Credit Transactions
Preference of Credits Case Digests
1. Pacific Farms, Inc. vs. Simplicio Esguerra, et al.
Gr L-21783
November 29,1969
Facts:
Insular Farms, Inc. failed to pay 4,710.18 of the purchase price for
lumber and other construction materials used for construction of six
buildings from Carried Lumber Company. The Company instituted a
civil case to recover the balance. The CFI ruled in favor of the
Company causing the sheriff to levy the six buildings constructed by
Insular Farms. Pacific Farms, Inc. filed a third-party claim claiming
to be the owner of the buildings even before the institution of the
case by the Company. Still the buildings were judicially sold to
Carried Lumber Company.
On May 24, 1962, Pacific Farms filed a complaint seeking the
nullification of the sale.
Issue:
Whether or not Article 447 of the Civil Code is applicable.
Decision:
The court ruled the Article 447 applies by analogy because it
contemplates the constriction of accessories, which in the case at
bar are buildings, through the use of materials owned by another
person by the owner of the land.
Reese B. Oguis
Pacific Farms cannot be considered as a purchaser in good faith
since Atty. Antonio Arante was the counsel of Pacific Farms who
signed the complaint and is also the president of Insular Farms.
Therefore, if such sale was in fact made, the fact that the property
was already purchased should have already been raised by the
petitioner from the institution of the case.
Therefore, in applying Article 447, the owner of the materials may
have the materials removed if no injury would be resulted,
otherwise, he must be reimbursed of their value.
2. Sampaguita Pictures, Inc. vs. Jalwindor Manufacturers, Inc.
93 SCRA 420
October 1979
FACTS:
Both the plaintiff-appellant Sampaguita Pictures Inc. (Sampaguita)
and defendant-appellee Jalwindor Manufacturers Inc. (Jalwindor)
were domestic corporations duly organized under the Philippine
laws. Sampaguita leased to Capitol 300 Inc. (Capitol) the roof deck
of its building with the agreement that all permanent improvements
Capitol will make on said property shall belong to Sampaguita
without any part on the latter to reimburse Capitol for the expenses
of said improvements. Shortly, Capitol purchased on credit from
Jalwindor glass and wooden jalousies, which the latter itself
delivered and installed in the leased premises, replacing the existing
windows.
On June 1, 1964, Jalwindor filed with the CFI of Rizal, Quezon City an
action for collection of a sum of money with a petition for

preliminary attachment against Capitol for its failure to pay its
purchases. Later, Jalwindor and Capitol submitted to the trial court
a Compromised Agreement wherein Capitol acknowledged its
indebtedness of P9,531.09, payable in monthly installments of at
least P300.00 a month beginning December 15,1964 and that all the
materials that Capitol purchased will be considered as security for
such undertaking. Meanwhile, Sampaguita filed a complaint for
ejectment and for collection of a sum of money against Capitol for
the latters failure to pay rentals from March 1964 to April 1965,
and the City Court of Quezon City ordered Capitol on June 8, 1965
to vacate the premises and to pay Sampaguita.
On the other hand, Capitol likewise failed to comply with the terms
of the Compromise Agreement, and on July 31, 1966, the Sheriff of
Quezon City made levy on the glass and wooden jalousies.
Sampaguita filed a third-party claim alleging that it is the owner of
said materials and not Capitol, but Jalwindor filed an indemnity
bond in favor of the Sheriff and the items were sold at public
auction on August 30, 1966, with Jalwindor as the highest bidder for
P6,000.00. Sampaguita filed with the CFI of Rizal, Quezon City an
action to nullify the Sheriff's sale and for an injunction to prevent
Jalwindor from detaching the glass and wooden jalousies. Jalwindor
was ordered to maintain the status quo pending final determination
of the case, and on October 20, 1967, the lower court dismissed the
complaint and ordered Sampaguita to pay Jalwindor the amount of
P500.00 as attorney's fees.
ISSUE:
Was there a delivery made and, therefore, a transfer of ownership
of the thing sold?
COURT RULING:
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
The Supreme Court reversed the decision of the lower court
declaring Sampaguita as declared the lawful owner of the disputed
glass and wooden jalousies, permanently enjoining Jalwindor from
detaching said items from the roof deck of the Sampaguita Pictures
Building, and ordered Jalwindor to pay Sampaguita the sum of
P1,000.00 for and as attorney's fees.
When a property levied upon by the sheriff pursuant to a writ of
execution is claimed by a third person in a sworn statement of
ownership thereof, as prescribed by the rules, an entirely different
matter calling for a new adjudication arises. The items in question
were illegally levied upon since they do not belong to the judgment
debtor. The power of the Court in execution of judgment extends
only to properties unquestionably belonging to the judgment
debtor. The fact that Capitol failed to pay Jalwindor the purchase
price of the items levied upon did not prevent the transfer of
ownership to Capitol and, later, to Sampaguita by virtue of the
agreement in their lease contract. Therefore, the complaint of
Sampaguita to nullify the Sheriff's sale is well founded, and should
prosper.
3. DEVELOPMENT BANK OF THE PHILIPPINES, vs. NATIONAL LABOR
RELATIONS COMMISSION, LABOR ARBITER ISABEL P. ORTIGUERRA,
and LABOR ALLIANCE FOR NATIONAL DEVELOPMENT, G.R. NO.
NOS. 82763-64 MARCH 19, 1990
FACTS: Lirag Textile Mills, Inc. (LIRAG) was a mortgage debtor of
DBP. Private respondent Labor Alliance for National Development
(LAND) was the bargaining representative of the more or less 800
former rank and file employees of LIRAG. LIRAG started terminating
the services of its employees on the ground of retrenchment. LIRAG
has since ceased operations presumably due to financial reverses.

Joselito Albay, one of the employees dismissed filed a complaint
before the National Labor Relations Commission (NLRC) against
LIRAG for illegal dismissal, LAND, on behalf of 180 dismissed
members, also filed a Complaint against LIRAG.
In a Decision, Labor Arbiter Apolinar L. Sevilla ordered LIRAG to pay
the individual complainants. The NLRC affirmed. Judgment
Writ of Execution was issued. DBP extrajudicially foreclosed the
mortgaged properties for failure of LIRAG to pay its mortgage
obligation. As the only bidder at the foreclosure sale, DBP acquired
said mortgaged properties. Since DBP was the sole mortgagee, no
actual payment was made, the amount of the bid having been
merely credited in partial satisfaction of LIRAG's indebtedness.
By reason of said foreclosure, the Writ of Execution issued in favor
of the complainants remained unsatisfied. A Notice of Levy on
Execution on the properties of LIRAG was then entered. library
LAND filed a "Motion for Writ of Execution and Garnishment" of the
proceeds of the foreclosure sale.
Labor Arbiter Sevilla granted the Writ of Garnishment and directed
DBP to remit to the NLRC the sum of P6,292,380.00 out of the
proceeds of the foreclosed properties of LIRAG sold at public
auction in order to satisfy the judgment previously rendered.
DBP sought reconsideration. Public respondent, Labor Arbiter Isabel
P. Ortiguerra denied reconsideration. DBP appealed that denial to
the NLRC.
In the meantime, by virtue of Proclamation Nos. 50 and 50-A, the
Asset Privatization Trust (APT) became the transferee of the DBP
foreclosed assets of LIRAG.
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
A partial Compromise Agreement was entered into between APT
and LAND (Litex Chapter) whereby APT paid the complainants-
employees, ex gratia, the sum of P750,000.00 "in full settlement of
their claims, past and present, with respect to all assets of LITEX
transferred by DBP to APT." That amount was received by LAND's
local President. LAND, through its national President,
NLRC affirmed the appealed Order and dismissed the DBP appeal.
ISSUE: WON the proceeds of LIRAG's properties foreclosed by DBP
should first satisfy the unpaid wages of the workers.
HELD: NO. Development Bank of the Philippines vs. Santos
categorically stated:
It is quite clear from the provision that a declaration of bankruptcy
or a judicial liquidation must be present before the workers
preference may be enforced. Thus, Article 110 of the Labor Code
and its implementing rule cannot be invoked by the respondents in
this case absent a formal declaration of bankruptcy or a liquidation
order.
Art. 110. Worker preference in case of bankruptcy. - In the event of
bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards their unpaid wages and other
monetary claims, any provision of law to the contrary
notwithstanding. Such unpaid wages and monetary claims shall be
paid in full before the claims of the Government and other creditors
may be paid.
Section 10, Rule III, Book III of the Omnibus Rules Implementing the
Labor Code:. Payment of wages and other monetary claims in case
of bankruptcy. - In case of bankruptcy or liquidation of the
employer's business, the unpaid wages and other monetary claims
of the employees shall be given first preference and shall be paid in

full before the claims of government and other creditors may be
paid.
In the event of insolvency, a principal objective should be to effect
an equitable distribution of the insolvent's property among his
creditors. To accomplish this there must first be some proceeding
where notice to all of the insolvents creditors may be given and
where the claims of preferred creditors may be bindingly
adjudicated
A preference of credit bestows upon the preferred creditor an
advantage of having his credit satisfied first ahead of other claims
which may be established against the debtor. The preferential right
of credit attains significance only after the properties of the debtor
have been inventoried and liquidated, and the claims held by his
various creditors have been established.
A distinction should be made between a preference of credit and a
lien. A preference applies only to claims which do not attach to
specific properties. A lien creates a charge on a particular property.
The right of first preference as regards unpaid wages recognized by
Article 110 does not constitute a lien on the property of the
insolvent debtor in favor of workers. It is but a preference of credit
in their favor, a preference in application. It is a method adopted to
determine and specify the order in which credits should be paid in
the final distribution of the proceeds of the insolvent's assets. It is a
right to a first preference in the discharge of the funds of the
judgment debtor.
The right to preference given to workers under Article 110 of the
Labor Code cannot exist in any effective way prior to the time of its
presentation in distribution proceedings. It will find application
when, in proceedings such as insolvency, such unpaid wages shall
be paid in full before the "claims of the Government and other
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
creditors" may be paid. But, for an orderly settlement of a debtor's
assets, all creditors must be convened, their claims ascertained and
inventoried, and thereafter the preferences determined in the
course of judicial proceedings which have for their object the
subjection of the property of the debtor to the payment of his debts
or other lawful obligations. Thereby, an orderly determination of
preference of creditors' claims is assured
4. PNB v. Teresita Cruz
Facts:
Art 110: workers shall enjoy first preference with regard to wages
due them and other monetary claimesm any provision of law to the
contrary notwithstanding, in case of bankruptcy or liquidation of an
employers business
History
AMEX laid off 70% of its employees because of business
reverses
30% retained employees were not paid of their wages from
1980-1982 when AMEX completely ceased operations and
entered into an opearating agreement with T.M. San Andres
Dev Corp for leasing of equipment and machineries of
AMEX
Unpaid employees file a complaint wth the Labor Arbiter,
ordered AMEX to pay the total amout of more than 200k
Necessary arrangement was made between respondents-
AMEX, T.M. San Andres Dev Corp and PNB; if AMEX cannot
pay, will pay thru the proceeds of the machineries and
equipement operated by T.M. And thru lease of the same
from PNB

AMEX did not appeal the decision but PNB, as mortgagee-
creditor of AMEX file an appeal with NLRC because workers
lien covers unpaid wages only and not the termination or
severence pay which the latter also claims they are entitled
to
NLRC denied appeal of PNB
Petitioner Grounds:
1. Art 110 of the Labor Code must be read in relation to Art 2241,
2242, 2243, 2244, and 2255 of Civil Code concerning the
classification concurrence and preference of credits?
2. Should apply on the workers unpaid wages and not included
termination or severence pay cited in Sec 7, Rule 1, Book VI of Rules
and Regulations of Labor Code, Art 283 of the Labor Code which
states that he separation from work of an employees for a just
cause does not entitle him to termination pay.
ISSUE:
1. WON Art 110 should apply and workers lien should take
precedence over any other claim?
2. WON even if workers lien apply to the instant case, the same
should only cover the unpaid wages excluding termination or
severnce pay?
SC Ruling
Petition is dismissed and affirmed decision of NLRC
For Issue Number 1:
Petitioner barred from claiming that the workers lien
applies only to the products of their labor and not to the
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
other properties of the employer which are encumbered by
mortgage contracts or otherwise due to failure of petitioner
to question the same on appeal
In regards to Art 110, phrase any provision of law to the
contrary indicates that such preference shall prevail
despite the order set forth in Arts 2241 to 2245 of the Civil
Code because no exceptions were provided under Art 110
so none shall be considered
Labor Code was signed into law after Civil code took effect;
when two statutes of different dates and of contrary tenor
are of theoretical application to a particular case the statute
od later date must prevail being a later expression of
legislative will
Reliance of petitioner on Republic v. Peralta is without
basis; case involved tax claims of the State which is of
highest importance of the sovereign; Art 110 as amended,
unpaid wages and monetary claims of workers should be
paid in full before the claims of the government and other
creditors
Art 110 of the Labor Code shall prevail because the purpose
by which it was intended is for the protection of the
working class
For Issue Number 2:
AMEX failed to convince Court that the financial reverses
were indeed serious
wages should also include all benefits under CBA like
severence pay, reduce allowance, accrued vac leave earned
but not enjoyed, as well as compensation awards and
unpaid salaries for services rendered

Termination pay forms part of the money benefits accruing
to wprkers by reason of their having previously rendered
services
5. AC Ransom Labor Union v. NLRC (1986)
Doctrines: Since a corporate employer is an artificial person, it must
have an officer who can be presumed to be the employer, being the
person acting in the interest of the employer.
Facts: On June 6, 1961, employees of AC Ransom, most being
members of the AC Ransom Labor Union, went on strike. The said
strike was lifted on June 21 with most of the strikers being allowed
to resume their work. However, twenty two strikers were refused
reinstatement. During 1969, the Hernandez family (owners of AC
RANSOM) organized another corporation under the name of
Rosario Industrial Corporation. The said company dealt in the same
type of business as AC Ransom. The issue of back wages was
brought before the Court of Industrial Relations which rendered a
decision on December 19, 1972 ordering the twenty two strikers to
be reinstated with back wages.
On April 2, 1973, RANSOM filed an application for clearance to close
or cease operations. The same was granted by the Ministry of Labor
and Employment. Although it has stopped operations, RANSOM has
continued its personality as a corporation. For practical purposes,
reinstatement of the 22 strikers has been precluded. As a matter of
fact, reinstatement is not an issue in this case.
A motion of execution was filed by the Union against AC Ransom
but the former was unable to collect due to the inability to find
loveable assets of the company.
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
The Union subsequently asked the officers of Ransom to be
personally liable for payment of the back wages.
The motion was granted by the Labor Arbiter but was subsequently
reversed byte NLRC.
Issue:
1. W/N the officers of the corporation should be held
personally liable to pay for the back wages.
Held
YES. Under Article 212 (c) of the Labor Code, Employee includes
any person acting in the interest of an employer, directly or
indirectly. Since Ransom is an artificial person, it must have an
officer who can be presumed to be the employer, being the person
acting in the interest of the employer (Ransom).In PD 525, where a
corporation fails to pay the emergency allowance therein provided,
the prescribed penalty shall be imposed upon the guilty officer or
officers of the corporation. In the instant case, RANSOM, in
foreseeing the possibility or probability of payment of back wages
to the 22strikers, organized ROSARIO to replace RANSOM, with the
latter to be eventually phased out if the 22 strikers win their case.
The record does not clearly identify the officer or officers of
RANSOM directly responsible for failure to pay the back wages of
the 22 strikers. In the absence of definite proof in that regard, it
should be presumed that the responsible officer is the President of
the corporation who can be deemed the chief operation officer
thereof.
6. DE BARRETO, ET. AL. v. VILLANUEVA, ET. AL., (1961)
Special Preferred Credits
(Important: See full text of the Resolution)

Facts: Rosario Cruzado sold all her right, title, and interest and that
of her children in the house and lot herein involved to Villanueva for
P19K. The purchaser paid P1,500 in advance, and executed a
promissory note for the balance. However, the buyer could only pay
P5,500 On account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the meantime, the
buyer Villanueva was able to secure a clean certificate of title and
mortgaged the property to appellant Barretto to secure a loan of
P30K, said mortgage having been duly recorded.
Villanueva defaulted on the mortgage loan in favor of Barretto. The
latter foreclosed the mortgage in her favor, obtained judgment, and
upon its becoming final asked for execution. Cruzado filed a motion
for recognition for her "vendor's lien" invoking Articles 2242, 2243,
and 2249 of the new Civil Code. After hearing, the court below
ordered the "lien" annotated on the back of the title, with the
proviso that in case of sale under the foreclosure decree the
vendor's lien and the mortgage credit of appellant Barretto should
be paid pro rata from the proceeds.
Appellants insist that:
1. The vendor's lien, under Articles 2242 and 2243 of the new,
Civil Code of the Philippines, can only become effective in the event
of insolvency of the vendee, which has not been proved to exist in
the instant case; and .
2. That the Cruzado is not a true vendor of the foreclosed
property.
Article 2242 of the new Civil Code enumerates the claims, mortgage
and liens that constitute an encumbrance on specific immovable
property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable
sold; and
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or
more credits with respect to the same specific real property or real
rights, they shall be satisfied pro-rata after the payment of the taxes
and assessment upon the immovable property or real rights.
Held: Application of the above-quoted provisions to the case at bar
would mean that the herein appellee Rosario Cruzado as an unpaid
vendor of the property in question has the right to share pro-rata
with the appellants the proceeds of the foreclosure sale.
Issue: Appellants argument: inasmuch as the unpaid vendor's lien
in this case was not registered, it should not prejudice the said
appellants' registered rights over the property.
Held: There is nothing to this argument. Note must be taken of the
fact that article 2242 of the new Civil Code enumerating the
preferred claims, mortgages and liens on immovables, specifically
requires that. Unlike the unpaid price of real property sold.
mortgage credits, in order to be given preference, should be
recorded in the Registry of Property. If the legislative intent was to
impose the same requirement in the case of the vendor's lien, or
the unpaid price of real property sold, the lawmakers could have
easily inserted the same qualification which now modifies the
mortgage credits. The law, however, does not make any distinction
between registered and unregistered vendor's lien, which only goes
to show that any lien of that kind enjoys the preferred credit status.
As to the point made that the articles of the Civil Code on
concurrence and preference of credits are applicable only to the
insolvent debtor, suffice it to say that nothing in the law shows any
such limitation. If we are to interpret this portion of the Code as

intended only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits would be left
without any rules to govern them, and it would render purposeless
the special laws on insolvency.
Resolution on Motion to Consider (1962)
Appellants, spouses Barretto, have filed a motion vigorously urging
that our decision be reconsidered and set aside, and a new one
entered declaring that their right as mortgagees remain superior to
the unrecorded claim of herein appellee for the balance of the
purchase price of her rights, title, and interests in the mortgaged
property.
We have reached the conclusion that our original decision must be
reconsidered and set aside:
Under the system of the Civil Code of the Philippines, only taxes
enjoy a similar absolute preference. All the remaining thirteen
classes of preferred creditors under Article 2242 enjoy no priority
among themselves, but must be paid pro-rata i.e., in proportion to
the amount of the respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific
real property or real rights, they, shall be satisfied pro-rata after the
payment of the taxes and assessments upon the immovable
property or real rights."
The full application of Articles 2249 and 2242 demands that there
must be first some proceedings where the claims of all the
preferred creditors may be bindingly adjudicated, such as:
1. insolvency,
2. the settlement of decedents estate under Rule 87 of the Rules
of Court, or
3. other liquidation proceedings of similar import.
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
This explains the rule of Article 2243 of the new Civil Code that
The claims or credits enumerated in the two preceding articles"
shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing
insolvency.
And the rule is further clarified in the Report of the Code
Commission, as follows:
The question as to whether the Civil Code and the insolvency Law
can be harmonized is settled by Article 2243. The preferences
named in Articles 2261 and 2262 (now 2241 and 2242) are to be
enforced in accordance with the Insolvency Law."
Rule
Thus, it becomes evident that one preferred creditor's third-party
claim to the proceeds of a foreclosure sale (as in the case now
before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute priority. If
none of the claims is for taxes, a dispute between two creditors will
not enable the Court to ascertain the pro-rata dividend
corresponding to each, because the rights of the other creditors
likewise" enjoying preference under Article 2242 can not be
ascertained.
Held: There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not require the character and rank
of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.

7. Medel vs Court of Appeals, 299 SCRA 481; GR No. 131622,
November 27, 1998
(Credit Transactions Loans, Usury Law, Interest Rates)
Facts: Defendants obtained a loan from Plaintiff in the amount P50,
000.00, payable in 2 months and executed a promissory note.
Plaintiff gave only the amount of P47, 000.00 to the borrowers and
retained P3, 000.00 as advance interest for 1 month at 6% per
month.
Defendants obtained another loan from Defendant in the amount of
P90, 000.00, payable in 2 months, at 6% interest per month. They
executed a promissory note to evidence the loan and received only
P84, 000.00 out of the proceeds of the loan.
For the third time, Defendants secured from Plaintiff another loan
in the amount of P300, 000.00, maturing in 1 month, and secured
by a real estate mortgage. They executed a promissory note in favor
of the Plaintiff. However, only the sum of P275, 000.00, was given to
them out of the proceeds of the loan.
Upon maturity of the three promissory notes, Defendants failed to
pay the indebtedness.
Defendants consolidated all their previous unpaid loans totalling
P440, 000.00, and sought from Plaintiff another loan in the amount
of P60, 000.00, bringing their indebtedness to a total of P50,000.00.
They executed another promissory note in favor of Plaintiff to pay
the sum of P500, 000.00 with a 5.5% interest per month plus 2%
service charge per annum, with an additional amount of 1% per
month as penalty charges.
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
On maturity of the loan, the Defendants failed to pay the
indebtedness which prompt the Plaintiffs to file with the RTC a
complaint for collection of the full amount of the loan including
interests and other charges.
Declaring that the due execution and genuineness of the four
promissory notes has been duly proved, the RTC ruled that although
the Usury Law had been repealed, the interest charged on the loans
was unconscionable and revolting to the conscience and ordered
the payment of the amount of the first 3 loans with a 12% interest
per annum and 1% per month as penalty.
On appeal, Plaintiff-appellants argued that the promissory note,
which consolidated all the unpaid loans of the defendants, is the
law that governs the parties.
The Court of Appeals ruled in favor of the Plaintiff-appellants on the
ground that the Usury Law has become legally inexistent with the
promulgation by the Central Bank in 1982 of Circular No. 905, the
lender and the borrower could agree on any interest that may be
charged on the loan, and ordered the Defendants to pay the
Plaintiffs the sum of P500,000, plus 5.5% per month interest and 2&
service charge per annum , and 1% per month as penalty charges.
Defendants filed the present case via petition for review on
certiorari.
Issue: WON the stipulated 5.5% interest rate per month on the loan
in the sum of P500, 000.00 is usurious.
Held: No.
A stipulated rate of interest at 5.5% per month on the P500, 000.00
loan is excessive, iniquitous, unconscionable and exorbitant, but it
cannot be considered usurious because Central Bank Circular No.

905 has expressly removed the interest ceilings prescribed by the
Usury Law and that the Usury Law is now legally inexistent.
Doctrine: A CB Circular cannot repeal a law. Only a law can repeal
another law.
Jurisprudence provides that CB Circular did not repeal nor in a way
amend the Usury Law but simply suspended the latters effectivity
(Security Bank and Trust Co vs RTC). Usury has been legally non-
existent in our jurisdiction. Interest can now be charged as lender
and borrower may agree upon.
Law: Article 2227, Civil Code
The courts shall reduce equitably liquidated damages, whether
intended as an indemnity or a penalty if they are iniquitous or
unconscionable.
Note: While the Usury Law ceiling on interest rates was lifted by the
CB Circular 905, nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise interest rates to
levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets (Almeda vs. CA, 256 SCRA 292 [1996]).
8. First Metro vs Este del Sol,, GR No. 141811, 15 November 2001,
369 SCRA 99
FACTS
FMIC granted Este del Sol a loan to finance a sports/resort
complex in Montalban, Rizal. Under the agreement, the interest was
16% pa based on the diminishing balance. In case of default, an
acceleration clause was provided and the amount due is subject to
20% one-time penalty on the amount due and such amount shall
bear interest at the highest rate permitted by law. respondent
Credit Transactions
Preference of Credits Case Digests
Reese B. Oguis
executed a REM, individual continuing suretyship and an
underwriting agreement whereby FMIC shall underwrite the public
offering of one P120,000 common shares of respondents capital
stock for one-time underwriting fee of P200,000. For failure to pay
its obligation, FMIC caused the foreclosure of the REM. At the public
auction, FIC was the highest bidder. Petitioner filed to collect for
alleged deficiency balance against respondents since it failed to
collect from the sureties, plus interest at 21% per annum. The trial
court ruled in favor of FMIC. Respondents appealed before the CA
which held that the fees provided for in the Underwriting and
Consultancy Agreements were mere subterfuges to camouflage the
excessively usurious interest charged. The CA ordered FMIC to
reimburse petitioner representing what is due to petitioner and
what is due to respondent.
ISSUE
Whether or not the interests are lawful
HELD
No. an apparently lawful loan is usurious when it is intended
that additional compensation for the loan be disguised by an
ostensibly unrelated contract for the payment by the borrower for
the lenders services which re of little value or which are not in fact
to be rendered. Article 1957 clearly provides: contracts and
stipulations, under any cloak or device whatever, intended to
circumvent the law against usury shall be void. The borrower may
recover in accordance with the laws on usury.
9. Espiritu vs Landrito
10. BANK OF THE PHILIPPINE ISLANDS, INC., Petitioner, vs. SPS.
NORMAN AND ANGELINA YU and TUANSON BUILDERS
CORPORATION represented by PRES. NORMAN YU, Respondents.
Facts:

Second. BPI also imposed a charge of P4, 052,046.11 in attorneys
fees, the equivalent of 10% of the principal, interest, and penalty
charges hi rd. BPI did not provide documents to support its claim
for foreclosure expenses of P446, 726.74 and cost of publication of
P518, 059.21. As an alternative to their three causes of action, the
Yu's claimed that BPI was in estoppel to claim more than the
amount stated in its published notices. Consequently, it must turn
over the excess bid of P6,035,311.46.After pre-trial, the Yu's moved
for summary judgment, pointing out that based on the answer, the
common exhibits of the parties, and the answer to the written
interrogatories to the sheriff, no genuine issues of fact exist in the
case.
The Yus waived their claim for moral damages so the RTC can
dispose of the case through a summary judgment. Initially, the RTC
granted only partial summary judgment. It reduced the penalty
charge of 36% per annum to 12% per annum until the debt would
have been fully paid but Maintained the attorneys fees as
reasonable considering that BPI already waived the P1, 761,511.36
that formed part of the attorneys fees and reduced the rate of
attorneys fees it collected from 25% to 10% of the amount due.
The RTC ruled that facts necessary to resolve the issues on penalties
and fees had been admitted by the parties thus dispensing with the
need to receive evidence. Still, the RTC held that it needed to
receive evidence for the resolution of the issues of
(1) whether or not the foreclosure and publication expenses were
justified;
(2) whether or not the foreclosure of the lot in Pili, Camarines Sur,
was valid given that the proceeds of the foreclosure of the
properties in Legazpi City sufficiently covered the debt; and
(3) whether or not BPI was entitled to its counterclaim for
attorneys fees, moral damages, and exemplary damages.
Credit Transactions
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The Yus moved for partial reconsideration. On January 3,
2006 the RTC reconsidered its earlier decision. BPI appealed the
decision to the Court of Appeals (CA) in CA-G.R. CV 86577. But the
CA rendered judgment on January 23, 2008, affirming the RTC
decision in all respects. And when BPI asked for reconsideration, the
CA denied it on July 14, 2008, hence, the banks recourse to this
Court.
ISSUE: WHETHER OR NOT THE LOAN AGREEMENTS BETWEEN THEM
WERE VALID ANDENFORCEABLE.
RULING:
BPI contends that a summary judgment was not proper given the
following issues that the parties raised:
1) whether or not the loan agreements between them were valid
and enforceable;
2) whether or not the Yus have a cause of action against BPI;
3) whether or not the Yus are proper parties in interest;
4) whether or not the Yus are stopped from questioning the
foreclosure proceeding after entering into a compromise agreement
with Magnacraft;
5) whether or not the penalty charges and fees and expenses of
litigation and publication are excessive; and
6) whether or not BPI violated the Truth in Lending Act.
But these are issues that could be readily resolved based on the
facts established by the pleadings and the admissions of the
parties. Indeed, BPI has failed to name any Bank ruling declared
valid the penalty charges that were stipulated in the promissory
notes. What the Court disallowed in that case was the collection of
a handling charge that the promissory notes did not contain.
The Court has affirmed that financial charges are amply disclosed

if stated in the promissory note in the case of Development Bank of
the Philippines v. Arcilla,Jr.
The Court there said, Under Circular 158 of the Central Bank, the
lender is required to include the information required by R.A. 3765
in the contract covering the credit transaction or any other
document to be acknowledged and signed by the borrower. In
addition, the contract or document shall specify additional charges,
if any, which will be collected in case certain stipulations in the
contract are not met by the debtor.
In this case, the promissory notes signed by the Yus contained data,
including penalty charges, required by the Truth in Lending
Act. They cannot avoid liability based on rigid interpretation of the
Truth in Lending Act that contravenes its goal. Nonetheless, the
courts have authority to reduce penalty charges when these are
unreasonable and iniquitous. Considering that BPI had already
received over P2.7 million in interest and that it seeks to impose the
penalty charge of 3% per month or 36% per annum on the total
amount dueprincipal plus interest, with interest not paid when due
added to and becoming part of the principal and also bearing
interest at the same ratethe Court finds the ruling of the RTC in its
original decision reasonable and fair.
Thus, the penalty charge of 12% per annum or 1% per month is
imposed.
Three:
As for the award of attorneys fee, it beiIn Bank of Philippine Islands
vs. Spouses Norman and Angelina Yu, the Supreme Court explained
that to resolve the issue of the excessive charges allegedly
incorporated into the auction bid price, the RTC simply had to look
at
a) the pleadings of the parties;
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b) the loan agreements, the promissory note, and the real estate
mortgages between them;
c) the foreclosure and bidding documents; and
d) the admissions and other disclosures between the parties during
pre-trial.
Since the parties admitted not only the existence, authenticity, and
genuine execution of these documents but also what they stated,
the trial court did not need to hold a trial for the reception of the
evidence of the parties. Be that as it may, BPI contends that
a summary judgment was not proper given the following issues that
the parties raised:
1) whether or not the loan agreements between them were valid
and enforceable;
2) whether or not the Yus have a cause of action against BPI;
3) whether or not the Yus are proper parties in interest;
4) whether or not the Yus are estopped from questioning the
foreclosure proceeding after entering into compromise agreement
with Magnacraft;
5) whether or not the penalty charges and fees and expenses of
litigation and publication are excessive; and
6) whether or not BPI violated the Truth in Lending Act.(RULES OF
COURT, Rule 35, Section 5).
But, the Supreme Court held that these are issues that could be
readily resolved based on the facts established by the pleadings
and the admissions of the parties.(A.M. No. 03-1-09-SC, Guidelines
to be Observed by Trial Court Judges and Clerks of Court in Conduct
of Pre-trial and Use of Deposition-Discovery Measures, August 16,
2004).
Indeed, BPI has failed to name any document or item of fact that it
would have wanted to adduce at the trial of the case. A trial would
have been such a great waste of time and resources. Otherwise

stated, a summary judgment is apt when the essential facts of the
case are uncontested or the parties do not raise any genuine issue
of fact.(BANK OF THE PHILIPPINE ISLANDS,INC., vs. SPS. NORMAN
AND ANGELINA YU, G.R. No. 184122, January 20, 2010, ABAD, J.).
11. UCPB vs. Beluso (2007)
Facts: In 1996, UCPB granted the spouses Beluso a Promissory
Notes Line under a Credit Agreement whereby the latter could avail
from the former credit of up to a maximum amount of P1.2 Million
pesos for a term ending in April 1997. In addition to the promissory
notes, the spouses Beluso also constituted a real estate mortgage
over parcels of land in Roxas City. Subsequently, the said Credit
Arrangement was amended to extend the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and
to extend the term thereof to February 1998.
The spouses executed three promissory notes which were renewed
several times. In 1997, the payment of the principal and interest of
the latter two promissory notes were debited from the spouses
Belusos account with UCPB; yet, a consolidated loan for P1.3
Million was again released to the spouses Beluso under one
promissory note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line
extended to them by UCPB, the spouses Beluso executed two more
promissory notes for a total of P350 thousand. However, the
spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account
and, thus, claimed that the principal indebtedness was only P2
Million.
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In any case, UCPB applied interest rates on the different promissory
notes ranging from 18% to 34%. During the term of these
promissory notes, the Belusos were able to pay the total sum of
about P760 thousand. However, they failed to pay for the interest
and penalty on their obligations. As a result, UCPB demanded that
they pay their total obligation of P2.9 millionbut the spouses Beluso
failed to comply therewith. Thereafter, UCPB foreclosed the
properties mortgaged by the spouses Beluso to secure their credit
line, which, by that time, already ballooned to nearly P3.8 million.
Two months after the foreclosure, the spouses Beluso filed a
Petition for Annulment, Accounting and Damages against UCPB with
the RTC of Makati City. UCPB moved to dismiss the case on the
ground that the spouses Beluso instituted another case before the
RTC of Roxas City, involving the same parties and issues. UCPB
claims that while the Roxas City case initially appears to be a
different action, as it prayed for the issuance of a temporary
restraining order and/or injunction to stop foreclosure of spouses
Belusos properties, it poses issues which are similar to those of the
present case.
The spouses Beluso claim that the issue in the Roxas City case is the
propriety of the foreclosure before the true account of spouses
Beluso is determined. On the other hand, the issue in the Makati
case is the validity of the interest rate provision. The spouses Beluso
claim that the Roxas City case has become moot because, before
RTC Roxas City could act on the restraining order, UCPB proceeded
with the foreclosure and auction sale. As the act sought to be
restrained has already been accomplished, the spouses Beluso had
to file a different action, that of Annulment of the Foreclosure Sale
with RTC Makati.
RTC ruled in favor of the Belusos. CA affirmed.

Issue: Whether or not the case should be dismissed due to forum
shopping
Held: YES. Even if it is assumed for the sake of argument, however,
that only one cause of action is involved in the two civil actions,
namely, the violation of the right of the spouses Beluso not to have
their property foreclosed for an amount they do not owe, the Rules
of Court nevertheless allows the filing of the second action. The
case in Roxas City was dismissed before the filing of the case with
RTC Makati, since the venue of litigation as provided for in the
Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed
only in the following instances:
(a) That the cause of action is barred by a prior judgment or by the
statute of limitations;
(b) That the claim or demand set forth in the plaintiffs pleading has
been paid, waived, abandoned, or otherwise extinguished; and
(c) That the claim on which the action is founded is unenforceable
under the provisions of the statute of frauds.
When an action is dismissed on the motion of the other party, it is
only when the ground for the dismissal of an action is either of
those aforementioned that the action cannot be refiled. As regards
all the other grounds, the complainant is allowed to file same
action, but should take care that, this time, it is filed with the proper
court or after the accomplishment of the erstwhile absent condition
precedent, as the case may be.
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The MR filed by the Belusos in the Roxas City case that has not yet
been resolved upon the filing of the Makati case does not change
the SCs findings. It is indeed the general rule that in cases where
there are two pending actions between the same parties on the
same issue, it should be the later case that should be dismissed.
However, this rule is not absolute. In the case of Allied Banking v.
CA, it was ruled that: Even if this is not the purpose for the filing of
the first action, it may nevertheless be dismissed if the later action
is the more appropriate vehicle for the ventilation of the issues
between the parties.
Applying the said ruling in the case at bar, the Court found that the
Makati City case is the more proper action in view of the execution
of the foreclosure sale. Moreover, Makati is the proper venue of the
action as mandated by the Credit Agreement. Hence, the Court
deemed that the Makati Case is the more appropriate vehicle for
litigating the issues between the parties, as compared to the Roxas
City case.