[G.R. No. 133632.

February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.

DECISION

QUISUMBING, J.:

This petition for certiorari assails the decision dated February 28, 1997, of the Court of
Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court
affirmed the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No.
11831, for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity)
against private respondents ALS Management and Development Corporation and Antonio K.
Litonjua,[1] consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance
of a writ of preliminary injunction by the private respondents against said petitioner.

The trial court had held that private respondents were not in default in the payment of
their monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was
premature and made in bad faith. It awarded private respondents the amount of P300,000 for
moral damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and expenses
for litigation. It likewise dismissed the foreclosure suit for being premature.

The facts are as follows:

Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment
and Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction
of a house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to
AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents
ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000
balance of Roas indebtedness with AIDC. The latter, however, was not willing to extend the old
interest rate to private respondents and proposed to grant them a new loan of P500,000 to be
applied to Roas debt and secured by the same property, at an interest rate of 20% per annum
and service fee of 1% per annum on the outstanding principal balance payable within ten years
in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum
per day from the date the amortization became due and payable.

Consequently, in March 1981, private respondents executed a mortgage deed containing

the above stipulations with the provision that payment of the monthly amortization shall
commence on May 1, 1981.
 On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum
of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was
liquidated when BPIIC applied thereto the proceeds of private respondents loan of P500,000.

On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be

what was left of their loan after full payment of Roas loan.

In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the
ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30,
1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100
Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984.

On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They
alleged, among others, that they were not in arrears in their payment, but in fact made an
overpayment as of June 30, 1984. They maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan in August and September 1982.
Further, out of the P500,000 loan, only the total amount of P464,351.77 was released to private
respondents. Hence, applying the effects of legal compensation, the balance of P35,648.23
should be applied to the initial monthly amortization for the loan.

On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and
52093, thus:

WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development

Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the
amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77,
with interest at 20% plus service charge of 1% per annum, payable on equal monthly and
successive amortizations at P9,283.83 for ten (10) years or one hundred twenty (120) months.
The amortization schedule attached as Annex A to the Deed of Mortgage is correspondingly
reformed as aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused
their publication in a newspaper of general circulation as defaulting debtors, and therefore
orders BPI to pay ALS and Litonjua the following sums:

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorneys fees and expenses of litigation.

The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.

Costs against BPI.

SO ORDERED.[2]
 Both parties appealed to the Court of Appeals. However, private respondents appeal was
dismissed for non-payment of docket fees.

On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive
portion reads:

WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.

SO ORDERED.[3]

In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the
delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date when BPIIC released the purported
balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness. Thus,
payment of the monthly amortization should commence only a month after the said date, as
can be inferred from the stipulations in the contract. This, despite the express agreement of the
parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the
total amortization due was only P194,960.43. Evidence showed that private respondents had an
overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage
and cause the publication in newspapers concerning private respondents delinquency in the
payment of their loan. This fact constituted sufficient ground for moral damages in favor of
private respondents.

The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this
petition, where BPIIC submits for resolution the following issues:

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT

OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.

II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY
ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
COURT OF APPEALS, 120 SCRA 707.

On the first issue, petitioner contends that the Court of Appeals erred in ruling that because
a simple loan is perfected upon the delivery of the object of the contract, the loan contract in
this case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is
a consensual contract, and a loan contract is perfected at the time the contract of mortgage is
executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the
present case, the loan contract was perfected on March 31, 1981, the date when the mortgage
deed was executed, hence, the amortization and interests on the loan should be computed
from said date.
 Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roas loan. This finds support in the registration on March 31,
1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title of the
property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner
claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC
only agreed to extend a P500,000 loan, private respondents were required to reduce Frank Roas
loan below said amount. According to petitioner, private respondents were only able to do so in
August 1982.

In their comment, private respondents assert that based on Article 1934 of the Civil Code,
[4]
a simple loan is perfected upon the delivery of the object of the contract, hence a real
contract. In this case, even though the loan contract was signed on March 31, 1981, it was
perfected only on September 13, 1982, when the full loan was released to private
respondents.They submit that petitioner misread Bonnevie. To give meaning to Article 1934,
according to private respondents, Bonnevie must be construed to mean that the contract to
extend the loan was perfected on March 31, 1981 but the contract of loan itself was only
perfectedupon the delivery of the full loan to private respondents on September 13, 1982.

Private respondents further maintain that even granting, arguendo, that the loan contract
was perfected on March 31, 1981, and their payment did not start a month thereafter, still no
default took place. According to private respondents, a perfected loan agreement imposes
reciprocal obligations, where the obligation or promise of each party is the consideration of the
other party. In this case, the consideration for BPIIC in entering into the loan contract is the
promise of private respondents to pay the monthly amortization. For the latter, it is the promise
of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with what is incumbent upon
him.Therefore, private respondents conclude, they did not incur in delay when they did not
commence paying the monthly amortization on May 1, 1981, as it was only on September 13,
1982when petitioner fully complied with its obligation under the loan contract.

We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract. [5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to
deliver something by way of simple loan.

In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the corresponding mortgage was executed
and registered. However, because of acts attributable to petitioner, the loan was not released.
Later, petitioner instituted an action for damages. We recognized in this case, a perfected
consensual contract which under normal circumstances could have made the bank liable for not
releasing the loan. However, since the fault was attributable to petitioner therein, the court did
not award it damages.

A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the delivery
of the object of the contract for its perfection and which gives rise to obligations only on the
part of the borrower.[6]

In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua,
on the other, was perfected only on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private respondents obligation to pay
commenced only on October 13, 1982, a month after the perfection of the contract. [7]

We also agree with private respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is the consideration for that of the
other.[8]As averred by private respondents, the promise of BPIIC to extend and deliver the loan is
upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing
on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in
reciprocal obligations that neither party incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. [9] Only when a party has
performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for
the payment of the monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in computing the amount due
as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting
date is October 13, 1982 and not May 1, 1981.

Other points raised by petitioner in connection with the first issue, such as the date of
actual release of the loan and whether private respondents were the cause of the delay in the
release of the loan, are factual. Since petitioner has not shown that the instant case is one of
the exceptions to the basic rule that only questions of law can be raised in a petition for review
under Rule 45 of the Rules of Court, [10] factual matters need not tarry us now. On these points
we are bound by the findings of the appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and
exemplary damages for it did not act maliciously when it initiated the foreclosure
proceedings. It merely exercised its right under the mortgage contract because private
respondents were irregular in their monthly amortization. It invoked our ruling in Social Security
System vs. Court of Appeals, 120 SCRA 707, where we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals the negligence of the appellant is not so gross as to warrant moral and temperate
damages, except that, said Court reduced those damages by only P5,000.00 instead of
eliminating them. Neither can we agree with the findings of both the Trial Court and respondent
Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief that it was
acting in the legitimate exercise of its right under the mortgage contract in the face of irregular
payments made by private respondents and placed reliance on the automatic acceleration
clause in the contract. The filing alone of the foreclosure application should not be a ground for
an award of moral damages in the same way that a clearly unfounded civil action is not among
the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization to
conform to the actual amount of loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely payment.

But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in
bad faith. Consequently, we should rule out the award of moral and exemplary damages. [11]

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed
of mortgage, without checking and correspondingly adjusting its records on the amount actually
released to private respondents and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. [12] For this purpose, the amount
of P25,000 is sufficient.

Lastly, as in SSS where we awarded attorneys fees because private respondents were
compelled to litigate, we sustain the award of P50,000 in favor of private respondents as
attorneys fees.

WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of
damages. The award of moral and exemplary damages in favor of private respondents is
DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD.
Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages.
Costs against petitioner.

SO ORDERED.

PAULINO GULLAS, PLAINTIFF AND APPELLANT, VS. THE PHILIPPINE NATIONAL BANK,
DEFENDANT AND APPELLANT.
 DECISION

MALCOLM, J.:

Both parties to this case appealed from a judgment of the Court of First Instance of Cebu, which
sentenced the defendant to return to the account of the plaintiff the sum of P509, with legal
interest and costs, the plaintiff to secure damages in the amount of P10,000 more or less, and
the defendant to be absolved totally from the amended complaint. As it is conceded that the
plaintiff has already received the sum represented by the United States treasury warrant, which
is in Question, the appeal will thus determine the amount, if any, which should be paid, to the
plaintiff by the defendant.

The parties to the case are Paulino Gullas and the Philippine National Bank. The first named is a
member of the Philippine Bar, resident in the City of Cebu. The second named is a banking
corporation with a branch in the same city. Attorney Gullas has had a current account with the
bank.

It appears from the record that on August 2, 1933, the Treasurer of the United States for the
United States Veterans Bureau issued a warrant in the amount of $361, payable to the order of
Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as indorsers of this check.
Thereupon it was cashed by the Philippine National Bank. Subsequently the treasury warrant
was dishonored by the Insular Treasurer.

At that time the outstanding balance of Attorney Gullas on the books of the bank was P509.
Against this balance he had issued certain checks which could not be paid when the money was
sequestered by the bank. On August 20, 1933, Attorney Gullas left his residence for Manila.

The bank on learning of the dishonor of the treasury warrant sent notices by mail to Mr. Gullas
which could not be delivered to him at that time because he was in Manila. In the bank's letter
of August 21, 1933, addressed to Messrs. Paulino Gullas and Pedro Lopez, they were informed
that the United States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos
for $361 or P722, the payment for which had been received has been returned by our Manila
office with the notation that the payment of his check has been stopped by the Insular
Treasurer. "In view of this therefore we have applied the outstanding balances of your current
accounts with us to the part payment of the foregoing check", namely, Mr. Paulino Gullas P509.
On the return of Attorney Gullas to Cebu on August 31, 1933, notice of dishonor was received
and the unpaid balance of the United States Treasury warrant was immediately paid by him.

As a consequence of these happenings, two occurrences transpired which inconvenienced

Attorney Gullas. In the first place, as above indicated, checks including one for his insurance
were not paid because of the lack of funds standing to his credit in the bank. In the second
place, periodicals in the vicinity gave prominence to the news to the great mortification of
Gullas.
A variety of incidental questions have been suggested on the record which it can be taken for
granted as having been adversely disposed of in this opinion. The main issues are two, namely,
(1) as to the right of the Philippine National Bank to apply a deposit to the debt of a depositor to
the bank, and (2) as to the amount of damages, if any, which should be awarded Gullas,

The Civil Code contains provisions regarding compensation (set off) and deposit. (Articles 1195
et seq., 1758 et seq.) These portions of Philippine law provide that compensation shall take
place when two persons are reciprocally creditor and debtor of each other (Civil Code, article
1195). In this connection, it has been held that the relation existing between a depositor and a
bank is that of creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1930],
55 Phil., 208; San Carlos Milling Co. vs. Bank of the Philippine Islands and China Banking
Corporation [1933], 59 Phil., 59.)

The Negotiable Instruments Law contains provisions establishing the liability of a general
indorser and giving the procedure for notice of dishonor. The general indorser of a negotiable
instrument engages that if it be dishonored and the necessary proceedings of dishonor be duly
taken, he will pay the amount thereof to the holder. (Negotiable Instruments Law, sec. 66.) In
this connection, it has been held by a long line of authorities that notice of dishonor is
necessary in order to charge an indorser and that the right of action against him does not
accrue until the notice is given. (Asia Banking Corporation vs. Javier [1923], 44 Phil., 777; 5
Uniform Laws Annotated.)

As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the
rule is denied, and it is held that a bank has no right, without an order from or special assent of
the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The
basis of the Louisiana doctrine is the theory of confidential contracts arising from irregular
deposits, e. g.f the deposit of money with a banker. With freedom of selection and1 after full
consideration, we have decided to adopt the general rule in preference to the minority rule as
more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., sec.
324; Garrison vs. Union Trust Company, [1905], 111 A. S, R.,,407; Louisiana Civil Code
Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manresa,
Comentarios al Codigo Civil Espanol, 4th ed., 359 et seq.; 11 Manresa, pp. 694 et seq.)

Starting, therefore, from the premise that the Philippine National Bank had with respect to the
deposit of Gullas a right of set off, we next consider if that remedy was enforced properly. The
fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting
for any action by Gullas, the bank made use of the money standing in his account to make good
for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued
checks in good faith.

As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of
a third party, it has been held that he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has applied the funds so deposited in
extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2
Ann. Cas., 203.) The decision cited represents the minority doctrine, for on principle it would
seem that notice is not necessary to a maker because the right is based on the doctrine that the
relationship is that of creditor and debtor. However this may be, as to an indorser the situation
is different, and notice should actually have been given him in order that he might protect his
interests.

We accordingly are of the opinion that the action of the bank was prejudicial to Gullas. But to
follow up that statement with others proving exact damages is not so easy. For instance, for
alleged libelous articles the bank would not be primarily liable. The same remark could be made
relative to the loss of business which Gullas claims but which could not be traced definitely to
this occurrence. Also Gullas having eventually been reimbursed lost little through the actual levy
by the bank on his funds. On the other hand, it was not agreeable for one to draw checks in all
good faith, then, leave for Manila, and on return find that those checks had not been cashed
because of the action taken by the bank. That caused a disturbance in Gullas' finances,
especially with reference to his insurance, which was injurious to him. All facts and
circumstances considered, we are of the opinion that Gullas should be awarded nominal
damages because of the premature action of the bank against which Gullas had no means of
protection, and have finally determined that the amount should be P250.

Agreeable to the foregoing, the errors assigned by the parties will in the main be overruled,
with the result that the judgment of the trial court will be modified by sentencing the defendant
to pay the plaintiff the sum of and the-costs of both instances.

Villa-Real, Imperial, Butte, and Goddard, JJ., doncur.

G.R. NO. L-30511 FEBRUARY 14, 1980

MANUEL M. SERRANO, PETITIONER,

VS.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M. RAMOS,
SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA
RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA, VICTORIA
RAMOS TANJUATCO, AND TEOFILO TANJUATCO, RESPONDENTS.

Rene Diokno for petitioner.

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas Bank of
Manila.

Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the
establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand
Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank of
Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to return the
time deposits made by petitioner and assigned to him, on the ground that respondent Central
Bank failed in its duty to exercise strict supervision over respondent Overseas Bank of Manila to
protect depositors and the general public. 1 Petitioner also prays that both respondent banks be
ordered to execute the proper and necessary documents to constitute all properties fisted in
Annex "7" of the Answer of respondent Central Bank of the Philippines in G.R. No. L-29352,
entitled "Emerita M. Ramos, et al vs. Central Bank of the Philippines," into a trust fund in favor
of petitioner and all other depositors of respondent Overseas Bank of Manila. It is also prayed
that the respondents be prohibited permanently from honoring, implementing, or doing any act
predicated upon the validity or efficacy of the deeds of mortgage, assignment. and/or
conveyance or transfer of whatever nature of the properties listed in Annex "7" of the Answer of
respondent Central Bank in G.R. No. 29352.2

A sought for ex-parte preliminary injunction against both respondent banks was not given by
this Court.

Undisputed pertinent facts are:

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year with
6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent Overseas
Bank of Manila. 3 Concepcion Maneja also made a time deposit, for one year with 6-½% interest,
on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the same respondent
Overseas Bank of Manila.4

On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and
conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent
Overseas Bank of Manila. 5

Notwithstanding series of demands for encashment of the aforementioned time deposits from
the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March 4, 1968,
not a single one of the time deposit certificates was honored by respondent Overseas Bank of
Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the banking
system of the Republic and it exercises supervision over all doing business in the Philippines, but
denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid and
stringent supervision of banks, implying that respondent Central Bank has to watch every move
or activity of all banks, including respondent Overseas Bank of Manila. Respondent Central Bank
claims that as of March 12, 1965, the Overseas Bank of Manila, while operating, was only on a
limited degree of banking operations since the Monetary Board decided in its Resolution No.
322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new loans and
investments in view of its chronic reserve deficiencies against its deposit liabilities. This limited
operation of respondent Overseas Bank of Manila continued up to 1968.7

Respondent Central Bank also denied that it is guarantor of the permanent solvency of any
banking institution as claimed by petitioner. It claims that neither the law nor sound banking
supervision requires respondent Central Bank to advertise or represent to the public any
remedial measures it may impose upon chronic delinquent banks as such action may inevitably
result to panic or bank "runs". In the years 1966-1967, there were no findings to declare the
respondent Overseas Bank of Manila as insolvent. 8

Respondent Central Bank likewise denied that a constructive trust was created in favor of
petitioner and his predecessor in interest Concepcion Maneja when their time deposits were
made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time the
latter was not an insolvent bank and its operation as a banking institution was being salvaged by
the respondent Central Bank. 9

Respondent Central Bank avers no knowledge of petitioner's claim that the properties given by
respondent Overseas Bank of Manila as additional collaterals to respondent Central Bank of the
Philippines for the former's overdrafts and emergency loans were acquired through the use of
depositors' money, including that of the petitioner and Concepcion Maneja. 10

In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines," a
case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila sought to
prevent respondent Central Bank from closing, declaring the former insolvent, and liquidating
its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a motion to
intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal interest as
depositor of the Overseas Bank of Manila in the matter in litigation in that case. Respondent
Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion to intervene in
that case, on the ground that his claim as depositor of the Overseas Bank of Manila should
properly be ventilated in the Court of First Instance, and if this Court were to allow Serrano to
intervene as depositor in G.R. No. L-29352, thousands of other depositors would follow and
thus cause an avalanche of cases in this Court. In the resolution dated October 4, 1968, this
Court denied Serrano's, motion to intervene. The contents of said motion to intervene are
substantially the same as those of the present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final and
executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila, with the
dispositive portion to wit:

WHEREFORE, the writs prayed for in the petition are hereby granted and
respondent Central Bank's resolution Nos. 1263, 1290 and 1333 (that prohibit
the Overseas Bank of Manila to participate in clearing, direct the suspension of
its operation, and ordering the liquidation of said bank) are hereby annulled and
set aside; and said respondent Central Bank of the Philippines is directed to
comply with its obligations under the Voting Trust Agreement, and to desist from
taking action in violation therefor. Costs against respondent Central Bank of the
Philippines. 12

Because of the above decision, petitioner in this case filed a motion for judgment in this case,
praying for a decision on the merits, adjudging respondent Central Bank jointly and severally
liable with respondent Overseas Bank of Manila to the petitioner for the P350,000 time deposit
made with the latter bank, with all interests due therein; and declaring all assets assigned or
mortgaged by the respondents Overseas Bank of Manila and the Ramos groups in favor of the
Central Bank as trust funds for the benefit of petitioner and other depositors. 13

By the very nature of the claims and causes of action against respondents, they in reality are
recovery of time deposits plus interest from respondent Overseas Bank of Manila, and recovery
of damages against respondent Central Bank for its alleged failure to strictly supervise the acts
of the other respondent Bank and protect the interests of its depositors by virtue of the
constructive trust created when respondent Central Bank required the other respondent to
increase its collaterals for its overdrafts said emergency loans, said collaterals allegedly acquired
through the use of depositors money. These claims shoud be ventilated in the Court of First
Instance of proper jurisdiction as We already pointed out when this Court denied petitioner's
motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for
mandamus and prohibition as there is no shown clear abuse of discretion by the Central Bank in
its exercise of supervision over the other respondent Overseas Bank of Manila, and if there was,
petitioner here is not the proper party to raise that question, but rather the Overseas Bank of
Manila, as it did in G.R. No. L-29352. Neither is there anything to prohibit in this case, since the
questioned acts of the respondent Central Bank (the acts of dissolving and liquidating the
Overseas Bank of Manila), which petitioner here intends to use as his basis for claims of
damages against respondent Central Bank, had been accomplished a long time ago.

Furthermore, both parties overlooked one fundamental principle in the nature of bank deposits
when the petitioner claimed that there should be created a constructive trust in his favor when
the respondent Overseas Bank of Manila increased its collaterals in favor of respondent Central
Bank for the former's overdrafts and emergency loans, since these collaterals were acquired by
the use of depositors' money.

Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans
and are to be covered by the law on loans. 14 Current and savings deposit are loans to a bank
because it can use the same. The petitioner here in making time deposits that earn interests
with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and
not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of he
respondent Bank to honor the time deposit is failure to pay s obligation as a debtor and not a
breach of trust arising from depositary's failure to return the subject matter of the deposit

WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.

SO ORDERED.

G.R. NO. 201264, JANUARY 11, 2016

FLORANTE VITUG, PETITIONER, V. EVANGELINE A. ABUDA, RESPONDENT.

DECISION
LEONEN, J.:chanRoblesvirtualLawlibrary

Parties who have validly executed a contract and have availed themselves of its benefits may
not, to escape their contractual obligations, invoke irregularities in its execution to seek its
invalidation.

This is a Petition for Review on Certiorari under Rule 45 assailing the Court of Appeals' October
26, 2011 Decision and its March 8, 2012 Resolution. The Court of Appeals affirmed the Regional
Trial Court's December 19, 2008 Decision upholding the validity of the mortgage contract
executed by petitioner Florante Vitug (Vitug) and respondent Evangeline A. Abuda (Abuda).

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug. 1 As security
for the loan, Vitug mortgaged to Abuda his property in Tondo Foreshore along R-10, Block A-50-
3, Del Pan to Kagitingan Streets, Tondo, Manila.2 The property was then subject of a conditional
Contract to Sell between the National Housing Authority and Vitug. Pertinent portions of the
mortgage deed reads

That, Mortgagor, is the owner, holder of a Conditional Contract to Sell of the National Housing
Authority (NHA) over a piece of property located at the Tondo Foreshore along R-10, Block "A-
50-3, Delpan to Kagitingan Streets in the district of Tondo, Manila;

That, with the full consent of wife Narcisa Vitug, hereby mortgage to Evangeline A. Abuda, with
full consent of husband Paulino Abuda, said property for TWO HUNDRED FIFTY THOUSAND
PESOS ONLY (P250,000.00), in hand paid by Mortgagee and in hand received to full satisfaction
by Mortgagor, for SIX MONTHS (6) within which to pay back the full amount plus TEN PERCENT
(10%) agreed interest per month counted from the date stated hereon;

That, upon consummation and completion of the sale by the NHA of said property, the title-
award thereof, shall be received by the Mortgagee by virtue of a Special Power of Attorney,
executed by Mortgagor in her favor, authorizing Mortgagee to expedite, follow-up, cause the
release and to received [sic] and take possession of the title award of the said property from the
NHA, until the mortgage amount is fully paid for and settled[.] 3ChanRoblesVirtualawlibrary
cralawlawlibrary

On November 17, 1997, the parties executed a "restructured" 4 mortgage contract on the
property to secure the amount of P600,000.00 representing the original P250,000.00 loan,
additional loans,5 and subsequent credit accommodations6 given by Abuda to Vitug with an
interest of five (5) percent per month. 7 By then, the property was covered by Transfer Certificate
of Title No. 234246 under Vitug's name. 8

Spouses Vitug failed to pay their loans despite Abuda's demands. 9

On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the Regional
Trial Court of Manila.10

On December 19, 2008, the Regional Trial Court promulgated a Decision in favor of Abuda. 11The
dispositive portion of the Decision reads

WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] and against the defendant

1. Ordering the defendant to pay unto the court and/or to the judgment debtor within the
reglementary period of Ninety (90) days the principal sum of P600,000.00 with interest at 5%
per month from May 31, 2002 to actual date of payment plus P20,000.00 as and for attorney's
fees;

2. Upon default of the defendant to fully pay the aforesaid sums, the subject mortgaged
property shall be sold at public auction to pay off the mortgage debt and its accumulated
interest plus attorney's fees, expenses and costs; and

3. After the confirmation of the sale, ordering the defendant and all persons claiming rights
under her [sic] to immediately vacate the subject premises.

SO ORDERED.12cralawlawlibrary

Vitug appealed the December 19, 2008 Regional Trial Court Decision before the Court of
Appeals.13 He contended that the real estate mortgage contract he and Abuda entered into was
void on the grounds of fraud and lack of consent under Articles 1318, 1319, and 1332 of the
Civil Code.14 He alleged that he was only tricked into signing the mortgage contract, whose
terms he did not really understand. Hence, his consent to the mortgage contract was vitiated. 15
On October 26, 2011, the Court of Appeals promulgated a Decision, 16 the dispositive portion of
which reads

WHEREFORE, the instant appeal is PARTIALLY GRANTED. The Decision of the RTC dated
December 19, 2008 in Civil Case No. 03-108470 in favor of the appellee and against the
appellant is AFFIRMED with the MODIFICATION that an interest rate of 1% per month or 12%
per annum shall be applied to the principal loan of P600,000.00, computed from the date of
judicial demand, i.e., November 21, 2003; and 12% interest per annum on the amount due from
the date of the finality of the Decision until fully paid.

SO ORDERED.17ChanRoblesVirtualawlibrary
cralawlawlibrary

The Court of Appeals found that Vitug failed to pay his obligation within the stipulated six-
month period under the March 17, 1997 mortgage contract. 18 As a result of this failure, the
parties entered into a restructured mortgage contract on November 17, 1997. 19 The new
mortgage contract was signed before a notary public by Vitug, his wife Narcisa, and witnesses
Rolando Vitug, Ferdinand Vitug, and Emily Vitug.20

The Court of Appeals also found that all the elements of a valid mortgage contract were present
in the parties' mortgage contract.21 The mortgage contract was also clear in its terms—that
failure to pay the P600,000.00 loan amount, with a 5% interest rate per month from November
17, 1997 to November 17, 1998, shall result in the foreclosure of Vitug's mortgaged
property.22 No evidence on record showed that Vitug was defrauded when he entered into the
agreement with Abuda.23

However, the Court of Appeals found that the interest rates imposed on Vitug's loan were
"iniquitous, unconscionable[,] and exorbitant." 24 It instead ruled that a legal interest of 1% per
month or 12% per annum should apply from the judicial demand on November 21,
2003.25cralawred

On November 23, 2011, Vitug moved for the reconsideration of the Court of Appeals' October
26, 2011 Decision.26 He pointed out that not all the requisites of a valid mortgage contract were
present since he did not have free disposal of his property when he mortgaged it to Abuda. His
transfer certificate of title had an annotation by the National Housing Authority, which
restricted his right to dispose or encumber the property. 27 The restriction clause provided that
the National Housing Authority's consent must first be obtained before he may dispose or
encumber his property.28

Abuda, according to Vitug, failed to get the National Housing Authority's consent before the
property was mortgaged to him.
Vitug also argued in his Motion for Reconsideration that the property was exempt from
execution because it was constituted as a family home before its mortgage.

In the Resolution promulgated on March 8, 2012, 29 the Court of Appeals denied Vitug's Motion
for Reconsideration.

Vitug filed this Petition for Review on Certiorari under Rule 45 to assail the Court of Appeals'
October 26, 2011 Decision and its March 8, 2012 Resolution.

Vitug raises the following issues:chanRoblesvirtualLawlibrary

First, whether petitioner Florante Vitug may raise in this Petition issues regarding the National
Housing Authority's alleged lack of consent to the mortgage, as well as the exemption of his
property from execution;

Second, whether the restriction clause in petitioner's title rendered invalid the real estate
mortgage he and respondent Evangeline Abuda executed; and

Lastly, whether petitioner's property is a family home that is free from execution, forced sale, or
attachment under the Family Code.30

We deny the Petition.

Petitioner argues that not all the requisites of a valid mortgage are present. 31 A mortgagor must
have free disposal of the mortgaged property. 32 The existence of a restriction clause33 in his title
means that he does not have free disposal of his property. 34 The restriction clause does not
allow him to mortgage the property without the National Housing Authority's approval. 35 Since
the National Housing Authority never gave its consent to the mortgage, 36 the mortgage contract
between him and respondent is invalid.37

On the other hand, respondent argues that the only issue in this case should be the validity of
the real estate mortgage executed by petitioner in her favor. 38 Petitioner raised other issues,
such as the alleged lack of written consent by the National Housing Authority (and the
property's exemption from execution), only in his Motion for Reconsideration before the Court
of Appeals.39

Respondent also argues that the National Housing Authority issued a Permit to Mortgage the
property. This was formally offered in evidence before the Regional Trial Court as Exhibit
"E."40 The National Housing Authority even accepted respondent's personal checks to settle
petitioner's mortgage obligations to the National Housing Authority. 41 The National Housing
Authority would have already foreclosed petitioner's property if not for the loan that
respondent extended to petitioner.42

Petitioner counters that the Permit to Mortgage cited by respondent was only valid for 90 days
and was subject to the conditions that respondent failed to fulfill. These conditions are

(1) The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction
sale so that it can participate in the foreclosure sale of the property."

(2) The mortgage contract must be submitted to NHA for verification and final approval[.] 43

Thus, according to petitioner, there was neither written consent nor approval by the National
Housing Authority of the mortgage contracts.44cralawlawlibrary

Petitioner further contends that the alleged lack of NHA consent on the mortgage (and, being a
family home, his property's exemption from execution) was raised in his Answer to respondent's
complaint for foreclosure filed before the Regional Trial Court, thus

20. Similarly, defendant has constituted their family home over said mortgage property and
should that property be sold, defendant and his family will be left with no place to reside with
[sic] within Metro Manila, hence, for humanitarian reason[s], the defendant prayed that he be
given ample time within which to settle his obligation with the plaintiff;

21. Lastly, the Memorandum of Encumbrances contained at the back of defendant's title
prohibits her from selling, encumbering, mortgaging, leasing, sub-leasing or in any manner
altering or disposing the lot or right thereon, in whole or in part within the period often (10)
years from the time of issuance of said title without first obtaining the consent of the NHA. As
reflected in the title, the same was issued on 25 June 1997 hence, the mortgage executed even
prior to the issuance of said title should be declared void. 45ChanRoblesVirtualawlibrary
cralawlawlibrary

I
Due process46 dictates that arguments not raised in the trial court may not be considered by the
reviewing court.47

Petitioner may raise in his Petition the issues of lack of the National Housing Authority's consent
to the mortgage and his property's alleged exemption from execution.
The records show that petitioner mentioned these issues as early as in his Answer to
respondent's Complaint48 and Pre-trial Brief.49 The trial court acknowledged these issues, but
found that his defenses based on these grounds could not be given credence

The defendant further stated that he is willing to pay the obligation is unconscionable. Further,
the said property constituted their family home. The defendant claimed that Memorandum of
Encumbrance prohibits her from selling, encumbering, mortgaging, leasing, subleasing or in any
manner altering or disposing the lot or right thereon in whole or in part within ten (10) years
from the time of issuance of the said title without obtaining the consent of the NHA.

. . . The court opines that the defendant has failed to raise a legitimate and lawful ground in
order to bar the herein plaintiff from asserting its lawful right under the law.

The contention of the defendant that the subject mortgaged property is their family home is
irrelevant as the debt secured by mortgages on the premises before or after the constitution of
the family home does not exempt the same from execution (Rule 106 of the Rules of
Court).50cralawlawlibrary

Whether these arguments seasonably raised are valid is, however, a different matter.

II

All the elements of a valid mortgage contract were present. For a mortgage contract to be valid,
the absolute owner of a property must have free disposal of the property. 51 That property must
be used to secure the fulfillment of an obligation. 52 Article 2085 of the Civil Code provides

Art. 2085. The following requisites are essential to contracts of pledge and mortgage

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.

Petitioner, who held under his name a transfer certificate of title to the property, mortgaged the
property to respondent to secure the payment of his loan of P600,000.00.

Petitioner claims that he only borrowed P250,000.00 and that he was only made to sign another
mortgage contract whose terms he did not agree to.
These claims were already found by the trial court and the Court of Appeals to be unsupported
by evidence. Petitioner's consent to the mortgage contract dated November 17, 1997 was not
vitiated. He voluntarily signed it in the presence of a notary public, his wife, and other
witnesses.53

Further, the amount of P600,000.00 under the November 17, 1997 mortgage contract
represented the initial loan of P250,000.00 and the subsequent loan amounts, which were
found to have been actually released to petitioner. The November 17, 1997 mortgage contract
reflected the changes in the parties' obligations after they executed the March 17, 1997
mortgage contract.

This court is not a trier of facts. As a general rule, findings of fact of the lower court and of the
Court of Appeals are not reviewable and are binding upon this court 54 unless the circumstances
of the case are shown to be covered by the exceptions. 55 Petitioner failed to show any ground
for this court to review the trial court's and the Court of Appeals' finding that petitioner
mortgaged his property in consideration of a loan amounting to P600,000.00.

Petitioner's undisputed title to and ownership of the property is sufficient to give him free
disposal of it. As owner of the property, he has the right to enjoy all attributes of ownership
including jus disponendi or the right to encumber, alienate, or dispose his property "without
other limitations than those established by law."56

Petitioner's claim that he lacks free disposal of the property stems from the existence of the
restrictions imposed on his title by the National Housing Authority. These restrictions were
annotated on his title, thus

Entry No. 4519/V-013/T-234246 -RESTRICTION-that the Vendee shall not sell, encumber,
mortgage, lease, sub-let or in any manner, alter or dispose the lot or right therein at any time, in
whole or in part without obtaining the written consent of the Vendor. Other restrictions set
forth in Doc. No. 287; Page No. 59; Book No. 250; SERIES of 1997 of Notary Public for Quezon
City, Liberty S. Perez.

Date of instrument - June 24, 1997

Date of inscription- June 25, 1997- 11:39 a.m.

The National Housing Authority's restrictions were provisions in a contract it executed with
petitioner. This contract bound petitioner to certain conditions before transferring or
encumbering the property. Specifically, when the National Housing Authority sold the property
to petitioner, petitioner became obligated not to sell, encumber, mortgage, lease, sublease,
alter, or dispose the property without the National Housing Authority's consent.
These restrictions do not divest petitioner of his ownership rights. They are mere burdens or
limitations on petitioner's jus disponendi. Thus, petitioner may dispose or encumber his
property. However, the disposition or encumbrance of his property is subject to the limitations
and to the rights that may accrue to the National Housing Authority. When annotated to the
title, these restrictions serve as notice to the whole world that the National Housing Authority
has claims over the property, which it may enforce against others.

Contracts entered into in violation of restrictions on a property owner's rights do not always
have the effect of making them void ab initio.58 This has been clarified as early as 1956
in Municipality of Camiling v. Lopez.59

The Municipality of Camiling sought to collect from Diego Z. Lopez payments for the lease of
"certain fisheries." As. a defense, Diego Z. Lopez invoked the alleged nullity of the lease contract
he entered into with the Municipality of Camiling.

Citing Municipality of Hagonoy v. Evangelista,60 the trial court ruled that the lease contract
between the Municipality of Camiling and Diego Z. Lopez was void since it "was not approved by
the provincial governor in violation of section 2196 of the Revised Administrative Code." 61 This
court reversed the trial court's Decision and noted the incorrect interpretation in Municipality
of Hagonoy of the term "nulos" under Article 4 of the then Civil Code: "Son nulos los actos
ejecutados contra lo dispuesto en la ley, salvo los casos en que la naisma ley or dene su
validez."62

In Municipality of Camiling, this court explained that void acts declared in Article 4 of the Old
Civil Code63refer to those made in violation of the law. Not all those acts are void from the
beginning. Void acts may be "those that are ipso facto void and those which are merely
voidable."64

The lease contract executed by the Municipality of Camiling and Diego Z. Lopez was not treated
as ipso facto void. Section 2196 of the Administrative Code required the provincial governor's
approval before the municipal council entered into contracts. However, the same provision did
not prohibit the municipal council from entering into contracts involving the properties of the
municipality.65 The municipal council's exercise of power to enter into these contracts might
have been limited, but its power was recognized. This court found that aside from the lack of
approval, the contract had no badge of illegality that would make it ipso facto void. The
execution of the contract was not tainted with violation of public order, morality, or public
policy. The contract could have been ratified. Hence, this court said that it was "merely voidable
at the option of the party who in law is granted the right to invoke its invalidity." 66

The same doctrine was repeated in Sarmiento v. Salud,67 which involved a property in
Kamuning, Quezon City. The property was sold by Philippine Homesite and Housing Corp. to
Spouses Francisco and Marcelina Sarmiento. The transfer certificate of title that covered the
property contained an annotation stating that the property was sold on the condition that it
could not be resold within 25 years from contract date. Sale could be made within the period
only to People's Homesite and Housing Corporation. 68 Spouses Sarmiento later mortgaged the
property to Jorge Salud. Because Spouses Sarmiento failed to redeem the property, the sheriff
auctioned and sold the property to Jorge Salud, who was issued a certificate of sale.

Spouses Sarmiento sought to prevent the foreclosure of the property by filing an action for
annulment of the foreclosure proceedings, sale, and certificate of sale on the ground that the
prohibition against sale of the property within 25 years was violated.

This court did not declare the contract void for violating the condition that the property could
not be resold within 25 years. Instead, it recognized People's Homesite and Housing
Corporation's right to cause the annulment of the contract. Since the condition was made in
favor of People's Homesite and Housing Corporation, it was the Corporation, not Spouses
Sarmiento, who had a cause of action for annulment. 69In effect, this court considered the
contract between Spouses Sarmiento and Jorge Salud as merely voidable at the option of
People's Homesite and Housing Corporation.

Thus, contracts that contain provisions in favor of one party may be void ab initio or
voidable.70 Contracts that lack consideration,71 those that are against public order or public
policy,72 and those that are attended by illegality 73 or immorality74 are void ab initio.

Contracts that only subject a property owner's property rights to conditions or limitations but
otherwise contain all the elements of a valid contract are merely voidable by the person in
whose favor the conditions or limitations are made. 75

The mortgage contract entered into by petitioner and respondent contains all the elements of a
valid contract of mortgage. The trial court and the Court of Appeals found no irregularity in its
execution. There was no showing that it was attended by fraud, illegality, immorality, force or
intimidation, and lack of consideration.

At most, therefore, the restrictions made the contract entered into by the parties voidable 76 by
the person in whose favor they were made—in this case, by the National Housing
Authority.77 Petitioner has no actionable right or cause of action based on those restrictions. 78

Having the right to assail the validity of the mortgage contract based on violation of the
restrictions, the National Housing Authority may seek the annulment of the mortgage
contract.79 Without any action from the National Housing Authority, rights and obligations,
including the right to foreclose the property in case of non-payment of the secured loan, are still
enforceable between the parties that executed the mortgage contract.

The voidable nature of contracts entered into in violation of restrictions or conditions

necessarily implies that the person in whose favor the restrictions were made has two (2)
options. It may either: (1) waive 80its rights accruing from such restrictions, in which case, the
duly executed subsequent contract remains valid; or (2) assail the subsequent contract based on
the breach of restrictions imposed in its favor.
In Sarmiento, this court recognized that the right to waive follows from the right to invoke any
violation of conditions under the contract. Only the person who has the right to invoke this
violation has the cause of action for annulment of contract. The validity or invalidity of the
contract on the ground of the violation is dependent on whether that person will invoke this
right. Hence, there was effectively a waiver on the part of People's Homesite and Housing
Corporation when it did not assail the validity of the mortgage in that case

It follows that on the assumption that the mortgage to appellee Salud and the foreclosure sale
violated the condition in the Sarmiento contract, only the PHHC was entitled to invoke the
condition aforementioned, and not the Sarmientos. The validity or invalidity of the sheriffs
foreclosure sale to appellant Salud thus depended exclusively on the PHHC; the latter could
attack the sale as violative of its right of exclusive reacquisition; but it (PHHC) also could waive
the condition and treat the sale as good, in which event, the sale can not be assailed [for]
breach of the condition aforestated. Since it does not appear anywhere in the record that the
PHHC treated the mortgage and foreclosure sale as an infringement of the condition, the
validity of the mortgage, with all its consequences, including its foreclosure and sale thereat,
can not be an issue between the parties to the present case. In the last analysis, the appellant,
as purchaser at the foreclosure sale, should be regarded as the owner of the lot, subject only to
the right of PHHC to have his acquisition of the land set aside if it so desires. 81cralawlawlibrary

There is no showing that the National Housing Authority assailed the validity of the mortgage
contract on the ground of violation of restrictions on petitioner's title. The validity of the
mortgage contract based on the restrictions is not an issue between the parties. Petitioner has
no cause of action against respondent based on those restrictions. The mortgage contract
remains binding upon petitioner and respondent.

In any case, there was at least substantial compliance with the consent requirement given the
National Housing Authority's issuance of a Permit to Mortgage. The Permit reads

25 November 1997

MR. FLORANTE VITUG

901 Del Pan Street
Tondo, Manila

PERMIT TO MORTGAGE

Dear Mr. Vitug,

Please be informed that your request dated 20 November 1997 for permission to mortgage
Commercial Lot 5, Block 1, Super Block 3, Area I, Tondo Foreshore Estate Management Project
covered by TCT No. 234246 is hereby GRANTED subject to the following terms and conditions

1. The Mortgage Contract must provide that

"In the event of foreclosure, the NHA shall be notified of the date, time and place of the auction
sale so that it can participate in the foreclosure sale of the property."

2. The mortgage contract must be submitted to NHA for verification and final approval; and

3. This permit shall be good only for a period of ninety (90) days from date of receipt hereof.

Very truly yours,

(Signed)
Mariano M. Pineda
General Manager82

Petitioner insists that the Permit cannot be treated as consent by the National Housing
Authority because of respondent's failure to comply with its conditions.

However, a reading of the mortgage contract executed by the parties on November 17, 1997
shows otherwise. The November 17, 1997 mortgage contract had references to the above
conditions imposed by the National Housing Authority, thus

It is the essence of this Contract, that if and should the Mortgagor fails to comply and pay the
principal obligations hereon within the period of the Contract, the Mortgage shall be foreclosed
according to law and in which case the NHA shall be duly notified of the matter.

That this mortgage contract shall be submitted to the NHA for verifixation [sic] and final
approval in accordance with NHA permit to mortgage the property. 83(Emphasis
supplied)cralawlawlibrary

Assuming there was non-compliance with the conditions set forth in the Permit, petitioner
cannot blame respondent. The restrictions were part of the contract between the National
Housing Authority and petitioner. It was petitioner, not respondent, who had the obligation to
notify and obtain the National Housing Authority's consent within the prescribed period before
sale or encumbrance of the property.

Petitioner cannot invoke his own mistake to assail the validity of a contract he voluntarily
entered into.84

III
Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the
contract's validity as against the other because they were equally at fault. 85 This is the principle
of in pari delicto (or in delicto) as embodied in Articles 1411 and 1412 of the Civil Code

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no
action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal
Code relative to the disposal of effects or instruments of a crime shall be applicable to the
things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to comply with his promise.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed

(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply
his promise.

Under this principle, courts shall not aid parties in their illegal acts. 86 The court shall leave them
as they are.87 It is an equitable principle that bars parties from enforcing their illegal acts,
assailing the validity of their acts, or using its invalidity as a defense. 88

In the 1906 case of Batarra v. Marcos,89 this court declared that a person cannot enforce a
promise to marry based on the consideration of "carnal connection." This court ruled that
whether or not such consideration was a crime, neither of the parties can recover because the
acts "were common to both parties." 90

In Bough v. Cantiveros,91 this court refused to enforce in favor of the guilty parties a contract of
sale that was not only simulated but also executed to defeat any attempt by a husband to
recover properties from his wife.

Another case, Liguez v. Court of Appeals,92 involves a party's claim over a property based on a
deed of donation executed in her favor when she was 16 years old. The heirs of the donor
assailed the donation on the ground of having an illicit causa.

The donor in that case was found to have had sexual relations with the claimant. The donation
was done to secure the claimant's continuous cohabitation with the donor, as well as to gratify
the donor's sexual impulses. At the time of the donation, the donor was married to another
woman. The donated property was part of their conjugal property.

This court held that the donation was founded on an illicit causa. While this court found the
principle of in pari delicto inapplicable in that case given the claimant's minority at the time of
donation, it had the occasion to say that the parties were barred "from pleading the illegality of
the bargain either as a cause of action or as a defense." 93 The claimant was declared entitled to
the donated property, without prejudice to the share and legitimes of the donor's forced heirs.

In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court ruled that the petitioners in
that case were not entitled to relief because they did not come to court with clean hands.

This court found that they "readily participated in a ploy to circumvent the Rural Banks Act and
offered no objection when their original loan of P350,000.00 was divided into small separate
loans not exceeding P50,000.00 each." 95 They and respondent bank were in pari delicto. They
could not be given affirmative relief against each other. 96 Hence, Spouses Villegas may not seek
the annulment of the loan and mortgage contracts they voluntarily executed with respondent
bank on the ground that these contracts were simulated to make it appear that the loans were
sugar crop loans, allowing respondent bank to approve it pursuant to Republic Act No. 720,
otherwise known as the Rural Banks Act.

The principle of in pari delicto admits exceptions. It does not apply when the result of its
application is clearly against statutory law, morals, good customs, and public policy. 97

In Philippine Banking Corporation, representing the Estate of Justina Santos v. Lui She,98 this
court refused to apply the principle of in pari delicto. Applying the principle meant that this
court had to declare as valid between the parties a 50-year lease contract with option to buy,
which was executed by a Filipino and a Chinese citizen. This court ruled that the policy to
conserve land in favor of Filipinos would be defeated if the principle of in pari delicto was
applied instead of setting aside the contracts executed by the parties. 99

Petitioner in this case did not come to this court with clean hands. He was aware of the
restrictions in his title when he executed the loan and mortgage contracts with respondent. He
voluntarily executed the contracts with respondent despite this knowledge. He also availed
himself of the benefits of the loan and mortgage contract. He cannot now assail the validity of
the mortgage contract to escape the obligations incurred because of it. 100

Petitioner also failed to show that upholding the validity of the mortgage contract would be
contrary to law, morals, good customs, and public policy.

Petitioner's contract with the National Housing Authority is not a law prohibiting the transfer or
encumbrance of his property. It does not render subsequent transactions involving the property
a violation of morals, good customs, and public policy. Violation of its terms does not render
subsequent transactions involving the property void ab initio.101 It merely provides the National
Housing Authority with a cause of action to annul subsequent transactions involving the
property.

IV

Petitioner argues that the property should be exempt from forced sale, attachment, and
execution, based on Article 155 of the Family Code. 102 Petitioner and his family have been
neighbors with respondent since 1992, before the execution of the mortgage contract. 103

Even though petitioner's property has been constituted as a family home, it is not exempt from
execution. Article 155 of the Family Code explicitly provides that debts secured by mortgages
are exempted from the rule against execution, forced sale, or attachment of family home

Art. 155. The family home shall be exempt from execution, forced sale or attachment except

(3) For debts secured by mortgages on the premises before or after such
constitution[.]cralawlawlibrary

Since petitioner's property was voluntarily used by him as security for a loan he obtained from
respondent, it may be subject to execution and attachment.

The Court of Appeals correctly found that the interest rates of 5% or 10% per month imposed
on petitioner's loan were unconscionable.

Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the
implementation of the Usury Law ceiling on interest effective January 1, 1983. 104

The freedom to stipulate interest rates is granted under the assumption that we have a perfectly
competitive market for loans where a borrower has many options from whom to borrow. It
assumes that parties are on equal footing during bargaining and that neither of the parties has a
relatively greater bargaining power to command a higher or lower interest rate. It assumes that
the parties are equally in control of the interest rate and equally have options to accept or deny
the other party's proposals. In other words, the freedom is granted based on the premise that
parties arrive at interest rates that they are willing but are not compelled to take either by force
of another person or by force of circumstances. 105

However, the premise is not always true. There are imperfections in the loan market. One party
may have more bargaining power than the other. A borrower may be in need of funds more
than a lender is in need of lending them. In that case, the lender has more commanding power
to set the price of borrowing than the borrower has the freedom to negotiate for a lower
interest rate.

Hence, there are instances when the state must step in to correct market imperfections
resulting from unequal bargaining positions of the parties.

Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety,
and welfare106chanroblesvirtuallawlibrary

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not contrary to law, morals, good customs,
public order, or public policy.cralawlawlibrary

In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor
unconscionable. Iniquitous or unconscionable interest rates are illegal and, therefore, void for
being against public morals.107 The lifting of the ceiling on interest rates may not be read as
"grant[ing] lenders carte blanche[authority] to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets." 108

Voluntariness of stipulations on interest rates is not sufficient to make the interest rates
valid.109 In Castro v. Tan

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in
law, in principles of justice, or in the human conscience nor is there any reason whatsoever
which may justify such imposition as righteous and as one that may be sustained within the
sphere of public or private morals.111cralawlawlibrary

Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary
power to equitably reduce it if it is later found to be iniquitous or unconscionable. 112 Courts
approximate what the prevailing market rate would have been under the circumstances had the
parties had equal bargaining power.

An interest rate is not inherently conscionable or unconscionable. Interest rates become

unconscionable in light of the context in which they were imposed or applied. In Medel v. Court
of Appeals,113 this Court ruled that the stipulated interest of 5.5% or 66% per annum was
unconscionable and contrary to morals. It was declared void. This court reduced the interest
rate to 1% per month or 12% per annum. 114

This court also ruled that the interest rates of 3%, 5%, and 10% per month were
unconscionable, thus justifying the need to reduce the interest rates to 12% per annum. 115
On the other hand, despite rulings that interest rates of 3% and 5% per month are
unconscionable, this court in Toledo v. Hydenu116 found that the interest rate of 6% to 7% per
month was not unconscionable. This court noted circumstances that differentiated that case
from Medel and found that the borrower in Toledo was not in dire need of money when she
obtained a loan; this implied that the interest rates were agreed upon by the parties on equal
footing. This court also found that it was the borrower in Toledo who was guilty of inequitable
acts

Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their
indebtedness from the very beginning and when their obligations ballooned into a staggering
sum, the creditors filed a collection case against them. In this case, there was no urgency of the
need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan
transactions. She used the money from the loans to make advance payments for prospective
clients of educational plans offered by her employer. In this way, her sales production would
increase, thereby entitling her to 50% rebate on her sales. This is the reason why she did not
mind the 6% to 7% monthly interest. Notably too, a business transaction of this nature between
Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed
amount of interest until she ordered for stop payment on some of the checks issued to
Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and
then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly
iniquitous or unconscionable and, hence, contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same
carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when
she availed of said loans, an advance interest of 6% to 7% was already deducted from the loan
amount, yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per
month and paying for the same, Jocelyn cannot now go to court to have the said interest rate
annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and
absolutely revolting to the conscience of man. "This is so because among the maxims of equity
are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with
clean hands. The latter is a frequently stated maxim which is also expressed in the principle that
he who has done inequity shall not have equity. It signifies that a litigant may be denied relief by
a court of equity on the ground that his conduct has been inequitable, unfair and dishonest, or
fraudulent, or deceitful as to the controversy in issue."

We are convinced that Jocelyn did not come to court for equitable relief with equity or with
clean hands. It is patently clear from the above summary of the facts that the conduct of Jocelyn
can by no means be characterized as nobly fair, just, and reasonable. This Court likewise notes
certain acts of Jocelyn before filing the case with the RTC. In September 1998, she requested
Marilou not to deposit her checks as she can cover the checks only the following month. On the
next month, Jocelyn again requested for another extension of one month. It turned out that she
was only sweet-talking Marilou into believing that she had no money at that time. But as
testified by Serapio Romarate, an employee of the Bank of Commerce where Jocelyn is one of
their clients, there was an available balance of P276,203.03 in the latter's account and yet she
ordered for the stop payments of the seven checks which can actually be covered by the
available funds in said account. She then caught Marilou by surprise when she surreptitiously
filed a case for declaration of nullity of the document and for damages. 117 (Emphases supplied,
citations omitted)cralawlawlibrary

Under the circumstances of this case, we find no reason to uphold the stipulated interest rates
of 5% to 10% per month on petitioner's loan. Petitioner obtained the loan out of extreme
necessity. As pointed out by respondent, the property would have been earlier foreclosed by
the National Housing Authority if not for the loan. Moreover, it would be unjust to impose a
heavier burden upon petitioner, who would already be losing his and his family's home.
Respondent would not be unjustly deprived if the interest rate is reduced. After all, respondent
still has the right to foreclose the property. Thus, we affirm the Court of Appeals Decision to
reduce the interest rate to 1% per month or 12% per annum.

However, we modify the rates in accordance with the guidelines set forth in Nacar v. Gallery
Frames

118
chanroblesvirtuallawlibrary

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e.,
a loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. In the absence of stipulation, the rate of interest shall
be 6% 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.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code), but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
 3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2,
above, shall be 6% per annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest
fixed therein.119cralawlawlibrary

Thus, the interest rate for petitioner's loan should be further reduced to 6% per annum from
July 1, 2013 until full satisfaction.

WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated October 26, 2011 and
its Resolution dated March 8, 2012 are AFFIRMED. The interest rate for the loan of P600,000.00
is further reduced to 6% per annum from July 1, 2013 until fully paid.

SO ORDERED.chanroblesvirtuallawlibrary

[G.R. NO. L-38427. MARCH 12, 1975.]

CENTRAL BANK OF THE PHILIPPINES AS LIQUIDATOR OF THE FIDELITY SAVINGS

BANK, PETITIONER, V. HONORABLE JUDGE JESUS P. MORFE, AS PRESIDING JUDGE OF BRANCH
XIII, COURT OF FIRST INSTANCE OF MANILA, SPOUSES AUGUSTO AND ADELAIDA PADILLA AND
SPOUSES MARCELA AND JOB ELIZES, RESPONDENTS.

F.E. EVANGELISTA & AGAPITO S. FAJARDO FOR PETITIONER.

JUAN C. NABONG, JR. FOR RESPONDENT SPOUSES AUGUSTO AND ADELAIDA PADILLA.

ALBERT R. PALACIO FOR RESPONDENT SPOUSES MARCELA AND JOB ELIZES.

SYNOPSIS
Private respondents secured against Savings Bank, after the same had been declared insolvent,
final judgments for the recovery of the balance of their time deposits. Payment of the same as
preferred credits evidenced by final judgments in accordance with Article 2244 (14) (b) of the
Civil Code was directed by the liquidation court. From this order, the Central Bank appealed
by certiorari.

The Supreme Court held that Art. 2244 (14) (b) of the Civil Code does not apply and the
judgments obtained by the respondents against the involvent savings bank do not enjoy
preference.

Orders of the lower court reversed and set aside.

SYLLABUS

1. BANKS: CLAIMS AND CREDITS AGAINST AN INSOLVENT BANK; JUDGMENT OBTAINED AFTER
DECLARATION OF INSOLVENCY NOT A PREFERRED CLAIM. — Article 2244 (14)(b) of the Civil
Code on preferred credits does not apply to judgments for the payment of the deposits in an
insolvent savings bank which obtained after the declaration of insolvency.

2. ID.; ID.; ID.; RATIONALE. — A contrary rule on practice would be productive of injustice,
mischief and confusion. To recognize such judgments as entitled to priority would mean that
depositors in insolvent banks, after learning that the bank is insolvent as shown by the fact that
it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the
Monetary Board from doing business, would rush to the courts to secure judgments for the
payment of their deposits. In such eventuality, the courts would be swamped with suits of that
character. Some of the judgments would be default judgment. Depositors armed with such
judgments would pester the liquidation court with claims for preference on the basis of Article
2244 (14)(b) of the Civil Code. Less alert depositors would be prejudiced. That inequitable
situation could not have been contemplated by the framers of section 29 of the General
Banking Law on the proceedings upon insolvency.

3. ID.; ID.; ASSETS OF INSOLVENT BANK HELD IN TRUST FOR THE EQUAL BENEFIT OF ALL
CREDITORS. — "The general principle of equality that the assets of an insolvent are to be
distributed ratably among general creditors applies with full force to the distribution of the
assets of a bank. A general depositor of a bank is merely a general creditor, and, as such, is not
entitled to any preference or priority over other general creditors. The assets of a bank in
process of liquidation are held in trust for the equal benefit of all creditors, and one cannot be
permitted to obtain an advantage or preference over, another by an attachment, execution or
otherwise.

4. ID.; ID.; EFFECT OF JUDGMENT OBTAINED BY A CREDITOR.— The effect of a judgment

obtained against it by a creditor is only to fix the amount of debt. He can acquire no lien which
will give him any preference or advantage over other general creditors.

DECISION

AQUINO, J.:
This case involves the question of whether a final judgment for the payment of a time deposit in
a savings bank, which judgment was obtained after the bank was declared insolvent, is a
preferred claim against the bank. The question arises under the following facts:chanrob1es
virtual 1aw library

On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The
Board directed the Superintendent of Banks to take charge of its assets, forbade it to do
business, and instructed the Central Bank Legal Counsel to take appropriate legal actions
(Resolution No. 350).

On December 9, 1969 the Board resolved to seek the court’s assistance and supervision in the
liquidation of the bank. The resolution was implemented only on January 25, 1972 when the
Central Bank of the Philippines filed the corresponding petition for assistance and supervision in
the Court of First Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).

Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or,
specifically, sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a
complaint in the Court of First Instance of Manila against the Fidelity Savings Bank for the
recovery of the sum of P50,584 as the balance of their time deposits (Civil Case No. 82520
assigned to Branch I).

In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was
ordered to pay the Elizes spouses the sum of P50,584 plus accumulated interest.

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses
Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the
Fidelity Savings Bank for the sums of P80,000 as the balance of their time deposits, plus
interests, P70,000 as moral and exemplary damages and P9,600 as attorney’s fees (Civil Case
No. 84200 where the action was filed on September 6, 1971).

In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having
cognizance of the liquidation proceeding), upon motions of the Elizes and Padilla spouses and
over the opposition of the Central Bank, directed the latter, as liquidator, to pay their time
deposits as preferred credits, evidenced by final judgments, within the meaning of article
2244(14)(b) of the Civil Code, if there are enough funds in the liquidator’s custody in excess of
the credits more preferred under section 30 of the Central Bank Law in relation to articles 2244
and 2251 of the Civil Code.

From the said order, the Central Bank appealed to this Court by certiorari. It contends that the
final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because
(a) they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the
charter of the Central Bank and the General Banking Law, no final judgment can be validly
obtained against an insolvent bank.
Republic Act No. 265 provides:jgc:chanrobles.com.ph

"SEC. 29. Proceedings upon insolvency. — Whenever, upon examination by the Superintendent
or his examiners or agents into the condition of any banking institution, it shall be disclosed that
the condition of the same is one of insolvency, or that its continuance in business would involve
probable loss to its depositors or creditors, it shall be the duty of the Superintendent forthwith,
in writing, to inform the Monetary Board of the facts, and the Board, upon finding the
statements of the Superintendent to be true, shall forthwith forbid the institution to do
business in the Philippines and shall take charge of its assets and proceeds according to law.

"The Monetary Board shall thereupon determine within thirty days whether the institution may
be reorganized or otherwise placed in such a condition so that it may be permitted to resume
business with safety to its creditors and shall prescribe the conditions under which such
resumption of business shall take place. In such case the expenses and fees in the
administration of the institution shall be determined by the Board and shall be paid to the
Central Bank out of the assets of such banking institution.

"At any time within ten days after the Monetary Board has taken charge of the assets of any
banking institution, such institution may apply to the Court of First Instance for an order
requiring the Monetary Board to show cause why it should not be enjoined from continuing
such charge of its assets, and the court may direct the Board to refrain from further proceedings
and to surrender charge of its assets.

"If the Monetary Board shall determine that the banking institution cannot resume business
with safety to its creditors, it shall, by the Solicitor General, file a petition in the Court of First
Instance reciting the proceedings which have been taken and praying the assistance and
supervision of the court in the liquidation of the affairs of the same. The Superintendent shall
thereafter, upon order of the Monetary Board and under the supervision of the court and with
all convenient speed, convert the assets of the banking institution to money.

"SEC. 30. Distribution of assets. — In case of liquidation of a banking institution, after payment
of the costs of the proceedings, including reasonable expenses and fees of the Central Bank to
be allowed by the court, the Central Bank shall pay the debts of such institution, under the
order of the court, in accordance with their legal priority."cralaw virtua1aw library

The General Banking Act, Republic Act No. 337, provides:jgc:chanrobles.com.ph

"SEC. 85. Any director or officer of any banking institution who receives or permits or causes to
be received in said bank any deposit, or who pays out or permits or causes to be paid out any
funds of said bank, or who transfers or permits or causes to be transferred any securities or
property of said bank, after said bank becomes insolvent, shall be punished by fine of not less
than one thousand nor more than ten thousand pesos and by imprisonment for not less than
two nor more than ten years."cralaw virtua1aw library
The Civil Code provides:jgc:chanrobles.com.ph

"ART. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent
with this Code. (n)

"ART. 2244. With reference to other property, real and personal, of the debtor, the following
claims or credits shall be preferred in the order named:chanrob1es virtual 1aw library

x x x

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final
judgment, if they have been the subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instruments and of the judgments,
respectively. (1924a)

"ART. 2251. Those credits which do not enjoy any preference with respect to specific property,
and those which enjoy preference, as to the amount not paid, shall be satisfied according to the
following rules:chanrob1es virtual 1aw library

(1) In the order established in article 2244;(2) Common credits referred to in article 2246 shall
be paid pro rata regardless of dates. (1929a)."

The trial court or, to be exact, the liquidation court noted that there is no provision in the
charter of the Central Bank and in the General Banking Law (Republic Acts Nos. 265 and 337,
respectively) which suspends or abates civil actions against an insolvent bank pending in courts
other than the liquidation court. It reasoned out that, because such actions are not suspended,
judgments against insolvent banks could be considered as preferred credits under article
2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central Bank Act,
section 18 of the Insolvency Law provides that upon the issuance by the court of an order
declaring a person insolvent, "all civil proceedings against the said insolvent shall be stayed."

The liquidation court directed the Central Bank to honor the writs of execution issued by
Branches I and XXX for the enforcement of the judgments obtained by the Elizes and Padilla
spouses. It suggested that, after satisfaction of the judgments, the Central Bank, as liquidator,
should include said judgments in the list of preferred credits contained in the "Project of
Distribution" "with the notation ‘already paid’."

On the other hand, the Central Bank argues that after the Monetary Board has declared that a
bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its
assets "for the equal benefit of all the creditors, including the depositors." The Central Bank
cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal
benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference
over another by an attachment, execution or otherwise" (Rohr v. Stanton Trust & Savings Bank,
76 Mont. 248, 245 Pac. 947).

The stand of the Central Bank is that all depositors and creditors of the insolvent bank should
file their actions with the liquidation court. In support of that view it cites the provision that the
Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No. 1956).

It also invokes the provision penalizing a director or officer of a hank who disburses, or allows
disbursement, of the funds of the bank after it becomes insolvent (Sec. 85, General Banking Act,
Republic Act No. 337). It cites the ruling that "a creditor of an insolvent state bank in the hands
of a liquidator who recovered a judgment against it is not entitled to a preference for (by) the
mere fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. v. Allen, 207 N. Carolina
10, 175 S. E. 838, Braver, Liquidation of Financial Institutions, p. 922).

It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are not true deposits. They are considered simple loans and, as such, are not
preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile Bank of China: Tan Tiong
Tick v. American Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. v. Chinese Grocers
Association, 65 Phil. 375; Fletcher American National Bank v. Ang Cheng Lian, 65 Phil. 385;
Pacific Commercial Co. v. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery v. Pacific
Coast Biscuit Co., 65 Phil. 443).

The aforequoted section 29 of the Central Bank’s charter explicitly provides that when a bank is
found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of
its assets. The Board in its Resolution No. 350 dated February 18, 1969 banned the Fidelity
Savings Bank from doing business. It took charge of the bank’s assets. Evidently, one purpose in
prohibiting the insolvent bank from doing business is to prevent some depositors from having
an undue or fraudulent preference over other creditors and depositors.

That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by
some depositors could be maintained and judgments would be rendered for the payment of
their deposits and then such judgments would be considered preferred credits under article
2244(14)(b) of the Civil Code.

We are of the opinion that such judgments cannot be considered preferred and that article
2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings
bank which were obtained after the declaration of insolvency.

A contrary rule or practice would be productive of injustice, mischief and confusion. To

recognize such judgments as entitled to priority would mean that depositors in insolvent banks,
after learning that the bank is insolvent as shown by the fact that it can no longer pay
withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from
doing business, would rush to the courts to secure judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character. Some of the
judgments would be default judgments. Depositors armed with such judgments would pester
the liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert
depositors would be prejudiced. That inequitable situation could not have been contemplated
by the framers of section 29.

The Rohr case (supra) supplies some illumination on the disposition of the instant case. It
appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to
business on July 9, 1923. On November 7, 1924 the bank (then already under liquidation) issued
to William Rohr a certificate stating that he was entitled to claim from the bank $1,191.72 and
that he was entitled to dividends thereon. Later, Rohr sued the bank for the payment of his
claim. The bank demurred to the complaint. The trial court sustained the demurrer. Rohr
appealed. In affirming the order sustaining the demurrer, the Supreme Court of Montana
said:jgc:chanrobles.com.ph

"The general principle of equity that the assets of an insolvent are to be distributed ratably
among general creditors applies with full force to the distribution of the assets of a bank. A
general depositor of a bank is merely a general creditor, and, as such, is not entitled to any
preference or priority over other general creditors.

"The assets of a bank in process of liquidation are held in trust for the equal benefit of all
creditors. and one cannot be permitted to obtain an advantage or preference over another by
an attachment, execution or otherwise. A disputed claim of a creditor may be adjudicated, but
those whose claims are recognized and admitted may not successfully maintain action thereon.
So to permit would defeat the very purpose of the liquidation of a bank whether being
voluntarily accomplished or through the intervention of a receiver.

x x x

"The available assets of such a bank are held in trust, and so conserved that each depositor or
other creditor shall receive payment or dividend according to the amount of his debt, and that
none of equal class shall receive any advantage or preference over another."cralaw virtua1aw
library

And with respect to a national bank under voluntary liquidation, the court noted in the Rohr
case that the assets of such a bank "become a trust fund, to be administered for the benefit of
all creditors pro rata, and, while the bank retains its corporate existence, and may be sued, the
effect of a judgment obtained against it by a creditor is only to fix the amount of debt. He can
acquire no lien which will give him any preference or advantage over other general creditors."
(245 Pac. 249) **

Considering that the deposits in question, in their inception, were not preferred credits, it does
not seem logical and just that they should be raised to the category of preferred credits simply
because the depositors, taking advantage of the long interval between the declaration of
insolvency and the filing of the petition for judicial assistance and supervision, were able to
secure judgments for the payment of their time deposits.

The judicial declaration that the said deposits were payable to the depositors, as indisputably
they were due, could not have given the Elizes and Padilla spouses a priority over the other
depositors whose deposits were likewise indisputably due and owing from the insolvent bank
but who did not want to incur litigation expenses in securing a judgment for the payment of the
deposits.

The circumstance that the Fidelity Savings Bank, having stopped operations since February 19,
1969, was forbidden to do business (and that ban would include the payment of time deposits)
implies that suits for the payment of such deposits were prohibited. What was directly
prohibited should not be encompassed indirectly. (See Maurello v. Broadway Bank & Trust Co.
of Paterson, 176 Atl. 391, 114 N.J.L. 167).

It is noteworthy that in the trial court’s order of October 3, 1972, which contains the Bank
Liquidation Rules and Regulations, it indicated in Step III the procedure for processing the claims
against the insolvent bank. In Step IV, the court directed the Central Bank, as liquidator, to
submit a Project of Distribution which should include "a list of the preferred credits to be paid in
full in the order of priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the
Civil Code (note that article 2244 was not mentioned). There is no cogent reason why the Elizes
and Padilla spouses should not adhere to the procedure outlined in the said rules and
regulations.

WHEREFORE, the lower court’s orders of August 20, 1973 and February 25, 1974 are reversed
and set aside. No costs.

SO ORDERED.

G.R. NO. L-6913 NOVEMBER 21, 1913

THE ROMAN CATHOLIC BISHOP OF JARO, PLAINTIFF-APPELLEE,

VS.
GREGORIO DE LA PEÑA, ADMINISTRATOR OF THE ESTATE OF FATHER AGUSTIN DE LA
PEÑA, DEFENDANT-APPELLANT.

J. LOPEZ VITO, FOR APPELLANT.

ARROYO AND HORRILLENO, FOR APPELLEE.

MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo,
awarding to the plaintiff the sum of P6,641, with interest at the legal rate from the beginning of
the action.

It is established in this case that the plaintiff is the trustee of a charitable bequest made for the
construction of a leper hospital and that father Agustin de la Peña was the duly authorized
representative of the plaintiff to receive the legacy. The defendant is the administrator of the
estate of Father De la Peña.

In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such
trustee the sum of P6,641, collected by him for the charitable purposes aforesaid. In the same
year he deposited in his personal account P19,000 in the Hongkong and Shanghai Bank at Iloilo.
Shortly thereafter and during the war of the revolution, Father De la Peña was arrested by the
military authorities as a political prisoner, and while thus detained made an order on said bank
in favor of the United States Army officer under whose charge he then was for the sum thus
deposited in said bank. The arrest of Father De la Peña and the confiscation of the funds in the
bank were the result of the claim of the military authorities that he was an insurgent and that
the funds thus deposited had been collected by him for revolutionary purposes. The money was
taken from the bank by the military authorities by virtue of such order, was confiscated and
turned over to the Government.

While there is considerable dispute in the case over the question whether the P6,641 of trust
funds was included in the P19,000 deposited as aforesaid, nevertheless, a careful examination
of the case leads us to the conclusion that said trust funds were a part of the funds deposited
and which were removed and confiscated by the military authorities of the United States.

That branch of the law known in England and America as the law of trusts had no exact
counterpart in the Roman law and has none under the Spanish law. In this jurisdiction,
therefore, Father De la Peña's liability is determined by those portions of the Civil Code which
relate to obligations. (Book 4, Title 1.)

Although the Civil Code states that "a person obliged to give something is also bound to
preserve it with the diligence pertaining to a good father of a family" (art. 1094), it also
provides, following the principle of the Roman law, major casus est, cui humana infirmitas
resistere non potest, that "no one shall be liable for events which could not be foreseen, or
which having been foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares." (Art. 1105.)

By placing the money in the bank and mixing it with his personal funds De la Peña did not
thereby assume an obligation different from that under which he would have lain if such
deposit had not been made, nor did he thereby make himself liable to repay the money at all
hazards. If the had been forcibly taken from his pocket or from his house by the military forces
of one of the combatants during a state of war, it is clear that under the provisions of the Civil
Code he would have been exempt from responsibility. The fact that he placed the trust fund in
the bank in his personal account does not add to his responsibility. Such deposit did not make
him a debtor who must respond at all hazards.

We do not enter into a discussion for the purpose of determining whether he acted more or less
negligently by depositing the money in the bank than he would if he had left it in his home; or
whether he was more or less negligent by depositing the money in his personal account than he
would have been if he had deposited it in a separate account as trustee. We regard such
discussion as substantially fruitless, inasmuch as the precise question is not one of negligence.
There was no law prohibiting him from depositing it as he did and there was no law which
changed his responsibility be reason of the deposit. While it may be true that one who is under
obligation to do or give a thing is in duty bound, when he sees events approaching the results of
which will be dangerous to his trust, to take all reasonable means and measures to escape or, if
unavoidable, to temper the effects of those events, we do not feel constrained to hold that, in
choosing between two means equally legal, he is culpably negligent in selecting one whereas he
would not have been if he had selected the other.

The court, therefore, finds and declares that the money which is the subject matter of this
action was deposited by Father De la Peña in the Hongkong and Shanghai Banking Corporation
of Iloilo; that said money was forcibly taken from the bank by the armed forces of the United
States during the war of the insurrection; and that said Father De la Peña was not responsible
for its loss.

The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his
complaint.

Arellano, C.J., Torres and Carson, JJ., concur.

G.R. NO. 4015 AUGUST 24, 1908

ANGEL JAVELLANA, PLAINTIFF-APPELLEE,

VS.
JOSE LIM, ET AL., DEFENDANTS-APPELLANTS.

R. ZALDARRIAGA FOR APPELLANTS.

B. MONTINOLA FOR APPELLEE.

TORRES, J.:

The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906,
with the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino
Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest
thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until full payment
should be made, deducting from the amount of interest due the sum of P1,102.16, and to pay
the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended on the
10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants executed
and subscribed a document in favor of the plaintiff reading as follows:

We have received from Angel Javellana, as a deposit without interest, the sum of two thousand
six hundred and eighty-six cents of pesos fuertes, which we will return to the said gentleman,
jointly and severally, on the 20th of January, 1898. — Jaro, 26th of May, 1897. — Signed Jose
Lim. — Signed: Ceferino Domingo Lim.

That, when the obligation became due, the defendants begged the plaintiff for an extension of
time for the payment thereof, building themselves to pay interest at the rate of 15 per cent on
the amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May,
1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the exception
of either capital or interest, had thereby been subjected to loss and damages.

A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the
defendants answered the original complaint before its amendment, setting forth that they
acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the
statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of
November, 1902, not, however, as payment of interest on the amount stated in the foregoing
document, but on account of the principal, and denied that there had been any agreement as to
an extension of the time for payment and the payment of interest at the rate of 15 per cent per
annum as alleged in paragraph 3 of the complaint, and also denied all the other statements
contained therein.

As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which,
together with the P1,102.16 acknowledged in the complaint, aggregated the total sum of
P5,602.16, and that, deducting therefrom the total sum of P2,686.58 stated in the document
transcribed in the complaint, the plaintiff still owed the defendants P2,915.58; therefore, they
asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the
sum of P2,915.58 with the costs.

Evidence was adduced by both parties and, upon their exhibits, together with an account book
having been made of record, the court below rendered judgment on the 15th of January, 1907,
in favor of the plaintiff for the recovery of the sum of P5,714.44 and costs.

The defendants excepted to the above decision and moved for a new trial. This motion was
overruled and was also excepted to by them; the bill of exceptions presented by the appellants
having been approved, the same was in due course submitted to this court.

The document of indebtedness inserted in the complaint states that the plaintiff left on deposit
with the defendants a given sum of money which they were jointly and severally obliged to
return on a certain date fixed in the document; but that, nevertheless, when the document
appearing as Exhibits 2, written in the Visayan dialect and followed by a translation into Spanish
was executed, it was acknowledged, at the date thereof, the 15th of November, 1902, that the
amount deposited had not yet been returned to the creditor, whereby he was subjected to
losses and damages amounting to 830 pesos since the 20th of January, 1898, when the return
was again stipulated with the further agreement that the amount deposited should bear
interest at the rate of 15 per cent per annum, from the aforesaid date of January 20, and that
the 1,000 pesos paid to the depositor on the 15th of May, 1900, according to the receipt issued
by him to the debtors, would be included, and that the said rate of interest would obtain until
the debtors on the 20th of May, 1897, it is called a deposit consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the one received by
them. For this reason it must be understood that the debtors were lawfully authorized to make
use of the amount deposited, which they have done, as subsequent shown when asking for an
extension of the time for the return thereof, inasmuch as, acknowledging that they have
subjected the letter, their creditor, to losses and damages for not complying with what had been
stipulated, and being conscious that they had used, for their own profit and gain, the money
that they received apparently as a deposit, they engaged to pay interest to the creditor from the
date named until the time when the refund should be made. Such conduct on the part of the
debtors is unquestionable evidence that the transaction entered into between the interested
parties was not a deposit, but a real contract of loan.

Article 1767 of the Civil Code provides that —

The depository can not make use of the thing deposited without the express permission
of the depositor.

Otherwise he shall be liable for losses and damages.

Article 1768 also provides that —

When the depository has permission to make use of the thing deposited, the contract
loses the character of a deposit and becomes a loan or bailment.

The permission shall not be presumed, and its existence must be proven.

When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor
asking for an extension of one year, in view of the fact the money was scare, and because
neither himself nor the other defendant were able to return the amount deposited, for which
reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the amount deposited, he having made use of
the same in his business and for his own profit; and the creditor, by granting them the
extension, evidently confirmed the express permission previously given to use and dispose of
the amount stated as having bee deposited, which, in accordance with the loan, to all intents
and purposes gratuitously, until the 20th of January, 1898, and from that dated with interest at
15 per cent per annum until its full payment, deducting from the total amount of interest the
sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2) executed
in the presence of three witnesses on the 15th of November, 1902, by Ceferino Domingo Lim on
behalf of himself and the former, nevertheless, the said document has not been contested as
false, either by a criminal or by a civil proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who attested the execution of the same; and
from the evidence in the case one is sufficiently convinced that the said Jose Lim was perfectly
aware of and authorized his joint codebtor to liquidate the interest, to pay the sum of 1,000
pesos, on account thereof, and to execute the aforesaid document No. 2. A true ratification of
the original document of deposit was thus made, and not the least proof is shown in the record
that Jose Lim had ever paid the whole or any part of the capital stated in the original document,
Exhibit 1.

If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as fully
established, such is not the case with the defendant's counterclaim for P5,602.16, because the
existence and certainty of said indebtedness imputed to the plaintiff has not been proven, and
the defendants, who call themselves creditors for the said amount have not proven in a
satisfactory manner that the plaintiff had received partial payments on account of the same; the
latter alleges with good reason, that they should produce the receipts which he may have
issued, and which he did issue whenever they paid him any money on account. The plaintiffs
allegation that the two amounts of 400 and 1,200 pesos, referred to in documents marked "C"
and "D" offered in evidence by the defendants, had been received from Ceferino Domingo Lim
on account of other debts of his, has not been contradicted, and the fact that in the original
complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000 pesos, the only payment
made on account of interest on the amount deposited according to documents No. 2 and letter
"B" above referred to, was due to a mistake.

Moreover, for the reason above set forth it may, as a matter of course, be inferred that there
was no renewal of the contract deposited converted into a loan, because, as has already been
stated, the defendants received said amount by virtue of real loan contract under the name of a
deposit, since the so-called bailees were forthwith authorized to dispose of the amount
deposited. This they have done, as has been clearly shown.

The original joint obligation contracted by the defendant debtor still exists, and it has not been
shown or proven in the proceedings that the creditor had released Joe Lim from complying with
his obligation in order that he should not be sued for or sentenced to pay the amount of capital
and interest together with his codebtor, Ceferino Domingo Lim, because the record offers
satisfactory evidence against the pretension of Jose Lim, and it further appears that document
No. 2 was executed by the other debtor, Ceferino Domingo Lim, for himself and on behalf of
Jose Lim; and it has also been proven that Jose Lim, being fully aware that his debt had not yet
been settled, took steps to secure an extension of the time for payment, and consented to pay
interest in return for the concession requested from the creditor.

In view of the foregoing, and adopting the findings in the judgment appealed from, it is our
opinion that the same should be and is hereby affirmed with the costs of this instance against
the appellant, provided that the interest agreed upon shall be paid until the complete
liquidation of the debt. So ordered.

Arellano, C.J., Carson, Willard and Tracey, JJ., concur.