciary, as
every Judge is urged to do by the Canons just cited,
respondent's aforesaid behavior produced the opposite result."
The third charge concerns Respondent's alleged act of harassment in
continuing with the criminal prosecution of complainant, Efren, for violation
of Batas Pambansa Blg. 22 despite his having been informed that Efren
was not the owner and drawer of the check, and, therefore, is not the
proper person to be charged. On this score, the Investigating Justice
found, and with which we agree:
". . . Even discounting the weight of complainant's said evidence,
it bears emphasis that while the case was shall under
investigation before the Fiscal's Office, respondent had, as he
himself admits, already been informed that it was not Efren
Javier who had signed the postdated check. Thus, it was, under
the aforecited Canons, respondent's bounden duty as a
Judge whose personal behavior should at all times, even in his
everyday life, be beyond reproach so as to promote public
confidence in the dignity, honor, integrity, and independence of
the judiciary (Canon 3, supra), who should endeavor always to
prevent the erosion of such public confidence 'by irresponsible
or improper conduct' to disregard his personal animosity
towards the Javiers and to see to the forthright dismissal of the
case. He failed to comply with this duty when he instead saw to
the continuation of the prosecution of the case until it reached
the Regional Trial Court and up to its termination thereat (with
the acquittal of Efren)."
The fourth charge that of having filed with the BIR and the Civil Service
Commission administrative charges against Complainant Pedro,
notwithstanding Respondent's knowledge of the fact that Pedro had no
participation whatsoever in the loan transaction in question was found
by Justice de la Fuente to be unsubstantiated. We find no reason to differ.
". . . It is true that it appears from the Memorandum of
Agreement that Pedro Javier is not a party nor a signatory
thereof; nonetheless, it also appears that his wife Lolita Javier is
that 'First Party,' and his son Efren Javier is the 'Second Party'
thereof. There was reason for respondent to believe that Pedro
Javier was not an 'innocent' party and had in reality a 'behindthe-scenes' participation in the transaction. For as respondent
believably relates it, Pedro Javier 'was the prime mover who, on
December 5, 1987 invited respondent and Mrs. de Guzman for
dinner and wanted the respondent to join in the venture.'

CREDIT TRANSACTION
Besides, in view of the closeness of 'the Filipino family ties which
usually extend to financial matters, similarly, while it was
respondent himself who had been expressly named the 'Third
Party' in the loan agreement, it was respondent's wife who,
although not at all mentioned as a party to the same Agreement,
took it upon herself to locate the funds with which to finance the
loan given to the Javiers. And considering that respondent had
the feeling, groundless or not, that the Javiers had, so to speak,
put one over on the de Guzmans when the former did not pay to
respondent the amount which he wished to collect on the loan,
respondent naturally felt aggrieved or wronged by Pedro Javier,
and this he undoubtedly thought could be righted by the filing of
the administrative charges against him (Pedro Javier). As the
undersigned sees it, this and not malice or a desire to harass
is the motivation for respondent's filing of said charges."
Except for the act complained of in the last charge, Respondent Judge's
actuations, indeed, show reproachable and improper conduct. He denied
that he was the lender when, in fact, he was, as concluded by Justice de
la Fuente.
While he had every right to protect his investment, and while the contract
of loan entered into between him and the Javiers was legal per se,
Respondent rendered it unconscionable by imposing a penalty of twenty
per cent (20%) interest per month compounded monthly. It strikes us, too,
that Respondent was equivocal as to the repayments that were made to
him by the Javiers. In his Verified Complaint before the Trial Court, he
averred failure to repay (Annex B, Complaint). However, in the
computation attached to his Motion for Judgment on the Pleadings (Annex
C, ibid.), he made mention of "alleged payments being accepted by (him)
at face value" and included them in the determination of the balance due.
Respondent also brought suit to collect the staggering sum of
P622,871.67 despite payments by the debtors of approximately
P177,000.00 of the original P200,000.00 loan. Although not illegal under
the terms of the Memorandum of Agreement, as in fact, the Trial Court had
ruled in Respondent's favor, it does not necessarily follow that it was moral
and fair. Respondent is not a hard-boiled and callous businessman. He is
a Judge.
A Judge's official conduct should be free from the appearance of
impropriety, and his personal behavior, not only upon the bench and in the
performance of judicial duties, but also in his everyday life, should be
beyond reproach (Canons of Judicial Ethics, Canon 3, which was
applicable at the time of the transaction in 1987; emphasis supplied). This
was reiterated in the Code of Judicial Conduct, Canon 2 and Rule 2.01,

which provides that a Judge should so behave at all times as to promote

public confidence in the integrity and impartiality of the Judiciary.
This is premised on the truism that a Judge's official life cannot simply be
detached or separated from his personal existence and that upon a
Judge's attributes depend the public perception of the Judiciary. Thus:
"Public confidence in the Judiciary is eroded by irresponsible or
improper conduct of judges. A judge must avoid all impropriety
and the appearance thereof. Being the subject of constant public
scrutiny, a judge should freely and willingly accept restrictions on
conduct that might be viewed as burdensome by the ordinary
citizen.chanrobles virtual law library
A judge should personify judicial integrity and exemplify honest
public service. The personal behavior of a judge, both in the
performance of official duties and in private life should be above
suspicion." (Commentaries on Canon, 2.01)
So exacting are the standards of judicial department that a Judge is even
enjoined from making investments in any enterprise that is likely to be
involved in litigation.
"A judge shall refrain from financial and business dealings that
tend to reflect adversely on the court's impartiality, interfere with
the proper performance of judicial activities, or increase
involvement with lawyers or persons likely to come before the
Court. A judge should so manage investments and other
financial interests as to minimize the number of cases giving
grounds for disqualification" cralaw (Code of Judicial Conduct,
Rule 5.02)
The rationale for the rule applies with equal vigor in this case.
While Respondent Judge may have had reasons of convenience for filing
his collection suit in Makati where he sits as one of the Trial Judges, a
sense of propriety should have impelled him to desist. In the eyes of the
public, it arouses suspicion, rightly or wrongly, that advantage is being
taken of one's position and that a Judge's adversary is sure to get a raw
deal. As it turned out, Respondent Judge, in his official stationery,
upbraided the Sheriff who enforced the Writ of Preliminary Attachment for
not having taken into custody all the items he had levied upon and "asked"
him to do so "within forty eight hours" (Exhibit J, Complaint, Rollo, p. 44).
In this regard, Respondent had exposed the Bench to possible charges of
exertion of undue pressure and influence.
The continued prosecution of the criminal charge for violation of Batas
Pambansa Blg. 22 against Complainant Efren, despite subsequent

P a g e | 25

knowledge that the latter was not the drawer of the check but his brotherin-law, although Efren had filled out the check himself, again exhibits
reproachable conduct. Respondent could have moved for the dismissal of
the case, considering his professional responsibility not to encourage, for
any motive or interest, any suit or proceeding (Rule 1.03, Code of
Professional Responsibility).
His explanation that the making and the issuance of a check without
sufficient funds constitute separate offenses so that he could proceed
even against Efren, exhibits "splitting of hairs" and a misuse of Court
processes in order to promote one's own interests. As it was, the criminal
charge was dismissed.
All told, traces of animosity and harassment on the part of Respondent
Judge are all too evident, in sharp contrast to what a Judge should be
the embodiment of what is judicious, proper and fair.: nad
WHEREFORE, finding Respondent Judge, Salvador P. de Guzman, Jr.
guilty on three (3) counts, of irresponsible, improper and dishonorable
conduct in disregard of the Code of Judicial Ethics, he is hereby
SEVERELY CENSURED, with a stern warning that a repetition of the said
acts or similar acts in the future shall receive graver sanctions.
Let this Decision be spread upon the personal records of Respondent
Judge.
SO ORDERED.

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

KAPUNAN, J.:p
On various dates in 1981, the Philippine National Bank granted to herein
petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda
several loan/credit accommodations totaling P18.0 Million pesos payable
in a period of six years at an interest rate of 21% per annum. To secure the
loan, the spouses Almeda executed a Real Estate Mortgage Contract
covering a 3,500 square meter parcel of land, together with the building
erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro
Manila. A credit agreement embodying the terms and conditions of the
loan was executed between the parties. Pertinent portions of the said
agreement are quoted below:
SPECIAL CONDITIONS
xxx xxx xxx
The loan shall be subject to interest at the rate of
twenty one per cent (21%) per annum, payable semiannually in arrears, the first interest payment to
become due and payable six (6) months from date of
initial release of the loan. The loan shall likewise be
subject to the appropriate service charge and a
penalty charge of three per cent (30%) per annum to
be imposed on any amount remaining unpaid or not
rendered when due.
xxx xxx xxx
III. OTHER CONDITIONS
(c) Interest and Charges

(1) The Bank reserves the right to increase the

interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in
the future; provided, that the interest rate on
this/these accommodations shall be correspondingly
decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease of the
maximum interest rate. 1
Between 1981 and 1984, petitioners made several partial payments on the
loan totaling. P7,735,004.66, 2 a substantial portion of which was applied
to accrued interest. 3 On March 31, 1984, respondent bank, over
petitioners' protestations, raised the interest rate to 28%, allegedly
pursuant to Section III-c (1) of its credit agreement. Said interest rate
thereupon increased from an initial 21% to a high of 68% between March
of 1984 to September, 1986. 4
Petitioner protested the increase in interest rates, to no avail. Before the
loan was to mature in March, 1988, the spouses filed on February 6, 1988
a petition for declaratory relief with prayer for a writ of preliminary
injunction and temporary restraining order with the Regional Trial Court of
Makati, docketed as Civil Case No. 18872. In said petition, which was
raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses
sought clarification as to whether or not the PNB could unilaterally raise
interest rates on the loan, pursuant to the credit agreement's escalation
clause, and in relation to Central Bank Circular No. 905. As a preliminary
measure, the lower court, on March 3, 1988, issued a writ of preliminary
injunction enjoining the Philippine National Bank from enforcing an interest
rate above the 21% stipulated in the credit agreement. By this time the
spouses were already in default of their loan obligations.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and
P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of
petitioner's mortgaged properties and scheduled an auction sale for March
14, 1989. Upon motion by petitioners, however, the lower court, on April 5,
1989, granted a supplemental writ of preliminary injunction, staying the
public auction of the mortgaged property.
On January 15, 1990, upon the posting of a counterbond by the PNB, the
trial court dissolved the supplemental writ of preliminary injunction.

P a g e | 26

Petitioners filed a motion for reconsideration. In the interim, respondent

bank once more set a new date for the foreclosure sale of Marvin Plaza
which was March 12, 1990. Prior to the scheduled date, however,
petitioners tendered to respondent bank the amount of P40,142,518.00,
consisting of the principal (P18,000,000.00) and accrued interest
calculated at the originally stipulated rate of 21%. The PNB refused to
accept the payment. 5
As a result of PNB's refusal of the tender of payment, petitioners, on
March 8, 1990, formally consigned the amount of P40,142,518.00 with the
Regional Trial Court in Civil Case No. 90-663. They prayed therein for a
writ of preliminary injunction with a temporary restraining order. The case
was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March
15, 1990, respondent bank sought the dismissal of the case.
On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an
order granting the writ of preliminary injunction enjoining the foreclosure
sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990
respondent bank filed a motion for reconsideration of the said order.
On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66
presided by Judge Eriberto Rosario who issued an order consolidating
said case with Civil Case 18871 presided by Judge Ignacio Capulong.
For Judge Ignacio's refusal to lift the writ of preliminary injunction issued
March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition
and Mandamus with respondent Court of Appeals, assailing the following
orders of the Regional Trial Court:
1. Order dated March 30, 1990 of Judge Guadiz
granting the writ of preliminary injunction restraining
the foreclosure sale of Mavin Plaza set on March 12,
1990;
2. Order of Judge Ignacio Capulong dated January 10,
1992 denying respondent bank's motion to lift the writ
of injunction issued by Judge Guadiz as well as its
motion to dismiss Civil Case No. 90-663;
3. Order of Judge Capulong dated July 3, 1992
denying respondent bank's subsequent motion to lift
the writ of preliminary injunction; and

CREDIT TRANSACTION
4. Order of Judge Capulong dated October 20, 1992
denying respondent bank's motion for reconsideration.
On August 27, 1993, respondent court rendered its decision setting aside
the assailed orders and upholding respondent bank's right to foreclose the
mortgaged property pursuant to Act 3135, as amended and P.D. 385.
Petitioners' Motion for Reconsideration and Supplemental Motion for
Reconsideration, dated September 15, 1993 and October 28, 1993,
respectively, were denied by respondent court in its resolution dated
January 10, 1994.
Hence the instant petition.
This appeal by certiorari from the respondent court's decision dated
August 27, 1993 raises two principal issues namely: 1) Whether or not
respondent bank was authorized to raise its interest rates from 21% to as
high as 68% under the credit agreement; and 2) Whether or not
respondent bank is granted the authority to foreclose the Marvin Plaza
under the mandatory foreclosure provisions of P.D. 385.
In its comment dated April 19, 1994, respondent bank vigorously denied
that the increases in the interest rates were illegal, unilateral, excessive
and arbitrary, it argues that the escalated rates of interest it imposed was
based on the agreement of the parties. Respondent bank further contends
that it had a right to foreclose the mortgaged property pursuant to P.D.
385, after petitioners were unable to pay their loan obligations to the bank
based on the increased rates upon maturity in 1984.
The instant petition is impressed with merit.
The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must
be mutuality between the parties based on their essential equality. 6 Any
contract which appears to be heavily weighed in favor of one of the parties
so as to lead to an unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left solely to the will of
one of the parties, is likewise, invalid.
It is plainly obvious, therefore, from the undisputed facts of the case that
respondent bank unilaterally altered the terms of its contract with
petitioners by increasing the interest rates on the loan without the prior

assent of the latter. In fact, the manner of agreement is itself explicitly

stipulated by the Civil Code when it provides, in Article 1956 that "No
interest shall be due unless it has been expressly stipulated in writing."
What has been "stipulated in writing" from a perusal of interest rate
provision of the credit agreement signed between the parties is that
petitioners were bound merely to pay 21% interest, subject to a possible
escalation or de-escalation, when 1) the circumstances warrant such
escalation or de-escalation; 2) within the limits allowed by law; and 3)
upon agreement.
Indeed, the interest rate which appears to have been agreed upon by the
parties to the contract in this case was the 21% rate stipulated in the
interest provision. Any doubt about this is in fact readily resolved by a
careful reading of the credit agreement because the same plainly uses the
phrase "interest rate agreed upon," in reference to the original 21%
interest rate. The interest provision states:
(c) interest and Charges
(1) The Bank reserves the right to increase the interest
rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the
future; provided, that the interest rate on this/these
accommodations shall be correspondingly decreased
in the event that the applicable maximum interest rate
is reduced by law or by the Monetary Board. In either
case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the
increase or decrease of the maximum interest rate.
In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized
respondent bank from unilaterally raising the interest rate in the borrower's
loan from 18% to 32%, 41% and 48% partly because the aforestated
increases violated the principle of mutuality of contracts expressed in
Article 1308 of the Civil Code. The Court held:
CB Circular No. 905, Series of 1982 (Exh.
11) removed the Usury Law ceiling on
interest rates
. . . increases in interest rates are not
subject to any ceiling prescribed by the
Usury Law.

P a g e | 27

but it did not authorize the PNB, or any bank for that
matter, to unilaterally and successively increase the
agreed interest rates from 18% to 48% within a span
of four (4) months, in violation of P.D. 116 which limits
such changes to once every twelve months.
Besides violating P.D. 116, the unilateral action of the
PNB in increasing the interest rate on the private
respondent's loan, violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:
Art. 308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the
will of one of them.
In order that obligations arising from contracts may
have the force of law between the parties, there must
be mutuality between the parties based on their
essential equality. A contract containing a condition
which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties,
is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the P1.8 million loan
agreement between the PNB and the private
respondent gave the PNB a license (although in fact
there was none) to increase the interest rate at will
during the term of the loan, that license would have
been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested
the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation
being reduced to the alternative "to take it or lease it"
(Qua vs. Law Union & Rock Insurance Co., 95 Phil.
85). Such a contract is a veritable trap for the weaker
party whom the courts of justice must protect against
abuse and imposition.
PNB's successive increases of the interest rate on the
private respondent's loan, over the latter's protest,
were arbitrary as they violated an express provision of
the Credit Agreement (Exh. 1) Section 9.01 that its
terms "may be amended only by an instrument in

CREDIT TRANSACTION
writing signed by the party to be bound as burdened
by such amendment." The increases imposed by PNB
also contravene Art. 1956 of the Civil Code which
provides that "no interest shall be due unless it has
been expressly stipulated in writing."
The debtor herein never agreed in writing to pay the
interest increases fixed by the PNB beyond 24%per
annum, hence, he is not bound to pay a higher rate
than that.
That an increase in the interest rate from 18% to 48%
within a period of four (4) months is excessive, as
found by the Court of Appeals, is indisputable.
Clearly, the galloping increases in interest rate imposed by respondent
bank on petitioners' loan, over the latter's vehement protests, were
arbitrary.
Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of
1982 did not authorize the bank, or any lending institution for that matter,
to progressively increase interest rates on borrowings to an extent which
would have made it virtually impossible for debtors to comply with their
own obligations. True, escalation clauses in credit agreements are
perfectly valid and do not contravene public policy. Such clauses, however,
(as are stipulations in other contracts) are nonetheless still subject to laws
and provisions governing agreements between parties, which agreements
while they may be the law between the contracting parties implicitly
incorporate provisions of existing law. Consequently, while the Usury Law
ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said
circular could possibly be read as granting respondent bank carte
blanche authority to raise interest rates to levels which would either
enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing
represents a transfusion of capital from lending institutions to industries
and businesses in order to stimulate growth. This would not, obviously, be
the effect of PNB's unilateral and lopsided policy regarding the interest
rates of petitioners' borrowings in the instant case.
Apart from violating the principle of mutuality of contracts, there is
authority for disallowing the interest rates imposed by respondent bank, for
the credit agreement specifically requires that the increase be "within the
limits allowed by law". In the case of PNB v. Court of Appeals, cited above,
this Court clearly emphasized that C.B. Circular No. 905 could not be

properly invoked to justify the escalation clauses of such contracts, not

being a grant of specific authority.
Furthermore, the escalation clause of the credit agreement requires that
the same be made "within the limits allowed by law," obviously referring
specifically to legislative enactments not administrative circulars. Note that
the phrase "limits imposed by law," refers only to the escalation clause.
However, the same agreement allows reduction on the basis of law or the
Monetary Board. Had the parties intended the word "law" to refer to both
legislative enactments and administrative circulars and issuances, the
agreement would not have gone as far as making a distinction between
"law or the Monetary Board Circulars" in referring to mutually agreed upon
reductions in interest rates. This distinction was the subject of the Court's
disquisition in the case of Banco Filipino Savings and Mortgage Bank
v. Navarro 8 where the Court held that:
What should be resolved is whether BANCO FILIPINO
can increase the interest rate on the LOAN from 12%
to 17% per annum under the Escalation Clause. It is
our considered opinion that it may not.
The Escalation Clause reads as follows:
I/We
hereby
authorize
to correspondingly increase.

Banco

Filipino

the interest rate stipulated in this contract without

advance notice to me/us in the event.
a law
increasing
the lawful rates of interest that may be charged
on this particular
kind of loan. (Paragraphing and emphasis supplied)
It is clear from the stipulation between the parties that
the interest rate may be increased "in the event

P a g e | 28

a law should be enacted increasing the lawful rate of

interest that may be charged on this particular kind of
loan." The Escalation Clause was dependent on an
increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law,
is not a law. "Although a circular duly issued is not
strictly a statute or a law, it has, however, the force
and effect of law." (Emphasis supplied). "An
administrative regulation adopted pursuant to law has
the force and effect of law." "That administrative rules
and regulations have the force of law can no longer be
questioned."
The distinction between a law and an administrative
regulation is recognized in the Monetary Board
guidelines quoted in the latter to the BORROWER of
Ms. Paderes of September 24, 1976 (supra).
According to the guidelines, for a loan's interest to be
subject to the increases provided in CIRCULAR No.
494, there must be an Escalation Clause allowing the
increase "in the event that any law or Central Bank
regulation is promulgated increasing the maximum
rate for loans." The guidelines thus presuppose that a
Central Bank regulation is not within the term "any
law."
The distinction is again recognized by P.D. No. 1684,
promulgated on March 17, 1980, adding section 7-a to
the Usury Law, providing that parties to an agreement
pertaining to a loan could stipulate that the rate of
interest agreed upon may be increased in the event
that the applicable maximum rate of interest is
increased "by law or by the Monetary Board." To
quote:
Sec. 7-a. Parties to an agreement
pertaining to a loan or forbearance
of money, goods or credits may
stipulate that the rate of interest
agreed upon may be increased in
the event that the applicable
maximum rate of interest

CREDIT TRANSACTION
is increased by law or by the
Monetary Board:
Provided, That such stipulation
shall be valid only if there is also a
stipulation in the agreement that
the rate of interest agreed upon
shall be reduced in the event that
the applicable maximum rate of
interest is reduced by law or by the
Monetary Board;
Provided, further, That the
adjustment in the rate of interest
agreed upon shall take effect on or
after the effectivity of the increase
or decrease in the maximum rate
of interest.' (Paragraphing and
emphasis supplied).
It is now clear that from March 17, 1980, escalation
clauses to be valid should specifically provide: (1) that
there can be an increase in interest if increased by law
or by the Monetary Board; and (2) in order for such
stipulation to be valid, it must include a provision for
reduction of the stipulated interest "in the event that
the applicable maximum rate of interest is reduced by
law or by the Monetary Board."
Petitioners never agreed in writing to pay the increased interest rates
demanded by respondent bank in contravention to the tenor of their credit
agreement. That an increase in interest rates from 18% to as much as
68% is excessive and unconscionable is indisputable. Between 1981 and
1984, petitioners had paid an amount equivalent to virtually half of the
entire principal (P7,735,004.66) which was applied to interest alone. By
the time the spouses tendered the amount of P40,142,518.00 in
settlement of their obligations; respondent bank was demanding
P58,377,487.00 over and above those amounts already previously paid by
the spouses.
Escalation clauses are not basically wrong or legally objectionable so long
as they are not solely potestative but based on reasonable and valid
grounds. 9 Here, as clearly demonstrated above, not only the increases of

the interest rates on the basis of the escalation clause patently

unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.
We go now to respondent bank's claim that the principal issue in the case
at bench involves its right to foreclose petitioners' properties under P.D.
385. We find respondent's pretense untenable.
Presidential Decree No. 385 was issued principally to guarantee that
government financial institutions would not be denied substantial cash
inflows necessary to finance the government's development projects all
over the country by large borrowers who resort to litigation to prevent or
delay the government's collection of their debts or loans. 10 In facilitating
collection of debts through its automatic foreclosure provisions, the
government is however, not exempted from observing basic principles of
law, and ordinary fairness and decency under the due process clause of
the Constitution. 11
In the first place, because of the dispute regarding the interest rate
increases, an issue which was never settled on merit in the courts below,
the exact amount of petitioner's obligations could not be determined. Thus,
the foreclosure provisions of P.D. 385 could be validly invoked by
respondent only after settlement of the question involving the interest rate
on the loan, and only after the spouses refused to meet their obligations
following such determination. In Filipinas Marble Corporation
v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on
mandatory foreclosure, we held that:
We cannot, at this point, conclude that respondent
DBP together with the Bancom people actually
misappropriated and misspent the $5 million loan in
whole or in part although the trial court found that
there is "persuasive" evidence that such acts were
committed by the respondent. This matter should
rightfully be litigated below in the main action. Pending
the outcome of such litigation, P.D. 385 cannot
automatically be applied for if it is really proven that
respondent DBP is responsible for the
misappropriation of the loan, even if only in part, then
the foreclosure of the petitioner's properties under the
provisions of P.D. 385 to satisfy the whole amount of
the loan would be a gross mistake. It would unduly

P a g e | 29

prejudice the petitioner, its employees and their

families.
Only after trial on the merits of the main case can the
true amount of the loan which was applied wisely or
not, for the benefit of the petitioner be determined.
Consequently, the extent of the loan where there was
no failure of consideration and which may be properly
satisfied by foreclosure proceedings under P.D. 385
will have to await the presentation of evidence in a trial
on the merits.
In Republic Planters Bank v. Court of Appeals 13 the Court reiterating
the dictum in Filipinas Marble Corporation, held:
The enforcement of P.D. 385 will sweep under the rug'
this iceberg of a scandal in the sugar industry during
the Marcos Martial Law years. This we can not allow to
happen. For the benefit of future generations, all the
dirty linen in the PHILSUCUCOM/NASUTRA/RPB
closets have to be exposed in public so that the same
may NEVER be repeated.
It is of paramount national interest, that we allow the
trial court to proceed with dispatch to allow the parties
below to present their evidence.
Furthermore, petitioners made a valid consignation of what they, in good
faith and in compliance with the letter of the Credit Agreement, honestly
believed to be the real amount of their remaining obligations with the
respondent bank. The latter could not therefore claim that there was no
honest-to-goodness attempt on the part of the spouse to settle their
obligations. Respondent's rush to inequitably invoke the foreclosure
provisions of P.D. 385 through its legal machinations in the courts below, in
spite of the unsettled differences in interpretation of the credit agreement
was obviously made in bad faith, to gain the upper hand over petitioners.
In the face of the unequivocal interest rate provisions in the credit
agreement and in the law requiring the parties to agree to changes in the
interest rate in writing, we hold that the unilateral and progressive
increases imposed by respondent PNB were null and void. Their effect
was to increase the total obligation on an eighteen million peso loan to an
amount way over three times that which was originally granted to the

CREDIT TRANSACTION
borrowers. That these increases, occasioned by crafty manipulations in
the interest rates is unconscionable and neutralizes the salutary policies of
extending loans to spur business cannot be disputed.
WHEREFORE, PREMISES CONSIDERED, the decision of the Court of
Appeals dated August 27, 1993, as well as the resolution dated February
10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded
to the Regional Trial Court of Makati for further proceedings.
SO ORDERED.

Petitioner,
,
-versus
CORONA,AZCUNA and
RICA MARIE S. THIO,
Respondent. Promulgated:

monthly interest of 4%, the maturity date of which was on November 5,

1995.[14] The amount of this loan was covered by the second check. For
both loans, no promissory note was executed since petitioner and
respondent were close friends at the time. [15] Respondent paid the
stipulated monthly interest for both loans but on their maturity dates, she
failed to pay the principal amounts despite repeated demands. [16]

March 16, 2007

CORONA, J.:
Assailed in this petition for review on certiorari[1] are the June 19,
2002 decision[2] and August 20, 2002 resolution[3] of the Court of Appeals
(CA) in CA-G.R. CV No. 56577 which set aside the February 28,
1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio
received from petitioner Carolyn M. Garcia a crossed
check[4] dated February 24, 1995 in the amount of US$100,000 payable to
the order of a certain Marilou Santiago.[5] Thereafter, petitioner received
from respondent every month (specifically, on March 24, April 26, June 26
and July 26, all in 1995) the amount of US$3,000 [6] and P76,500[7] on July
26,[8] August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another
crossed check[9] dated June 29, 1995 in the amount of P500,000, also
payable to the order of Marilou Santiago. [10] Consequently, petitioner
received from respondent the amount of P20,000 every month on August
5, September 5, October 5 and November 5, 1995.[11]
According to petitioner, respondent failed to pay the principal
amounts of the loans (US$100,000 and P500,000) when they fell
due. Thus, on February 22, 1996, petitioner filed a complaint for sum of
money and damages in the RTC of Makati City, Branch 58 against
respondent, seeking to collect the sums of US$100,000, with interest
thereon at 3% a month from October 26, 1995 and P500,000, with interest
thereon at 4% a month from November 5, 1995, plus attorneys fees and
actual damages.[12]

CAROLYN M. GARCIA, G.R. No. 154878

P a g e | 30

Petitioner alleged that on February 24, 1995, respondent

borrowed from her the amount of US$100,000 with interest thereon at the
rate of 3% per month, which loan would mature on October 26, 1995.
[13]
The amount of this loan was covered by the first check. On June 29,
1995, respondent again borrowed the amount ofP500,000 at an agreed

Respondent denied that she contracted the two loans with

petitioner and countered that it was Marilou Santiago to whom petitioner
lent the money. She claimed she was merely asked by petitioner to give
the crossed checks to Santiago.[17] She issued the checks for P76,000
and P20,000 not as payment of interest but to accommodate petitioners
request that respondent use her own checks instead of Santiagos. [18]
In a decision dated February 28, 1997, the RTC ruled in favor of
petitioner.[19] It found that respondent borrowed from petitioner the
amounts of US$100,000 with monthly interest of 3% and P500,000 at a
monthly interest of 4%:[20]
WHEREFORE, finding preponderance of
evidence to sustain the instant complaint, judgment is
hereby rendered in favor of [petitioner], sentencing
[respondent] to pay the former the amount of:
1.
[US$100,000.00] or its peso equivalent with interest
thereon at 3% per month from October 26, 1995 until fully
paid;
2.
P500,000.00 with interest thereon at 4% per month
from November 5, 1995 until fully paid.
3.

P100,000.00 as and for attorneys fees; and

4.

P50,000.00 as and for actual damages.

For lack of merit, [respondents] counterclaim is perforce

dismissed.
With costs against [respondent].
IT IS SO ORDERED.[21]

CREDIT TRANSACTION
On appeal, the CA reversed the decision of the RTC and ruled that
there was no contract of loan between the parties:
A perusal of the record of the case shows
that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There
is nothing in the record that shows that [respondent]
received money from [petitioner]. What is evident is
the fact that [respondent] received a MetroBank
[crossed] check dated February 24, 1995 in the sum of
US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June
29, 1995 in the amount of P500,000.00, again payable
to the order of Marilou Santiago, both of which were
issued by [petitioner]. The checks received by
[respondent], being crossed, may not be encashed but
only deposited in the bank by the payee thereof, that
is, by Marilou Santiago herself.
It must be noted that crossing a check has
the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check
may be negotiated only onceto one who has an
account with the bank; (c) and the act of crossing the
check serves as warning to the holder that the check
has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed]
check by [respondent] is not the issuance and delivery
to the payee in contemplation of law since the latter is
not the person who could take the checks as a holder,
i.e., as a payee or indorsee thereof, with intent to
transfer title thereto. Neither could she be deemed as
an agent of Marilou Santiago with respect to the
checks because she was merely facilitating the
transactions between the former and [petitioner].
With the foregoing circumstances, it may be
fairly inferred that there were really no contracts of
loan that existed between the parties. x x x (emphasis
supplied)[22]

Hence this petition.[23]

As a rule, only questions of law may be raised in a petition
for review on certiorari under Rule 45 of the Rules of Court. However,
this case falls under one of the exceptions, i.e., when the factual
findings of the CA (which held that there were no contracts of loan
between petitioner and respondent) and the RTC (which held
that there were contracts of loan) are contradictory.[24]
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is
perfected only upon the delivery of the object of the contract. [25] This
is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something
by way of commodatum or simple loan is binding upon
the parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object of
the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in
this case the money received by the debtor when the checks were
encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount. [26]
It is undisputed that the checks were delivered to
respondent. However, these checks were crossed and payable not to
the order of respondent but to the order of a certain Marilou
Santiago. Thus the main question to be answered is: who borrowed
money from petitioner respondent or Santiago?

Petitioner insists that it was upon respondents instruction that

both checks were made payable to Santiago.[27] She maintains that it was
also upon respondents instruction that both checks were delivered to her
(respondent) so that she could, in turn, deliver the same to Santiago.
[28]
Furthermore, she argues that once respondent received the checks, the
latter had possession and control of them such that she had the choice to
either forward them to Santiago (who was already her debtor), to retain
them or to return them to petitioner. [29]

P a g e | 31

We agree with petitioner. Delivery is the act by which

the res or substance thereof is placed within the actual or
constructive possession or control of another. [30] Although respondent
did not physically receive the proceeds of the checks, these
instruments were placed in her control and possession under an
arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally
know Santiago.[31] It was highly improbable that petitioner would grant
two loans to a complete stranger without requiring as much as
promissory notes or any written acknowledgment of the debt
considering that the amounts involved were quite big. Respondent,
on the other hand, already had transactions with Santiago at that
time.[32]
Second, Leticia Ruiz, a friend of both petitioner and
respondent (and whose name appeared in both parties list of
witnesses) testified that respondents plan was for petitioner to lend
her money at a monthly interest rate of 3%, after which respondent
would lend the same amount to Santiago at a higher rate of 5% and
realize a profit of 2%.[33] This explained why respondent instructed
petitioner to make the checks payable to Santiago. Respondent has
not shown any reason why Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted
issuing her own checks in the amount of P76,000 each (peso
equivalent of US$3,000) for eight months to cover the monthly
interest. For the P500,000 loan, she also issued her own checks in
the amount of P20,000 each for four months. [34] According to
respondent, she merely accommodated petitioners request for her to
issue her own checks to cover the interest payments since petitioner
was not personally acquainted with Santiago.[35] She claimed,
however, that Santiago would replace the checks with cash. [36] Her
explanation is simply incredible. It is difficult to believe that
respondent would put herself in a position where she would be
compelled to pay interest, from her own funds, for loans she allegedly
did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses,
this Court is guided by the rule that for evidence to be
believed, it must not only proceed from the mouth of a

CREDIT TRANSACTION
credible witness, but must be credible in itself such as
the common experience of mankind can approve as
probable under the circumstances. We have no test of
the truth of human testimony except its conformity to
our knowledge, observation, and experience.
Whatever is repugnant to these belongs to the
miraculous, and is outside of juridical cognizance.[37]
Fourth, in the petition for insolvency sworn to and filed by
Santiago, it was respondent, not petitioner, who was listed as one of
her (Santiagos) creditors.[38]
Last, respondent inexplicably never presented Santiago as
a witness to corroborate her story. [39] The presumption is that
evidence willfully suppressed would be adverse if produced.
[40]
Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it
ruled that respondent did not borrow the amounts of US$100,000
and P500,000 from petitioner. We instead agree with the ruling of the
RTC making respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the
3% and 4% monthly interest for the US$100,000 and P500,000 loans
respectively. There was no written proof of the interest payable
except for the verbal agreement that the loans would earn 3% and
4% interest per month. Article 1956 of the Civil Code provides that
[n]o interest shall be due unless it has been expressly stipulated in
writing.

absence of stipulation, the rate of interest shall be

12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.[41]
Hence, respondent is liable for the
payment of legal interest per annum to be
computed from November 21, 1995, the date
when she received petitioners demand letter.
[42]
From the finality of the decision until it is
fully paid, the amount due shall earn interest at
12% per annum, the interim period being deemed
equivalent to a forbearance of credit.[43]
The award of actual damages in the amount of P50,000
and P100,000 attorneys fees is deleted since the RTC decision did
not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the
June 19, 2002 decision and August 20, 2002 resolution of the Court
of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET
ASIDE. The February 28, 1997 decision of the Regional Trial Court in
Civil Case No. 96-266 is AFFIRMED with theMODIFICATION that
respondent is directed to pay petitioner the amounts of US$100,000
and P500,000 at 12% per annum interest from November 21, 1995
until the finality of the decision. The total amount due as of the date of
finality will earn interest of 12% per annum until fully paid. The award
of actual damages and attorneys fees is deleted.
SO ORDERED.

Be that as it may, while there can be no stipulated interest, there

can be legal interest pursuant to Article 2209 of the Civil Code. It is wellsettled that:
When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the

DECISION
YNARES-SANTIAGO, J.:
This is a petition for review under Rule 45 of the Rules of Court
assailing the February 17, 1997 Decision [1] and the April 2, 1998
Resolution[2] of the Court of Appeals[3] in CA-G.R. SP No. 40996.
The undisputed facts are as follows:
On May 9, 1974, respondent, through its Japan Branch, entered into
an International Passenger Sales Agency Agreement with petitioner,
authorizing the latter to sell its air transport tickets.Petitioner failed to remit
the proceeds of the ticket sales, for which reason, respondent filed a
collection suit against petitioner before the Tokyo District Court which
rendered judgment on January 29, 1981, ordering petitioner to pay
respondent the amount of 83,158,195 Yen and damages for the delay at
the rate of 6% per annum from August 28, 1980 up to and until payment is
completed.[4] Unable to execute the decision in Japan, respondent filed a
case to enforce said foreign judgment with the Regional Trial Court of
Manila, Branch 54.[5] However, the case was dismissed on the ground of
failure of the Japanese Court to acquire jurisdiction over the person of the
petitioner. Respondent appealed to the Court of Appeals, which affirmed
the decision of the trial court.
Respondent filed a petition for review with this Court, docketed as
G.R. No. 112573. On February 9, 1995, a decision was rendered, the
dispositive portion of which reads:
WHEREFORE, the instant petition is partly GRANTED, and the
challenged decision is AFFIRMED insofar as it denied NORTHWESTs
claims for attorneys fees, litigation expenses, and exemplary damages but
REVERSED insofar as it sustained the trial courts dismissal of
NORTHWESTs complaint in Civil Case No. 83-17637 of Branch 54 of the
Regional Trial Court of Manila, and another in its stead is hereby rendered
ORDERING private respondent C.F. SHARP & COMPANY, INC. to pay to
NORTHWEST the amounts adjudged in the foreign judgment subject of
said case, with interest thereon at the legal rate from the filing of the
complaint therein until the said foreign judgment is fully satisfied.
Costs against the private respondent.

G.R. No. 133498. April 18, 2002]

C.F. SHARP & CO., INC., petitioner, vs. NORTHWEST AIRLINES,
INC., respondent.

P a g e | 32

SO ORDERED.[6]

CREDIT TRANSACTION
Accordingly, the Regional Trial Court of Manila, Branch 54, issued a
writ of execution of the foregoing decision. [7] On November 22, 1995, the
trial court modified its order for the execution of the decision, viz:

paid in local currency based on the conversion rate prevailing at the time
of payment; plus 6% legal interest per annum from August 28, 1980, the
date of the filing of the complaint in the foreign judgment.

WHEREFORE, in view of the foregoing, this Court hereby issues another

order, as follows: the writ of execution is issued against defendant C.F.
Sharp ordering said defendant to pay the plaintiff the sum of 83,158,195
Yen at the exchange rate prevailing on the date of the foreign judgment on
January 29, 1981, plus 6% per annum until May 19, 1983; and from said
date until full payment, 12% per annum (6% by way of damages and 6%
interest) until the entire obligation is fully satisfied.

No costs.

SO ORDERED.[8]

In the present recourse, petitioner questions the applicable

conversion rate of its liability, and claims that a ruling thereon by the Court
of Appeals effectively deprived it of due process of law because said rate
was not among the issues submitted for resolution.

On December 18, 1995, petitioner filed a petition for certiorari under

Rule 65, docketed as G.R. No. 122890, assailing the aforequoted
order. On May 29, 1996, the case was referred to the Court of
Appeals. Petitioner contended that it had already made partial payments;
hence, it was liable only for the amount of 61,734,633 Yen. Moreover, it
argued that it was not liable to pay additional interest on top of the 6%
interest imposed in the foreign judgment.
The Court of Appeals rendered the assailed decision on February
17, 1997. It sustained the imposition of additional interest on the liability of
petitioner as adjudged in the foreign judgment.The appellate court likewise
corrected the reckoning date of the imposition of the interests in
accordance with the February 9, 1995 decision to be executed, but
lowered the additional interest from 12% to 6% per annum. Further, it ruled
that the basis of the conversion of petitioners liability in its peso equivalent
should be the prevailing rate at the time of payment and not the rate on
the date of the foreign judgment. The dispositive portion of the said
decision reads:
WHEREFORE, the petition is GRANTED. The assailed Orders dated
October 13, 1995 and November 22, 1995 are annulled and set aside on
the ground that they varied the final judgment of the First Division of the
Supreme Court in G.R. No. 112573, entitled, NORTHWEST ORIENT
AIRLINES, INC., Petitioner, versus, COURT OF APPEALS and C. F.
SHARP & COMPANY, INC., Respondents.
Respondent court is enjoined to execute the said final judgment with an
unpaid principal balance of Y61,734,633 plus damages for delay at the
rate of 6% per annum from August 28, 1980, until fully paid, which may be

SO ORDERED.[9]
On April 2, 1998, the Court of Appeals denied both the motion for
reconsideration and the partial motion for reconsideration filed by
petitioner and respondent, respectively.

The petition is without merit.

In ruling that the applicable conversion rate of petitioners liability is
the rate at the time of payment, the Court of Appeals cited the case
of Zagala v. Jimenez,[10] interpreting the provisions of Republic Act No.
529, as amended by R.A. No. 4100. Under this law, stipulations on the
satisfaction of obligations in foreign currency are void. Payments of
monetary obligations, subject to certain exceptions, shall be discharged in
the currency which is the legal tender in the Philippines. But since R.A.
No. 529 does not provide for the rate of exchange for the payment of
foreign currency obligations incurred after its enactment, the Court held in
a number of cases[11] that the rate of exchange for the conversion in the
peso equivalent should be the prevailing rate at the time of payment.
Petitioner, however, contends that with the repeal of R.A. No. 529 by
R.A. No. 8183,[12] the jurisprudence relied upon by the Court of Appeals is
no longer applicable.
Republic Act No. 529, as amended by R.A. No. 4100, provides:
SECTION 1. Every provision contained in, or made with respect to, any
domestic obligation to wit, any obligation contracted in the Philippines
which provision purports to give the obligee the right to require payment in
gold or in a particular kind of coin or currency other than Philippine
currency or in an amount of money of the Philippines measured thereby,
be as it is hereby declared against public policy, and null, void, and of no
effect, and no such provision shall be contained in, or made with respect
to, any obligation hereafter incurred. The above prohibition shall not apply

P a g e | 33

to (a) transactions where the funds involved are the proceeds of loans or
investments made directly or indirectly, through bona fide intermediaries or
agents, by foreign governments, their agencies and instrumentalities, and
international financial banking institutions so long as the funds are
identifiable, as having emanated from the sources enumerated above; b)
transactions affecting high-priority economic projects for agricultural,
industrial and power development as may be determined by the National
Economic Council which are financed by or through foreign funds; (c)
forward exchange transactions entered into between banks or between
banks and individuals or juridical persons; (d) import-export and other
international banking, financial investment and industrial transactions. With
the exception of the cases enumerated in items (a), (b), (c) and (d) in the
foregoing provision, in which cases the terms of the parties agreement
shall apply, every other domestic obligation heretofore or hereafter
incurred, whether or not any such provision as to payment is contained
therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public
and private debts: Provided, That if the obligation was incurred prior to the
enactment of this Act and required payment in a particular kind of coin or
currency other than Philippine currency, it shall be discharged in Philippine
currency, measured at the prevailing rates of exchange at the time the
obligation was incurred, except in case of a loan made in a foreign
currency stipulated to be payable in the same currency in which case the
rate of exchange prevailing at the time of the stipulated date of payment
shall prevail. All coin and currency, including Central Bank notes,
heretofore or hereafter issued and declared by the Government of the
Philippines shall be legal tender for all debts, public and private.
Pertinent portion of Republic Act No. 8183 states:
SECTION 1. All monetary obligations shall be settled in the Philippine
currency which is legal tender in the Philippines. However, the parties may
agree that the obligation or transaction shall be settled in any other
currency at the time of payment.
SEC. 2. Republic Act Numbered Five Hundred and Twenty-Nine (R.A. No.
529), as amended, entitled An Act to Assure the Uniform Value of
Philippine Coin and Currency is hereby repealed.
The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of
removing the prohibition on the stipulation of currency other than
Philippine currency, such that obligations or transactions may now be paid
in the currency agreed upon by the parties. Just like R.A. No. 529,

CREDIT TRANSACTION
however, the new law does not provide for the applicable rate of exchange
for the conversion of foreign currency-incurred obligations in their peso
equivalent. It follows, therefore, that the jurisprudence established in R.A.
No. 529 regarding the rate of conversion remains applicable. Thus, in Asia
World Recruitment, Inc. v. National Labor Relations Commission, [13] the
Court, applying R.A. No. 8183, sustained the ruling of the NLRC that
obligations in foreign currency may be discharged in Philippine currency
based on the prevailing rate at the time of payment. The wisdom on which
the jurisprudence interpreting R.A. No. 529 is based equally holds true
with R.A. No. 8183.Verily, it is just and fair to preserve the real value of the
foreign exchange- incurred obligation to the date of its payment. [14]
We find no denial of due process in the instant case. Contrary to the
argument of petitioner, the matter of the applicable conversion rate was
one of the issues submitted for resolution before the Court of
Appeals. Moreover, opportunity to be heard, which is the very essence of
due process, was afforded petitioner when it filed a motion for
reconsideration of the Court of Appeals decision.
Petitioners contention that it is Article 1250 [15] of the Civil Code that
should be applied is untenable. The rule that the value of the currency at
the time of the establishment of the obligation shall be the basis of
payment finds application only when there is an official pronouncement or
declaration of the existence of an extraordinary inflation or deflation. [16]
For its part, respondent prays for the modification of the Court of
Appeals award of interest. While as a general rule, a party who has not
appealed is not entitled to affirmative relief other than what was granted in
the decision of the court below, law and jurisprudence authorize a tribunal
to consider errors, although unassigned, if they involve (1) errors affecting
the lower courts jurisdiction over the subject matter, (2) plain errors not
specified, and (3) clerical errors.[17]
In the case at bar, the Court of Appeals failure to apply the correct
legal rate of interest, to which respondent is lawfully entitled, amounts to a
plain error. In Eastern Shipping Lines, Inc. v. Court of Appeals, [18] it was
held that absent any stipulation, the legal rate of interest in obligations
which consists in the payment of a sum of money, as in the present case,
is 12% per annum. As stated in the decision of the Court in G.R. No.
112573, which is final and executory, petitioner is liable to pay respondent
the amount adjudged in the foreign judgment, with interest thereon at the
legal rate [12% per annum] from the filing of the complaint therein [on
August 28, 1980] until the said foreign judgment is fully satisfied. Since
petitioner already made partial payments, his obligation was reduced to
61,734,633 Yen. Thus, petitioner should pay respondent the amount of

61,734,633 Yen plus damages for the delay at the rate of 6% per
annum from August 28, 1980 up to and until payment is completed, with
interest thereon at the rate of 12% per annum from the filing of the
complaint on August 28, 1980, until fully satisfied.
The Court is clothed with ample authority to review matters, even if
they are not assigned as errors on appeal, if it finds that their
consideration is necessary in arriving at a just decision of the case. Rules
of procedure are mere tools designed to facilitate the attainment of
justice. Their strict and rigid application, which would result in technicalities
that tend to frustrate rather than promote substantial justice, must be
avoided. Hence, substantive rights, like the applicable legal rate of interest
on petitioners long due and demandable obligation, must not be
prejudiced by a rigid and technical application of the rules. [19]
WHEREFORE, in view of all the foregoing, the instant petition is
DENIED. The February 17, 1997 decision and the April 2, 1998 resolution
of the Court of Appeals in CA-G.R. SP No. 40996 are AFFIRMED with
MODIFICATION. Petitioner is directed to pay respondent 61,734,633 Yen
plus damages for the delay at the rate of 6% per annum from August 28,
1980 up to and until payment is completed, with interest at the rate of
12% per annum counted from the date of filing of the complaint on August
28, 1980, until fully satisfied. Petitioners liability may be paid in Philippine
currency, computed at the exchange rate prevailing at the time of
payment.
SO ORDERED.

SECOND DIVISION
G.R. No. 175339
PREMIERE
vs.

December 16, 2008

DEVELOPMENT

BANK, petitioner,

P a g e | 34

ALFREDO C. FLORES, in his Capacity as Presiding Judge of

Regional Trial Court of Pasig City, Branch 167, ARIZONA
TRANSPORT CORPORATION and PANACOR MARKETING
CORPORATION, respondents.
DECISION
TINGA, J.:
This is a Rule 45 petition for review 1 of the Court of Appeals decision 2 in
CA-G.R. SP No. 92908 which affirmed the Regional Trial Courts (RTCs)
orders3 granting respondent corporations motion for execution of the
Courts 14 April 2004 decision in G.R. No. 159352 4 and denying5 petitioner
Premiere Development Banks motion for reconsideration, as well as the
appellate courts resolution6 denying Premiere Development Banks motion
for reconsideration.
The factual antecedents of the case, as found by the Court in G.R. No.
159352, are as follows:
The undisputed facts show that on or about October 1994,
Panacor Marketing Corporation (Panacor for brevity), a newlyformed corporation, acquired an exclusive distributorship of
products manufactured by Colgate Palmolive Philippines, Inc.
(Colgate for short). To meet the capital requirements of the
exclusive distributorship, which required an initial inventory level
of P7.5 million, Panacor applied for a loan of P4.1 million with
Premiere Development Bank. After an extensive study of
Panacors creditworthiness, Premiere Bank rejected the loan
application and suggested that its affiliate company, Arizona
Transport Corporation (Arizona for short), should instead apply
for the loan on condition that the proceeds thereof shall be made
available to Panacor. Eventually, Panacor was granted a P4.1
million credit line as evidenced by a Credit Line Agreement. As
suggested, Arizona, which was an existing loan client, applied
for and was granted a loan of P6.1 million, P3.4 million of which
would be used to pay-off its existing loan accounts and the
remaining P2.7 million as credit line of Panacor. As security for
the P6.1 million loan, Arizona, represented by its Chief Executive
Officer Pedro Panaligan and spouses Pedro and Marietta
Panaligan in their personal capacities, executed a Real Estate
Mortgage against a parcel of land covered by TCT No. T-3475
as per Entry No. 49507 dated October 2, 1995.

CREDIT TRANSACTION
Since the P2.7 million released by Premiere Bank fell short of
the P4.1 million credit line which was previously approved,
Panacor negotiated for a take-out loan with IBA-Finance
Corporation (hereinafter referred to as IBA-Finance) in the sum
of P10 million, P7.5 million of which will be released outright in
order to take-out the loan from Premiere Bank and the balance
of P2.5 million (to complete the needed capital ofP4.1 million
with Colgate) to be released after the cancellation by Premiere
of the collateral mortgage on the property covered by TCT No. T3475. Pursuant to the said take-out agreement, IBA-Finance
was authorized to pay Premiere Bank the prior existing loan
obligations of Arizona in an amount not to exceedP6 million.
On October 5, 1995, Iba-Finance sent a letter to Ms. Arlene R.
Martillano, officer-in-charge of Premiere Banks San Juan
Branch, informing her of the approved loan in favor of Panacor
and Arizona, and requesting for the release of TCT No. T-3475.
Martillano, after reading the letter, affixed her signature of
conformity thereto and sent the original copy to Premiere Banks
legal office. x x x
On October 12, 1995, Premiere Bank sent a letter-reply to [IBA]Finance, informing the latter of its refusal to turn over the
requested documents on the ground that Arizona had existing
unpaid loan obligations and that it was the banks policy to
require full payment of all outstanding loan obligations prior to
the release of mortgage documents. Thereafter, Premiere Bank
issued to IBA-Finance a Final Statement of Account showing
Arizonas total loan indebtedness. On October 19, 1995,
Panacor and Arizona executed in favor of IBA-Finance a
promissory note in the amount of P7.5 million. Thereafter, IBAFinance paid to Premiere Bank the amount of P6,235,754.79,
representing the full outstanding loan account of Arizona.
Despite such payment, Premiere Bank still refused to release
the requested mortgage documents specifically, the owners
duplicate copy of TCT No. T-3475.
On November 2, 1995, Panacor requested IBA-Finance for the
immediate approval and release of the remaining P2.5 million
loan to meet the required monthly purchases from Colgate. IBAFinance explained however, that the processing of the P2.5
million loan application was conditioned, among others, on the
submission of the owners duplicate copy of TCT No. 3475 and

P a g e | 35

the cancellation by Premiere Bank of Arizonas mortgage.

Occasioned by Premiere Banks adamant refusal to release the
mortgage cancellation document, Panacor failed to generate the
required capital to meet its distribution and sales targets. On
December 7, 1995, Colgate informed Panacor of its decision to
terminate their distribution agreement.

The Court, in a resolution dated 16 February 2005, did not give due
course to the petition for review of respondent corporations as it did not
find any reversible error in the decision of the appellate court. 10 After the
Court had denied with finality the motion for reconsideration, 11 the
mortgaged property was purchased by Premiere Development Bank at the
foreclosure sale held on 19 September 2005 for P6,600,000.00.12

On March 13, 1996, Panacor and Arizona filed a complaint for

specific performance and damages against Premiere Bank
before the Regional Trial Court of Pasig City, docketed as Civil
Case No. 65577.

Respondent corporations filed a motion for execution dated 25 August

200513 asking for the issuance of a writ of execution of our decision in G.R.
No. 159352 where we awarded P800,000.00 as damages in their
favor.14 The RTC granted the writ of execution sought. The Court of
Appeals affirmed the order.

On June 11, 1996, IBA-Finance filed a complaint-in-intervention

praying that judgment be rendered ordering Premiere Bank to
pay damages in its favor.
On May 26, 1998, the trial court rendered a decision in favor of
Panacor and IBA-Finance, the decretal portion of which reads: x
xx
Premiere Bank appealed to the Court of Appeals contending that
the trial court erred in finding, inter alia, that it had maliciously
downgraded the credit-line of Panacor from P4.1 million to P2.7
million.
In the meantime, a compromise agreement was entered into
between IBA-Finance and Premiere Bank whereby the latter
agreed to return without interest the amount of P6,235,754.79
which IBA-Finance earlier remitted to Premiere Bank to pay off
the unpaid loans of Arizona. On March 11, 1999, the
compromise agreement was approved.
On June 18, 2003, a decision was rendered by the Court of
Appeals which affirmed with modification the decision of the trial
court, the dispositive portion of which reads:7 x x x
Incidentally, respondent corporations received a notice of sheriffs sale
during the pendency of G.R. No. 159352. Respondent corporations were
able to secure an injunction from the RTC but it was set aside by the Court
of Appeals in a decision dated 20 August 2004. 8 The appellate court
denied respondent corporations motion for reconsideration in a resolution
dated 5 November 2004.9

Hence, the present petition for review.

The only question before us is the propriety of the grant of the writ of
execution by the RTC.
Premiere Development Bank argues that the lower courts should have
applied the principles of compensation or set-off as the foreclosure of the
mortgaged property does not preclude it from filing an action to recover
any deficiency from respondent corporations loan. It allegedly did not file
an action to recover the loan deficiency from respondent corporations
because of the pending Civil Case No. MC03-2202 filed by respondent
corporations before the RTC of Mandaluyong City entitled Arizona
Transport Corp. v. Premiere Development Bank. That case puts into issue
the validity of Premiere Development Banks monetary claim against
respondent corporations and the subsequent foreclosure sale of the
mortgaged property. Premiere Development Bank allegedly had wanted to
wait for the resolution of the civil case before it would file its deficiency
claims against respondent corporations. Moreover, the execution of our
decision in G.R. No. 159352 would allegedly be iniquitous and unfair since
respondent corporations are already in the process of winding up. 15
The Court finds the petition unmeritorious.
A judgment becomes "final and executory" by operation of law. In such a
situation, the prevailing party is entitled to a writ of execution, and
issuance thereof is a ministerial duty of the court. 16 This policy is clearly
and emphatically embodied in Rule 39, Section 1 of the Rules of Court, to
wit:

CREDIT TRANSACTION
SECTION 1. Execution upon judgments or final orders.
Execution shall issue as a matter of right, on motion, upon a
judgment or order that disposes of the action or proceeding
upon the expiration of the period to appeal therefrom if no
appeal has been duly perfected.
If the appeal has been duly perfected and finally resolved, the
execution may forthwith be applied for in the court of origin, on
motion of the judgment obligee, submitting therewith certified
true copies of the judgment or judgments or final order or orders
sought to be enforced and of the entry thereof, with notice to the
adverse party.
The appellate court may, on motion in the same case, when the
interest of justice so requires, direct the court of origin to issue
the writ of execution. (Emphasis supplied.)
Jurisprudentially, the Court has recognized certain exceptions to the rule
as where in cases of special and exceptional nature it becomes imperative
in the higher interest of justice to direct the suspension of its execution;
whenever it is necessary to accomplish the aims of justice; or when certain
facts and circumstances transpired after the judgment became final which
could render the execution of the judgment unjust. 17
None of these exceptions avails to stay the execution of this Courts
decision in G.R. No. 159352. Premiere Development Bank has failed to
show how injustice would exist in executing the judgment other than the
allegation that respondent corporations are in the process of winding up.
Indeed, no new circumstance transpired after our judgment had become
final that would render the execution unjust.
The Court cannot give due course to Premiere Development Banks claim
of compensation or set-off on account of the pending Civil Case No.
MC03-2202 before the RTC of Mandaluyong City. For compensation to
apply, among other requisites, the two debts must be liquidated and
demandable already.18
A distinction must be made between a debt and a mere claim. A debt is an
amount actually ascertained. It is a claim which has been formally passed
upon by the courts or quasi-judicial bodies to which it can in law be
submitted and has been declared to be a debt. A claim, on the other hand,
is a debt in embryo. It is mere evidence of a debt and must pass thru the
process prescribed by law before it develops into what is properly called a

debt.19 Absent, however, any such categorical admission by an obligor or

final adjudication, no legal compensation or off-set can take place. Unless
admitted by a debtor himself, the conclusion that he is in truth indebted to
another cannot be definitely and finally pronounced, no matter how
convinced he may be from the examination of the pertinent records of the
validity of that conclusion the indebtedness must be one that is admitted
by the alleged debtor or pronounced by final judgment of a competent
court.20 At best, what Premiere Development Bank has against respondent
corporations is just a claim, not a debt. At worst, it is a speculative claim.
The alleged deficiency claims of Premiere Development Bank should have
been raised as a compulsory counterclaim before the RTC of
Mandaluyong City where Civil Case No. MC03-2202 is pending. Under
Section 7, Rule 6 of the 1997 Rules of Civil Procedure, a counterclaim is
compulsory when its object "arises out of or is necessarily connected with
the transaction or occurrence constituting the subject matter of the
opposing partys claim and does not require for its adjudication the
presence of third parties of whom the court cannot acquire jurisdiction".
In Quintanilla v. CA21 and reiterated in Alday v. FGU Insurance
Corporation,22 the "compelling test of compulsoriness" characterizes a
counterclaim as compulsory if there should exist a "logical relationship"
between the main claim and the counterclaim. There exists such a
relationship when conducting separate trials of the respective claims of the
parties would entail substantial duplication of time and effort by the parties
and the court; when the multiple claims involve the same factual and legal
issues; or when the claims are offshoots of the same basic controversy
between the parties. Clearly, the recovery of Premiere Development
Banks alleged deficiency claims is contingent upon the case filed by
respondent corporations; thus, conducting separate trials thereon will
result in a substantial duplication of the time and effort of the court and the
parties.
The fear of Premiere Development Bank that they would have difficulty
collecting its alleged loan deficiencies from respondent corporations since
they were already involuntarily dissolved due to their failure to file
reportorial requirements with the Securities and Exchange Commission is
neither here nor there. In any event, the law specifically allows a trustee to
manage the affairs of the corporation in liquidation, and the dissolution of
the corporation would not serve as an effective bar to the enforcement of
rights for or against it.
As early as 1939,23 this Court held that, although the time during which the
corporation, through its own officers, may conduct the liquidation of its

P a g e | 36

assets and sue and be sued as a corporation is limited to three years from
the time the period of dissolution commences, there is no time limit within
which the trustees must complete a liquidation placed in their hands. What
is provided in Section 12224 of the Corporation Code is that the
conveyance to the trustees must be made within the three-year period. But
it may be found impossible to complete the work of liquidation within the
three-year period or to reduce disputed claims to judgment. The trustees
to whom the corporate assets have been conveyed pursuant to the
authority of Section 122 may sue and be sued as such in all matters
connected with the liquidation.
Furthermore, Section 145 of the Corporation Code clearly provides that
"no right or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred by any
such corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution of said
corporation." Even if no trustee is appointed or designated during the
three-year period of the liquidation of the corporation, the Court has held
that the board of directors may be permitted to complete the corporate
liquidation by continuing as "trustees" by legal implication. 25 Therefore, no
injustice would arise even if the Court does not stay the execution of G.R.
159352.
Although it is commendable for Premiere Development Bank in offering to
deposit with the RTC the P800,000.00 as an alternative prayer, the Court
cannot allow it to defeat or subvert the right of respondent corporations to
have the final and executory decision in G.R. No. 159352 executed. The
offer to deposit cannot suspend the execution of this Courts decision for
this cannot be deemed as consignation. Consignation is the act of
depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment, and it generally
requires a prior tender of payment. In this case, it is Premiere
Development Bank, the judgment debtor, who refused to pay respondent
corporations P800,000.00 and not the other way around. Neither could
such offer to make a deposit with the RTC provide a ground for this Court
to issue an injunctive relief in this case.
WHEREFORE, the petition for review is DENIED. The decision of the
Court of Appeals in CA-G.R. SP No. 92908 is AFFIRMED.
SO ORDERED.

CREDIT TRANSACTION
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari2 are the Decision3 dated
November 29, 2013 and the Resolution 4 dated May 13, 2014 of the Court
of Appeals (CA) in CA-G.R. CV No. 02211, which affirmed the
Decision5 dated June 16, 2005 of the Regional Trial Court of Bacolod City,
Branch 41 (RTC) in Civil Case No. 98-10451 declaring the extrajudicial
foreclosure sale of the property covered by Transfer Certificate of Title
(TCT) No. T-5649 as null and void for being barred by prescription.

The Facts
On December 15, 1980, respondents-spouses Oscar and Nenita Tarrosa
(Sps. Tarrosa) obtained from then PNB-Republic Bank, now petitioner
Maybank Philippines, Inc. (Maybank), a loan in the amount of P91,000.00.
The loan was secured by a Real Estate Mortgage 6 dated January 5, 1981
(real estate mortgage) over a 500-square meter parcel of land situated in
San Carlos City, Negros Occidental (subject property), covered by TCT
No. T-5649,7 and the improvements thereon.8
After paying the said loan, or sometime in March 1983, Sps. Tarrosa
obtained another loan from Maybank in the amount of P60,000.00 (second
loan),9 payable on March 11, 1984.10 However, Sps. Tarrosa failed to settle
the second loan upon maturity.11

G.R. No. 213014, October 14, 2015

MAYBANK PHILIPPINES, INC. (FORMERLY PNB-REPUBLIC
BANK1), Petitioner, v. SPOUSES OSCAR AND NENITA
TARROSA, Respondents.

Sometime in April 1998, Sps. Tarrosa received a Final Demand

Letter12 dated March 4, 1998 (final demand letter) from Maybank requiring
them to settle their outstanding loan in the aggregate amount of
P564,579.91, inclusive of principal, interests, and penalty charges. 13 They
offered to pay a lesser amount, which Maybank refused. 14 Thereafter, or
on June 25, 1998, Maybank commenced extrajudicial foreclosure
proceedings15 before the office of Ex-Officio Provincial Sheriff Ildefonso
Villanueva, Jr. (Sheriff Villanueva). The subject property was eventually
sold in a public auction sale held on July 29, 1998 16 for a total bid price of
P600,000.00, to the highest bidder, Philmay Property, Inc. (PPI), which
was thereafter issued a Certificate of Sale17 dated July 30, 1998.18
On September 7, 1998, Sps. Tarrosa filed a complaint 19 for declaration of
nullity and invalidity of the foreclosure of real estate and of public auction

P a g e | 37

sale proceedings and damages with prayer for preliminary injunction

against Maybank, PPI, Sheriff Villanueva, and the Registry of Deeds of
San Carlos City, Negros Occidental (RD-San Carlos), before the RTC,
docketed as Civil Case No. 98-10451. They averred, inter alia, that: (a) the
second loan was a clean or unsecured loan; (b) after receiving the final
demand letter, they tried to pay the second loan, including the agreed
interests and charges, but Maybank unjustly refused their offers of
payment; and (c) Maybank's right to foreclose had prescribed or is barred
by laches.20
On the other hand, Maybank and PPI countered 21 that: (a) the second loan
was secured by the same real estate mortgage under a continuing security
provision therein; (b) when the loan became past due, Sps. Tarrosa
promised to pay and negotiated for a restructuring of their loan, but failed
to pay despite demands; and (c) Sps. Tarrosa's positive acknowledgment
and admission of their indebtedness controverts the defense of
prescription.
The RTC Ruling
In a Decision23 dated June 16, 2005, the RTC held that the second loan
was subject to the continuing security provision in the real estate
mortgage.24 However, it ruled that Maybank's right to foreclose, reckoned
from the time the mortgage indebtedness became due and payable on
March 11, 1984, had already prescribed, considering the lack of any timely
judicial action, written extrajudicial demand or written acknowledgment by
the debtor of his debt that could interrupt the prescriptive
period.25Accordingly, it declared the extrajudicial foreclosure proceedings
affecting the subject property as null and void, and ordered Maybank to
pay Sps. Tarrosa moral and exemplary damages, as well as attorney's
fees
and
litigation
expenses.26
Maybank filed a motion for reconsideration 27 which was, however, denied
in an Order28 dated December 9, 2005, prompting it to appeal29 to the CA.
The CA Ruling
In a Decision30 dated November 29, 2013, the CA affirmed the RTC ruling
that Maybank's right to foreclose the real estate mortgage over the subject
property is already barred by prescription. It held that the prescriptive
period should be reckoned from March 11, 1984 when the second loan
had become past due and remained unpaid since demand was not a
condition sine qua non for the accrual of the latter's right to foreclose
under paragraph 5 of the real estate mortgage. It observed that Maybank

CREDIT TRANSACTION
failed to present evidence of any timely written extrajudicial demand or
written acknowledgment by the debtors of their debt that could have
effectively interrupted the running of the prescriptive period. 31
Undaunted, Maybank moved for reconsideration,32 which was denied in a
Resolution33 dated May 13, 2014; hence this petition.
The Issues Before the Court
The essential issue for the Court's resolution is whether or not the CA
committed reversible error in finding that Maybank's right to foreclose the
real estate mortgage over the subject property was barred by prescription.
The Court's Ruling
The petition is meritorious.
An action to enforce a right arising from a mortgage should be enforced
within ten (10) years from the time the right of action accrues, i.e., when
the mortgagor defaults in the payment of his obligation to the mortgagee;
otherwise, it will be barred by prescription and the mortgagee will lose his
rights under the mortgage.34 However, mere delinquency in payment does
not necessarily mean delay in the legal concept. To be in default is
different from mere delay in the grammatical sense, because it involves
the beginning of a special condition or status which has its own peculiar
effects or results.35
In order that the debtor may be in default, it is necessary that: ( a) the
obligation be demandable and already liquidated; (b) the debtor delays
performance; and (c) the creditor requires the performance judicially or
extrajudicially,36unless demand is not necessary - i.e., when there is an
express stipulation to that effect; where the law so provides; when the
period is the controlling motive or the principal inducement for the creation
of the obligation; and where demand would be useless. Moreover, it is not
sufficient that the law or obligation fixes a date for performance; it must
further state expressly that after the period lapses, default will commence.
Thus, it is only when demand to pay is unnecessary in case of the
aforementioned circumstances, or when required, such demand is made
and subsequently refused that the mortgagor can be considered in default
and the mortgagee obtains the right to file an action to collect the debt or
foreclose the mortgage.38
In the present case, both the CA and the RTC reckoned the accrual of
Maybank's cause of action to foreclose the real estate mortgage over the

subject property from the maturity of the second loan on May 11, 1984.
The CA further held that demand was unnecessary for the accrual of the
cause of action in light of paragraph 5 of the real estate mortgage, which
pertinently provides:

P a g e | 38

ASIDE. The complaint in Civil Case No. 98-10451 isDISMISSED.

SO ORDERED.

5. In the event that the Mortgagor herein should fail or refuse to pay any of
the sums of money secured by this mortgage, or any part thereof, in
accordance with the terms and conditions herein set forth, or should he/it
fail to perform any of the conditions stipulated herein, then and in any such
case, the Mortgagee shall have the right, at its election to foreclose this
mortgage, [x x x].39
However, this provision merely articulated Maybank's right to elect
foreclosure upon Sps. Tarrosa's failure or refusal to comply with the
obligation secured, which is one of the rights duly accorded to mortgagees
in a similar situation.40 In no way did it affect the general parameters of
default, particularly the need of prior demand under Article 1169 41 of the
Civil Code, considering that it did not expressly declare: (a) that demand
shall not be necessary in order that the mortgagor may be in default; or (b)
that default shall commence upon mere failure to pay on the maturity date
of the loan. Hence, the CA erred in construing the above provision as one
through which the parties had dispensed with demand as a condition sine
qua non for the accrual of Maybank's right to foreclose the real estate
mortgage over the subject property, and thereby, mistakenly reckoned
such right from the maturity date of the loan on March 11, 1984. In the
absence of showing that demand is unnecessary for the loan obligation to
become due and demandable, Maybank's right to foreclose the real estate
mortgage accrued only after the lapse of the period indicated in its final
demand letter for Sps. Tarrosa to pay, i.e., after the lapse of five (5) days
from receipt of the final demand letter dated March 4,
1998.42 Consequently, both the CA and the RTC committed reversible
error in declaring that Maybank's right to foreclose the real estate
mortgage had already prescribed.
Thus, considering that the existence of the loan had been admitted, the
default on the part of the debtors-mortgagors had been duly established,
and the foreclosure proceedings had been initiated within the prescriptive
period as afore-discussed, the Court finds no reason to nullify the
extrajudicial foreclosure sale of the subject property.
WHEREFORE,

the

petition

is GRANTED. The

Decision

dated

November 29, 2013 and the Resolution dated May 13, 2014 of the Court
of Appeals in CA-G.R. CV No. 02211 are hereby REVERSED AND SET

[G.R. No. 115307. July 8, 1997]

CREDIT TRANSACTION
MANUEL LAO, petitioner, vs. COURT OF
APPEALS and BETTER HOMES
REALTY
&
HOUSING
CORPORATION, respondents.

No. 22184 of the Registry of Deeds of Quezon City; that (herein Petitioner
Manuel Lao) occupied the property without rent, but on (private
respondents) pure liberality with the understanding that he would vacate
the property upon demand, but despite demand to vacate made by letter
received by (herein petitioner) on February 5, 1992, the (herein petitioner)
refused to vacate the premises.

DECISION

In his answer to the complaint, (herein petitioner) claimed that he is the

true owner of the house and lot located at Unit I, No. 21 N. Domingo
Street, Quezon City; that the (herein private respondent) purchased the
same from N. Domingo Realty and Development Corporation but the
agreement was actually a loan secured by mortgage; and that plaintiffs
cause of action is foraccion publiciana, outside the jurisdiction of an
inferior court.

PANGANIBAN, J.:

As a general rule, the main issue in an

ejectment suit is possession de facto, not possession de jure. In the event
the issue of ownership is raised in the pleadings, such issue shall be taken
up only for the limited purpose of determining who between the contending
parties has the better right to possession. However, where neither of the
parties objects to the allegation of the question of ownership -- which may
be initially improvident or improper -- in an ejectment suit and, instead,
both present evidence thereon, argue the question in their various
submissions and participate in all aspects of the trial without objecting to
the Metropolitan (or Municipal) Trial Courts jurisdiction to decide the
question of ownership, the Regional Trial Court -- in the exercise of its
original jurisdiction as authorized by Section 11, Rule 40 of the Rules of
Court -- may rule on the issue and the corollary question of whether the
subject deed is one of sale or of equitable mortgage.
These postulates are discussed by the Court as it resolves this
petition under Rule 45 seeking a reversal of the December 21, 1993
Decision[1] and April 28, 1994 Resolution [2] of the Court of Appeals in CAG.R. SP No. 92-14293.

The Antecedent Facts

The facts of this case are narrated by Respondent Court of Appeals
as follows:[3]
On June 24, 1992, (herein Private Respondent Better Homes Realty and
Housing Corporation) filed with the Metropolitan Trial Court of Quezon
City, a complaint for unlawful detainer, on the ground that (said private
respondent) is the owner of the premises situated at Unit I, No. 21 N.
Domingo Street, Quezon City, evidenced by Transfer Certificate of Title

On October 9, 1992, the Metropolitan Trial Court of Quezon City rendered

judgment ordering the (petitioner) to vacate the premises located at Unit I,
No. 21 N. Domingo Street, Quezon City; to pay (private respondent) the
sum of P300.00 a day starting on January 31, 1992, as reasonable rent for
the use and occupation of the premises; to pay plaintiff P5,000.00, as
attorneys fees, and costs.
On appeal to the Regional Trial Court of Quezon City, [4] on March 30,
1993, the latter court rendered a decision reversing that of the
Metropolitan Trial Court, and ordering the dismissal of the (private
respondents) complaint for lack of merit, with costs taxed against (private
respondent).
In its decision, the Regional Trial Court held that the subject property was
acquired by (private respondent) from N. Domingo Realty and
Development Corporation, by a deed of sale, and (private respondent) is
now the registered owner under Transfer Certificate of Title No. 316634 of
the Registry of Deeds of Quezon City, but in truth the (petitioner) is the
beneficial owner of the property because the real transaction over the
subject property was not a sale but a loan secured by a mortgage thereon.
The dispositive portion of the Regional Trial Courts decision is
quoted below:[5]
WHEREFORE, judgment is hereby rendered reversing the appealed
decision and ordering the dismissal of plaintiffs complaint for lack of merit,
with the costs taxed against it.

P a g e | 39

IT IS SO ORDERED.
On April 28, 1993, private respondent filed an appeal with the Court
of Appeals which reversed the decision of the Regional Trial Court. The
Respondent Court ruled:
The Metropolitan Trial Court has no jurisdiction to resolve the issue of
ownership in an action for unlawful detainer (B.P. 129, Sec. 33 [2]; Cf. Alvir
vs. Vera, 130 SCRA 357). The jurisdiction of a court is determined by the
nature of the action alleged in the complaint (Ching vs. Malaya, 153 SCRA
412). In its complaint in the inferior court, the plaintiff alleged that it is the
owner of the premises located at Unit I, No. 21 N. Domingo Street,
Quezon City, and that defendants occupation is rent free and based on
plaintiffs pure liberality coupled with defendants undertaking to vacate the
premises upon demand, but despite demands, defendant has refused to
vacate. The foregoing allegations suffice to constitute a cause of action for
ejectment (Banco de Oro vs. Court of Appeals, 182 SCRA 464).
The Metropolitan Trial Court is not ousted of jurisdiction simply because
the defendant raised the question of ownership (Bolus vs. Court of
Appeals, 218 SCRA 798). The inferior court shall resolve the issue of
ownership only to determine who is entitled to the possession of the
premises (B.P. 129, Sec. 33[2]; Bolus vs. Court of Appeals, supra).
Here, the Metropolitan Trial Court ruled that as owner, plaintiff (herein
private respondent Better Homes Realty and Housing Corporation) is
entitled to the possession of the premises because the defendants stay is
by mere tolerance of the plaintiff (herein private respondent).
On the other hand, the Regional Trial Court ruled that the subject property
is owned by the defendant, (herein petitioner Manuel Lao) and,
consequently, dismissed the complaint for unlawful detainer. Thus, the
Regional Trial Court resolved the issue of ownership, as if the case were
originally before it as an action for recovery of possession, or accion
publiciana, within its original jurisdiction. In an appeal from a decision of
the Municipal Trial Court, or Metropolitan Trial Court, in an unlawful
detainer case, the Regional Trial Court is simply to determine whether the
inferior court correctly resolved the issue of possession; it shall not delve
into the issue of ownership (Manuel vs. Court of Appeals, 199 SCRA
603). What the Regional Trial Court did was to rule that the real agreement
between the plaintiff and the previous owner of the property was not a
sale, but an equitable mortgage. Defendant was only a director of the
seller corporation, and his claim of ownership could not be true. This

CREDIT TRANSACTION
question could not be determined summarily. It was not properly in issue
before the inferior court because, as aforesaid, the only issue was
possessionde facto (Manlapaz vs. Court of Appeals, 191 SCRA 795), or
who has a better right to physical possession (Dalida vs. Court of Appeals,
117 SCRA 480). Consequently, the Regional Trial Court erred in reversing
the decision of the Metropolitan Trial Court.
WHEREFORE, the Court hereby REVERSES the decision of the Regional
Trial Court. In lieu thereof, We affirm the decision of the Metropolitan Trial
Court of Quezon City sentencing the defendant and all persons claiming
right under him to vacate the premises situated at Unit I, No. 21 N.
Domingo Street, Quezon City, and to surrender possession to the plaintiff;
to pay plaintiff the sum of P300.00, a day starting on January 31, 1992,
until defendant shall have vacated the premises; to pay plaintiff P5,000.00
as attorneys fees, and costs.
SO ORDERED.[6]
Manuel Laos motion for reconsideration dated January 24, 1994 was
denied by the Court of Appeals in its Resolution promulgated on April 28,
1994. Hence, this petition for review before this Court.[7]

The Issues
Petitioner Manuel Lao raises three issues:
3.1 Whether or not the lower court can decide on the issue of ownership in
the present ejectment case
3.2 Whether or not private respondent had acquired ownership over the
property in question
3.3 Whether or not petitioner should be ejected from the premises in
question[8]

The Courts Ruling

The petition for review is meritorious.

First Issue: Jurisdiction to Decide the Issue of Ownership

The Court of Appeals held that as a general rule, the issue in an
ejectment suit is possession de facto, not possession de jure, and that in
the event the issue of ownership is raised as a defense, the issue is taken
up for the limited purpose of determining who between the contending
parties has the better right to possession. Beyond this, the MTC acts in
excess of its jurisdiction. However, we hold that this is not a hard and fast
rule that can be applied automatically to all unlawful detainer cases.
Section 11, Rule 40 of the Rules of Court provides that [a] case tried
by an inferior court without jurisdiction over the subject matter shall be
dismissed on appeal by the Court of First Instance. But instead of
dismissing the case, the Court of First Instance, in the exercise of its
original jurisdiction, may try the case on the merits if the parties therein file
their pleadings and go to the trial without any objection to such
jurisdiction. After a thorough review of the records of this case, the Court
finds that the respondent appellate court failed to apply this Rule and
erroneously reversed the RTC Decision.
Respondent Court cites Alvir vs. Vera to support its Decision. On the
contrary, we believe such case buttresses instead the Regional Trial
Courts decision. The cited case involves an unlawful detainer suit where
the issue of possession was inseparable from the issue of transfer of
ownership, and the latter was determinable only after an examination of a
contract of sale involving the property in question. The Court ruled that
where a case was tried and heard by the lower court in the exercise of its
original jurisdiction by common assent of the parties by virtue of the issues
raised x x x and the proofs presented by them, any dismissal on the
ground of lack of jurisdiction would only lead to needless delays and
multiplicity of suits. The Court held:
In actions of forcible entry and detainer, the main issue is possession de
facto, independently of any claim of ownership or possession de jure that
either party may set forth in his pleading. x x x Defendants claim of
ownership of the property from which plaintiff seeks to eject him is not
sufficient to divest the inferior court of its jurisdiction over the action of
forcible entry and detainer.However, if it appears during the trial that the
principal issue relates to the ownership of the property in dispute and any
question of possession which may be involved necessarily depends upon
the result of the inquiry into the title, previous rulings of this Court are that
the jurisdiction of the municipal or city court is lost and the action should
be dismissed.

P a g e | 40

We have at bar a case where, in effect, the question of physical

possession could not properly be determined without settling that of lawful
or de jure possession and of ownership and hence, following early
doctrine, the jurisdiction of the municipal court over the ejectment case
was lost and the action should have been dismissed. As a consequence,
respondent court would have no jurisdiction over the case on appeal and it
should have dismissed the case on appeal from the municipal trial
court. However, in line with Section 11, Rule 40 of the Revised Rules of
Court, which reads -SEC. 11. Lack of Jurisdiction. -- A case tried by an inferior court without
jurisdiction over the subject matter shall be dismissed on appeal by the
Court of First Instance. But instead of dismissing the case, the Court of
First Instance in the exercise of its original jurisdiction, may try the case on
the merits if the parties therein file their pleadings and go to trial without
objection to such jurisdiction.
this Court held in Saliwan vs. Amores, 51 SCRA 329, 337, that dismissal
on the said ground of lack of appellate jurisdiction on the part of the lower
court flowing from the municipal courts loss of jurisdiction would lead only
to needless delay and multiplicity of suits in the attainment of the same
result and ignores, as above stated, that the case was tried and heard by
the lower court in the exercise of its original jurisdiction by common assent
of the parties by virtue of the issues raised by the parties and the proof
presented by them thereon. [9]
This pronouncement was reiterated by this Court through Mr. Justice
Teodoro R. Padilla in Consignado vs. Court of Appeals[10] as follows:
As the MTC of Laguna had no jurisdiction over the unlawful detainer case
in view of the raised question of title or ownership over the property in
dispute, the RTC of Laguna also had noappellate jurisdiction to decide the
case on the merits. It should have dismissed the appeal. However, it
had original jurisdiction to pass upon the controversy. It is to be noted, in
this connection, that in their respective memoranda filed with the RTC of
Laguna, the petitioners and private respondents did not object to the said
court exercising its original jurisdiction pursuant to the aforequoted
provisions of Section 11, Rule 40 of the Rules of Court.
xxxxxxxxx

CREDIT TRANSACTION
Petitioners now contend, among others, that the Court of Appeals erred in
resolving the question of ownership as if actual title, not mere possession
of subject premises, is involved in the instant case.
The petitioners contention is untenable. Since the MTC and RTC of
Laguna decided the question of ownership over the property in dispute, on
appeal the Court of Appeals had to review and resolve also the issue of
ownership. x x x
It is clear, therefore, that although an action for unlawful detainer is
inadequate for the ventilation of issues involving title or ownership of
controverted real property, [i]t is more in keeping with procedural due
process that where issues of title or ownership are raised in the summary
proceedings for unlawful detainer, said proceeding should bedismissed for
lack of jurisdiction, unless, in the case of an appeal from the inferior court
to the Court of First Instance, the parties agree to the latter Court hearing
the case in its original jurisdiction in accordance with Section 11, Rule 40 x
x x.[11]
In the case at bar, a determination of the issue of ownership is
indispensable to resolving the rights of both parties over the property in
controversy, and is inseparable from a determination of who between them
has the right to possess the same. Indeed, the very complaint for unlawful
detainer filed in the Metropolitan Trial Court of Quezon City is anchored on
the alleged ownership of private respondent over the subject premises.
[12]
The parties did not object to the incongruity of a question of ownership
being brought in an ejectment suit. Instead they both submitted evidence
on such question, and the Metropolitan Trial Court decided on the
issue. These facts are evident in the Metropolitan Trial Courts decision:
From the records of the case, the evidence presented and the various
arguments advanced by the parties, the Court finds that the property
subject matter of this case is in the name of (herein private respondent)
Better Homes and Realty Housing Corporation; that the Deed of Absolute
Sale which was the basis for the issuance of said TCT No. 22184 is
between N. Domingo Realty and Development Corporation and Better
Homes Realty and Housing Corporation which was signed by Artemio S.
Lao representing the seller N. Domingo and Realty Development
Corporation; that a Board Resolution of N. Domingo and Realty and
Development Corporation (Exhibit D position paper) shows that the
Directors of the Board of the N. Domingo Realty and Development
Corporation passed a resolution selling apartment units I and F located at
No. 21 N. Domingo St., Quezon City and designating the (herein
petitioner) with his brother Artemio S. Lao as signatories to the Deed of

Sale. The claim therefore of the (herein petitioner) that he owns the
property is not true. x x x[13]
When the MTC decision was appealed to the Regional Trial Court,
not one of the parties questioned the Metropolitan Trial Courts jurisdiction
to decide the issue of ownership. In fact, the records show that both
petitioner and private respondent discussed the issue in their respective
pleadings before the Regional Trial Court.[14] They participated in all
aspects of the trial without objection to its jurisdiction to decide the issue of
ownership. Consequently, the Regional Trial Court aptly decided the issue
based on the exercise of its original jurisdiction as authorized by Section
11, Rule 40 of the Rules of Court.
This Court further notes that in both of the contending parties
pleadings filed on appeal before the Court of Appeals, the issue of
ownership was likewise amply discussed.[15] The totality of evidence
presented was sufficient to decide categorically the issue of ownership.
These considerations, taken together with the fact that both the
Metropolitan Trial Court and the Regional Trial Court decided the issue of
ownership, justify the review of the lower courts findings of fact and
decision on the issue of ownership. This we now do, as we dispose of the
second issue and decide the case with finality to spare the parties the
time, trouble and expense of undergoing the rigors of another suit where
they will have to present the same evidence all over again and where, in
all probability, the same ultimate issue of ownership will be brought up on
appeal.

Second Issue: Absolute Sale or Equitable Mortgage?

Private Respondent Better Homes Realty and Housing Corporation
anchored its right in the ejectment suit on a contract of sale in which
petitioner (through their family corporation) transferred the title of the
property in question. Petitioner contends, however, that their transaction
was not an absolute sale, but an equitable mortgage.
In determining the nature of a contract, the Court looks at the intent
of the parties and not at the nomenclature used to describe it. Pivotal to
deciding this issue is the true aim and purpose of the contracting parties
as shown by the terminology used in the covenant, as well as by their
conduct, words, actions and deeds prior to, during and immediately after
executing the agreement.[16] In this regard, parol evidence becomes

P a g e | 41

admissible to prove the true intent and agreement of the parties which the
Court will enforce even if the title of the property in question has already
been registered and a new transfer certificate of title issued in the name of
the transferee. In Macapinlac vs. Gutierrez Repide, which involved an
identical question, the Court succintly stated:
x x x This conclusion is fully supported by the decision in Cuyugan vs.
Santos (34 Phil., 100), where this court held that a conveyance in the form
of a contract of sale with pacto de retro will be treated as a mere
mortgage, if really executed as security for a debt, and that this fact can be
shown by oral evidence apart from the instrument of conveyance, a
doctrine which has been followed in the later cases of Villa vs. Santiago
(38 Phil., 157), and Cuyugan vs. Santos (39 Phil., 970).
xxxxxxxxx
In the first place, it must be borne in mind that the equitable doctrine which
has been so fully stated above, to the effect that any conveyance intended
as security for a debt will be held in effect to be a mortgage, whether so
actually expressed in the instrument or not, operates regardless of the
form of the agreement chosen by the contracting parties as the repository
of their will. Equity looks through the form and considers the substance;
and no kind of engagement can be adopted which will enable the parties
to escape from the equitable doctrine to which reference is made. In other
words, a conveyance of land, accompanied by registration in the name of
the transferee and the issuance of a new certificate, is no more secured
from the operation of this equitable doctrine than the most informal
conveyance that could be devised.[17]
The law enumerates when a contract may be presumed to be an
equitable mortgage:
(1) When the price of a sale with right to repurchase is unusually
inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or granting a
new period is executed;

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(4) When the purchaser retains for himself a part of the purchase
price;

formality.[24] In fact, this Court, in various cases involving the same

situation, had occasion to state:

(5) When the vendor binds himself to pay the taxes on the thing
sold;

x x x In Jayme, et al. v. Salvador, et al., this Court upheld a judgment of

the Court of First Instance of Iloilo which found the transaction between
the parties to be a loan instead of a sale of real property notwithstanding
the terminology used in the document, after taking into account the
surrounding circumstances of the transaction. The Court through Justice
Norberto Romualdez stated that while it was true that plaintiffs were aware
of the contents of the contracts, the preponderance of the evidence
showed however that they signed knowing that said contracts did not
express their real intention, and if they did so notwithstanding this, it
was due to the urgent necessity of obtaining funds. Necessitous men are
not, truly speaking, free men; but to answer a present emergency, will
submit to any terms that the crafty may impose upon them.[25]

(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.
x x x x x x x x x[18]
The foregoing presumption applies also to a contract purporting to be an
absolute sale.[19]
Applying the preceding principles to the factual milieu of this case,
we find the agreement between the private respondent and N. Domingo
Realty & Housing Corporation, as represented by petitioner, manifestly
one of equitable mortgage. First, possession of the property in the
controversy remained with Petitioner Manuel Lao who was the beneficial
owner of the property, before, during and after the alleged sale. [20] It is
settled that a pacto de retro sale should be treated as a mortgage where
the (property) sold never left the possession of the vendors. [21] Second, the
option given to Manuel Lao to purchase the property in controversy had
been extended twice[22] through documents executed by Mr. Tan Bun Uy,
President and Chairman of the Board of Better Homes Realty & Housing
Corporation. The wording of the first extension is a refreshing revelation
that indeed the parties really intended to be bound by a loan with
mortgage, not by a pacto de retro. It reads, On June 10, 88, this option is
extended for another sixty days to expired (sic) on Aug. 11, 1988. The
purchase price is increased to P137,000.00. Since Mr. Lao borrow
(sic) P20,000.00 from me.[23] These extensions clearly represent the
extension of time to pay the loan given to Manuel Lao upon his failure to
pay said loan on its maturity. Mr. Lao was even granted an additional loan
of P20,000.00 as evidenced by the above-quoted document. Third,
unquestionably, Manuel Lao and his brother were in such dire need of
money that they mortgaged their townhouse units registered under the
name of N. Domingo Realty Corporation, the family corporation put up by
their parents, to Private Respondent Better Homes Realty & Housing
Corporation. In retrospect, it is easy to blame Petitioner Manuel Lao for not
demanding a reformation of the contract to reflect the true intent of the
parties. But this seeming inaction is sufficiently explained by the Lao
brothers desperate need for money, compelling them to sign the document
purporting to be a sale after they were told that the same was just for

Moreover, since the borrowers urgent need for money places the
latter at a disadvantage vis-a-vis the lender who can thus dictate the terms
of their contract, the Court, in case of an ambiguity, deems the contract to
be one which involves the lesser transmission of rights and interest over
the property in controversy.[26]
As aptly found and concluded by the regional trial court:
The evidence of record indicates that while as of April 4, 1988 (the date of
execution of the Deed of Absolute Sale whereby the N. Domingo and
Realty & Development Corporation purportedly sold the townhouse and lot
subject of this suit to [herein private respondent Better Homes Realty &
Housing Corporation] for P100,000.00) said N. Domingo Realty &
Development Corporation (NDRDC, for short) was the registered owner of
the subject property under Transfer Certificate of Title (TCT) No. 316634 of
the Registry of Deeds for Quezon City, (herein petitioner Manuel Lao) in
fact was and has been since 1975 the beneficial owner of the subject
property and, thus, the same was assigned to him by the NDRDC, the
family corporation set up by his parents and of which (herein petitioner)
and his siblings are directors. That the parties real transaction or contract
over the subject property was not one of sale but, rather, one of loan
secured by a mortgage thereon is unavoidably inferrable from the
following facts of record, to (herein petitioners) possession of the subject
property, which started in 1975 yet, continued and remained even after the
alleged sale of April 4, 1988; (herein private respondent) executed an
option to purchase in favor (herein petitioner) as early as April 2, 1988 or
two days before (herein private respondent) supposedly acquired
ownership of the property; the said option was renewed several times and

P a g e | 42

the price was increased with each renewal (thus, the original period for the
exercise of the option was up to June 11, 1988 and the price
was P109,000.00; then, on June 10, 1988, the option was extended for 60
days or until August 11, 1988 and the price was increased to P137,000.00;
and then on August 11, 1988, the option was again extended until
November 11, 1988 and the price was increased to P158, 840.00); and,
the Deed of Absolute Sale of April 4, 1988 was registered and the property
transferred in the name of (private respondent) only on May 10, 1989, per
TCT No. 22184 of the Registry of Deeds for Quezon City (Arts. 1602, nos.
2, 3, & 6, & 1604, Civil Code). Indeed, if it were true, as it would have the
Court believe, that (private respondent) was so appreciative of
(petitioners) alleged facilitation of the subject propertys sale to it, it is quite
strange why (private respondent) some two days before such supposed
sale would have been minded and inclined to execute an option to
purchase allowing (petitioner) to acquire the property -- the very same
property it was still hoping to acquire at the time. Certainly, what is more
likely and thus credible is that, if (private respondent) was indeed thankful
that it was able to purchase the property, it would not given (petitioner) any
option to purchase at all x x x.[27]
Based on the conduct of the petitioner and private respondent and
even the terminology of the second option to purchase, we rule that the
intent and agreement between them was undoubtedly one of equitable
mortgage and not of sale.

Third Issue: Should Petitioner Be Ejected?

We answer in the negative. An action for unlawful detainer is
grounded on Section 1, Rule 70 of the Rules of Court which provides that:
x x x a landlord, vendor, vendee, or other person against whom the
possession of any land or building is unlawfully withheld after the
expiration or termination of the right to hold possession, by virtue of any
contract, express or implied, or the legal representatives or assigns of any
such landlord, vendor, vendee, or other person, may, at any time within
one (1) year after such unlawful deprivation or withholding of possession,
bring an action in the proper inferior court against the person or persons
unlawfully withholding or depriving of possession, or any person or
persons claiming under them, for the restitution of such possession,
together with damages and costs. x x x.

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P a g e | 43

Based on the previous discussion, there was no sale of the disputed

property. Hence, it still belongs to petitioners family corporation, N.
Domingo Realty & Development Corporation. Private respondent, being a
mere mortgagee, has no right to eject petitioner. Private respondent, as a
creditor and mortgagee, x x x cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any stipulation to the contrary
is null and void.[28]

Other Matters
Private respondent in his memorandum also contends that (1)
petitioner is not the real party in interest and (2) the petition should be
dismissed for raising/stating facts not so found by the Court of
Appeals. These deserve scant consideration. Petitioner was impleaded as
party defendant in the ejectment suit by private respondent itself. Thus,
private respondent cannot question his standing as a party. As such party,
petitioner should be allowed to raise defenses which negate private
respondents right to the property in question. The second point is really
academic. This ponencia relies on the factual narration of the Court of
Appeals and not on the facts supplied by petitioner.
WHEREFORE, the petition is hereby GRANTED. The challenged
Decision of the Court of Appeals is REVERSED and SET ASIDE. The
decision of the Regional Trial Court of Quezon City ordering the dismissal
of the complaint for ejectment is REINSTATED and AFFIRMED. No
pronouncement as to costs.
SO ORDERED

G.R. No. 80294-95 September 21, 1988

CATHOLIC
VICAR
APOSTOLIC
OF
THE
MOUNTAIN
PROVINCE, petitioner,
vs.

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COURT OF APPEALS, HEIRS OF EGMIDIO
OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating
counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio
Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.
GANCAYCO, J.:
The principal issue in this case is whether or not a
decision of the Court of Appeals promulgated a long
time ago can properly be considered res judicata by
respondent Court of Appeals in the present two
cases between petitioner and two private
respondents.
Petitioner questions as allegedly erroneous the
Decision dated August 31, 1987 of the Ninth Division
of Respondent Court of Appeals 1 in CA-G.R. No. 05148
[Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil
Case No. 3655 (429)], both for Recovery of Possession,
which affirmed the Decision of the Honorable Nicodemo T.
Ferrer, Judge of the Regional Trial Court of Baguio and
Benguet in Civil Case No. 3607 (419) and Civil Case No.
3655 (429), with the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered

ordering the defendant, Catholic Vicar
Apostolic of the Mountain Province to return
and surrender Lot 2 of Plan Psu-194357 to
the plaintiffs. Heirs of Juan Valdez, and Lot 3
of the same Plan to the other set of plaintiffs,
the Heirs of Egmidio Octaviano (Leonardo
Valdez, et al.). For lack or insufficiency of
evidence, the plaintiffs' claim or damages is

hereby denied. Said defendant is ordered to

pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial
court's decision, sustained the trial court's
conclusions that the Decision of the Court of
Appeals, dated May 4,1977 in CA-G.R. No. 38830-R,
in the two cases affirmed by the Supreme Court,
touched on the ownership of lots 2 and 3 in question;
that the two lots were possessed by the
predecessors-in-interest of private respondents
under claim of ownership in good faith from 1906 to
1951; that petitioner had been in possession of the
same lots as bailee in commodatum up to 1951,
when petitioner repudiated the trust and when it
applied for registration in 1962; that petitioner had
just been in possession as owner for eleven years,
hence there is no possibility of acquisitive
prescription which requires 10 years possession with
just title and 30 years of possession without; that the
principle of res judicata on these findings by the
Court of Appeals will bar a reopening of these
questions of facts; and that those facts may no
longer be altered.
Petitioner's motion for reconsideation of the
respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and
05419) was denied.
The facts and background of these cases as
narrated by the trail court are as follows
... The documents and records
presented reveal that the whole
controversy
started
when
the
defendant Catholic Vicar Apostolic of
the Mountain Province (VICAR for

P a g e | 44

brevity) filed with the Court of First

Instance of Baguio Benguet on
September 5, 1962 an application for
registration of title over Lots 1, 2, 3,
and 4 in Psu-194357, situated at
Poblacion Central, La Trinidad,
Benguet, docketed as LRC N-91, said
Lots being the sites of the Catholic
Church building, convents, high school
building, school gymnasium, school
dormitories, social hall, stonewalls, etc.
On March 22, 1963 the Heirs of Juan
Valdez and the Heirs of Egmidio
Octaviano
filed
their
Answer/Opposition on Lots Nos. 2 and
3, respectively, asserting ownership
and title thereto. After trial on the
merits, the land registration court
promulgated its Decision, dated
November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2,
3, and 4.
The Heirs of Juan Valdez (plaintiffs in
the herein Civil Case No. 3655) and
the Heirs of Egmidio Octaviano
(plaintiffs in the herein Civil Case No.
3607) appealed the decision of the
land registration court to the then
Court of Appeals, docketed as CAG.R. No. 38830-R. The Court of
Appeals rendered its decision, dated
May 9, 1977, reversing the decision of
the land registration court and
dismissing the VICAR's application as
to Lots 2 and 3, the lots claimed by the two sets of
oppositors in the land registration case (and two sets
of plaintiffs in the two cases now at bar), the first lot
being presently occupied by the convent and the

CREDIT TRANSACTION
second by the women's dormitory and the sister's
convent.
On May 9, 1977, the Heirs of Octaviano filed a motion
for reconsideration praying the Court of Appeals to
order the registration of Lot 3 in the names of the Heirs
of Egmidio Octaviano, and on May 17, 1977, the Heirs
of Juan Valdez and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be
ordered registered in the names of the Heirs of Juan
Valdez and Pacita Valdez. On August 12,1977, the
Court of Appeals denied the motion for reconsideration
filed by the Heirs of Juan Valdez on the ground that
there was "no sufficient merit to justify reconsideration
one way or the other ...," and likewise denied that of
the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a
petition for review on certiorari of the decision of the
Court of Appeals dismissing his (its) application for
registration of Lots 2 and 3, docketed as G.R. No. L46832, entitled 'Catholic Vicar Apostolic of the
Mountain Province vs. Court ofAppeals and Heirs of
Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion
for reconsideration the Heirs of Juan Valdez and
Pacita Valdez, on September 8, 1977, filed with the
Supreme Court a petition for review, docketed as G.R.
No. L-46872, entitled, Heirs of Juan Valdez and Pacita
Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio
Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a
minute resolution both petitions (of VICAR on the one
hand and the Heirs of Juan Valdez and Pacita Valdez
on the other) for lack of merit. Upon the finality of both
Supreme Court resolutions in G.R. No. L-46832 and
G.R. No. L- 46872, the Heirs of Octaviano filed with
the then Court of First Instance of Baguio, Branch II, a
Motion For Execution of Judgment praying that the
Heirs of Octaviano be placed in possession of Lot 3.
The Court, presided over by Hon. Salvador J. Valdez,

on December 7, 1978, denied the motion on the

ground that the Court of Appeals decision in CA-G.R.
No. 38870 did not grant the Heirs of Octaviano any
affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with
the Court of Appeals a petitioner for certiorari and
mandamus, docketed as CA-G.R. No. 08890-R,
entitled Heirs of Egmidio Octaviano vs. Hon. Salvador
J. Valdez, Jr. and Vicar. In its decision dated May 16,
1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed.
The Heirs of Egmidio Octaviano filed Civil Case No.
3607 (419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of Juan Valdez filed
Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision,
pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of
Egmidio Octaviano presented one (1) witness, Fructuoso Valdez,
who testified on the alleged ownership of the land in question (Lot
3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C );
his written demand (Exh. BB-4 ) to defendant Vicar for the return
of the land to them; and the reasonable rentals for the use of the
land at P10,000.00 per month. On the other hand, defendant Vicar
presented the Register of Deeds for the Province of Benguet, Atty.
Nicanor Sison, who testified that the land in question is not covered
by any title in the name of Egmidio Octaviano or any of the
plaintiffs (Exh. 8). The defendant dispensed with the testimony of
Mons.William Brasseur when the plaintiffs admitted that the
witness if called to the witness stand, would testify that defendant
Vicar has been in possession of Lot 3, for seventy-five (75) years
continuously and peacefully and has constructed permanent
structures thereon.
In Civil Case No. 3655, the parties admitting that the
material facts are not in dispute, submitted the case on
the sole issue of whether or not the decisions of the
Court of Appeals and the Supreme Court touching on
the ownership of Lot 2, which in effect declared the
plaintiffs the owners of the land constitute res judicata.

P a g e | 45

In these two cases , the plaintiffs arque that the

defendant Vicar is barred from setting up the defense
of ownership and/or long and continuous possession
of the two lots in question since this is barred by prior
judgment of the Court of Appeals in CA-G.R. No.
038830-R under the principle of res judicata. Plaintiffs
contend that the question of possession and
ownership have already been determined by the Court
of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R)
and affirmed by the Supreme Court (Exh. 1, Minute
Resolution of the Supreme Court). On his part,
defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the
issues of long possession and ownership because the
dispositive portion of the prior judgment in CA-G.R.
No. 038830-R merely dismissed their application for
registration and titling of lots 2 and 3. Defendant Vicar
contends that only the dispositive portion of the
decision, and not its body, is the controlling
pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to
petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2
AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT
DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED
LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED
ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE
RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT
LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE
PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE
RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;

CREDIT TRANSACTION
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3
ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER
ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF
APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME
COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830
TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE
RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN
GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION
OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN
COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND
BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND
REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R.
Nos. 05148 and 05149, when it clearly held that it was in agreement with
the findings of the trial court that the Decision of the Court of Appeals
dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership
of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R.
No. 38830-R) did not positively declare private respondents as owners of
the land, neither was it declared that they were not owners of the land, but
it held that the predecessors of private respondents were possessors of
Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951.
Petitioner was in possession as borrower in commodatum up to 1951,
when it repudiated the trust by declaring the properties in its name for
taxation purposes. When petitioner applied for registration of Lots 2 and 3
in 1962, it had been in possession in concept of owner only for eleven
years. Ordinary acquisitive prescription requires possession for ten years,
but always with just title. Extraordinary acquisitive prescription requires 30
years. 4

On the above findings of facts supported by evidence and evaluated by

the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We
see no error in respondent appellate court's ruling that said findings
are res judicata between the parties. They can no longer be altered by
presentation of evidence because those issues were resolved with finality
a long time ago. To ignore the principle of res judicata would be to open
the door to endless litigations by continuous determination of issues
without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question
under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of
30 years possession for acquisitive prescription over Lots 2 and 3. Neither
did it satisfy the requirement of 10 years possession for ordinary
acquisitive prescription because of the absence of just title. The appellate
court did not believe the findings of the trial court that Lot 2 was acquired
from Juan Valdez by purchase and Lot 3 was acquired also by purchase
from Egmidio Octaviano by petitioner Vicar because there was absolutely
no documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by
Valdez and Octaviano. Both Valdez and Octaviano had Free Patent
Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned
lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are
not in question, but not Lots 2 and 3, because the buildings standing
thereon were only constructed after liberation in 1945. Petitioner Vicar only
declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil
Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed
only in 1947, the church was constructed only in 1951 and the new
convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish
priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were
surveyed by request of petitioner Vicar only in 1962.

P a g e | 46

Private respondents were able to prove that their predecessors' house

was borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the
petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part
of the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of petitioner Vicar by
such adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private
respondents were possessors under claim of ownership in good faith from
1906; that petitioner Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of
Appeals in CA-G.R. No. 38830-R. Its findings of fact have become
incontestible. This Court declined to review said decision, thereby in effect,
affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less
grave abuse of discretion, when it held that the Decision of the Court of
Appeals in CA-G.R. No. 38830-R is governing, under the principle of res
judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CAG.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is
DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R.
Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED,
with costs against petitioner.
SO ORDERED.

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