Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., petitioner-appellant, vs.THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-appellees.

 ABAD SANTOS, J.:ñé+.£ªwph!1

Petition to review the Order of the respondent judge dated August 24, 1977. The facts are simple.

Private respondent was the plaintiff and the petitioner was the defendant in Civil Case No. 2414 of the Court of First Instance of La Union. On January 22, 1973, the respondent judge rendered judgment in said case, the dispositive portion of which reads: têñ.£îhqwâ£

IN VIEW OF THE FOREGOING, the Court hereby renders judgment and sentences the defendant to pay Concordia Garcia Navalta the amount of P75,000.00 with legal interest from October, 1968, Pl,000.00, as attorney's fees am the cost of suit.

The decision was appealed by the petitioner to the Court of Appeals in CA-G.R. No. 52675-R but was affirmed on February 7, 1977. On February 24, 1977, the petitioner paid the following amounts to the private respondent: têñ.£îhqwâ£

On the principal P75,000.00

Interest at 6% per annum

from Oct. 1968* to April 30,

1977 P 38,250.00

Attorney's fee P 1,000.00

Total P114,250.00

(*Art. 2209 of the Civil Code provides: "If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum." This appears to be the basis for awarding interest at the legal rate from October, 1968, although the debt was judicially demanded only on July 6, 1970.)

The petitioner was advised by the respondent and her counsel that the payment was not in fun satisfaction of the judgment because the former had to pay compound interest or an additional sum of P10,375.77.

Upon refusal of the petitioner to pay the sum additionally claimed, the private respondent secure a writ of execution for the same which the former sought to quash over the opposition of the latter. In resolving the question the respondent judge issued an Order on August 24, 1977 as follows: 

After hearing and consideration of the motion of the plaintiff for the issuance of an alias writ of execution, and the written manifestation and opposition filed by the defendant and finding as it appears that the written schedule of interest computation, which was submitted, is correct and in order, because compound interest has been computed from July 6, 1970 when the claim was judicially demanded, let an alias writ of execution issue to satisfy accordingly the unpaid balance as demanded.

It is this Order which is the object of this petition and which raises the question as to whether or not the petitioner is obligated to pay compound interest under the judgment.

The questioned Order cannot be sustained. The judgment which was sought to be executed ordered the payment of simple "legal interest" only. It said nothing about the payment of compound interest. Accordingly, when the respondent judge ordered the payment of compound interest he went beyond the confines of his own judgment which had been affirmed by the Court of Appeals and which had become final. Fundamental is the rule that execution must conform to that ordained or decreed in the dispositive part of the decision. Likewise, a court can not, except for clerical errors or omissions, amend a judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil. 750 [1952]; Robles vs. Timario, et al., 107 Phil. 809 [1960]; Collector of Internal Revenue vs. Gutierrez, et al., 108 Phil. 215 [1960]; Ablaza vs. Sycip, et al., 110 Phil., 4 [1960].)

Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: "In computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or, in default thereof, whenever the debt is judicially claimed in which last case it shall draw six per centum per annum interest ..." as well as Art. 2212 of the Civil Code which stipulates: "Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point." Both legal provisions are in applicable for they contemplate the presence of stipulated or conventional interest which had accrued when demand was judicially made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913]; Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil. 539 [1924]; Philippine Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916 [1930].) In this case no interest had been stipulated by the parties. In other words, there was no accrued conventional interest which could further earn interest upon judicial demand.

WHEREFORE, the Order dated August 24, 1977, of the respondent judge is hereby set aside. No special pronouncement as to costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-57314 November 29, 1983

TEODORO SANCHEZ, petitioner, vs.HON. CARLOS R. BUENVIAJE, Presiding Judge, Branch VII, Court of First Instance of Camarines Sur, Iriga City, and ALEJO SANCHEZ, respondents.

Andres C. Regalado for petitioner.

The Solicitor General for respondents.

1

 ABAD SANTOS, J.:ñé+.£ªwph!1

This is a petition to review a decision rendered by the defunct Court of First Instance of Camarines Sur, Branch VII, with following factual background.

On August 25, 1976, Alejo Sanchez sued Teodoro Sanchez and Leonor Santilles in the Municipal Court of Bato, Camarines Sur, for the recovery of P2,000.00 which the latter had promised to pay in two notes. Said notes also contained stipulations for interest at the rate of 10% per month The Municipal Court rendered judgment ordering Teodoro Sanchez only to pay to Alejo Sanchez P2,000.00 plus interest thereon at the legal rate from the filing of the complaint.

Teodoro appealed to the Court of First Instance of Camarines Sur which rendered the following judgment: têñ.£îhqwâ£

WHEREFORE, the judgment rendered by the lower court is hereby AFFIRMED with modification as to costs. Judgment is hereby rendered, ordering the defendant to pay his indebtedness to plaintiff in the total sum of P2,000.00, plus interest thereon at the legal rate from the firing of the complaint in this case to actual payment. Defendant to pay double the costs of this suit. (Rollo p. 30.)

In his petition for review, Teodoro claims that in a loan with usurious interest both the loan and the usurious interest are void.

Alejo was required to comment on the petition but it appears that he died sometime in the latter part of 1980 and the early part of 1981. (Rollo, p. 42.) Accordingly, his children were impleaded as respondents and required to file comment which they failed to do despite notice to them.

The absence of comment on the part of the private respondents notwithstanding, We resolve the petition without any difficulty.

It is now well-settled that: "the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the lender of his right to recover of the borrower the money actually loaned this only in the case that the interest collected is usurious. The law, as it is now, does not provide for the forfeiture of the capital in favor of the debtor in usurious contract ... (Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, 275 [1925].)

True it is that in Briones vs. Cammayo, L-23559, Oct. 4, 1971; 41 SCRA 404, Chief Justice Concepcion and now Chief Justice Fernando concurred with Justice Castro who opined that both loan and usurious interest are void. However, it must be emphasized that eight other justices maintained that only the usurious interest is void but not the principal obligation.

WHEREFORE, finding the judgment sought to be reviewed to be in accordance with law, the petition is hereby dismissed for lack of merit with costs against the petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

SECOND DIVISION

G.R. No. 128990             September 21, 2000

INVESTORS FINANCE CORPORATION, petitioner, vs.AUTOWORLD SALES CORPORATION, and PIO BARRETTO REALTY DEVELOPMENT CORPORATION,respondents.

BELLOSILLO, J.:

INVESTORS FINANCE CORPORATION seeks a review of the Decision of the Court of Appeals which ruled that the financing firm had entered into a usurious loan transaction with Autoworld Sales Corporation, thus entitling the latter to reimbursement of excess interest payments amounting to P2,586,035.44.1

Petitioner Investors Finance Corporation, then known also as FNCB Finance (now doing business under the name of Citytrust Finance Corporation), is a financing company doing business with private respondent Autoworld Sales Corporation (AUTOWORLD) since 1975. Anthony Que, president of AUTOWORLD, also held the same position at its affiliate corporation, private respondent Pio Barretto Realty Corporation (BARRETTO).

Sometime in August 1980 Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not engaged in direct lending; consequently, AUTOWORLD's request for loan was denied.

But sometime thereafter, FNCB's Assistant Vice President, Mr. Leoncio Araullo, informed Anthony Que that although it could not grant direct loans it could extend funds to AUTOWORLD by purchasing any of its outstanding receivables at a discount. After a series of negotiations the parties agreed to execute an Installment Paper Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it needed. The mechanics of the proposed "IPP" transaction was —

(1) First, Pio Barretto (BARRETTO) would execute a Contract to Sell a parcel of land in favor of AUTOWORLD for P12,999,999.60 payable in sixty (60) equal monthly installments of P216,666.66. Consequently, BARRETTO would acquire P12,999,999.60 worth of receivables from AUTOWORLD;

(2) FNCB would then purchase the receivables worth P12,999,999.60 from BARRETTO at a discounted value of P6,980,000.00 subject to the condition that such amount would be "flowed back" to AUTOWORLD;

(3) BARRETTO, would in turn, execute a Deed of Assignment (in favor of FNCB) obliging AUTOWORLD to pay the installments of the P12,999,999.60 purchase price directly to FNCB;2 and

(4) Lastly, to secure the payment of the receivables under the Deed of Assignment, BARRETTO would mortgage the property subject of the sale to FNCB.

On 17 November 1980 FNCB informed AUTOWORLD that its Executive Committee approved the proposed "IPP" transaction.3 The lawyers of FNCB then drafted the contracts needed and furnished Anthony Que with copies thereof.4

On 9 February 1981 the parties signed three (3) contracts to implement the "IPP" transaction:

(1) Contract to Sell whereby BARRETTO sold a parcel of land to AUTOWORLD, situated in San Miguel, Manila, together with the improvements thereon, covered by TCT No. 129763 for the price of P12,999,999.60 payable in sixty (60) consecutive and equal monthly installments of P216,666.66.

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(2) Deed of Assignment whereby BARRETTO assigned and sold in favor of FNCB all its rights, title and interest to all the money and other receivables due from AUTOWORLD under the Contract to Sell, subject to the condition that the assignee (FNCB) has the right of recourse against the assignor (BARRETTO) in the event that the payor (AUTOWORLD) defaulted in the payment of its obligations.

(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged the property subject of the Contract to Sell to FNCB as security for payment of its obligation under the Deed of Assignment.5

After the three (3) contracts were concluded AUTOWORLD started paying the monthly installments to FNCB.

On 18 June 1982 AUTOWORLD transacted with FNCB for the second time obtaining a loan of P3,000,000.00 with an effective interest rate of 28% per annum.6 AUTOWORLD and BARRETTO, as co-makers, then signed a promissory note in favor of FNCB worth P5,604,480.00 payable in sixty (60) consecutive monthly installments of P93,408.00.7 To secure the promissory note, AUTOWORLD mortgaged a parcel of land located in Sampaloc, Manila, to FNCB.8 Thereafter, AUTOWORLD began paying the installments.

In December 1982, after paying nineteen (19) monthly installments of P216,666.66 on the first transaction ("IPP" worth P6,980,000.00) and three (3) monthly installments of P93,408.00 on the second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that it intended to preterminate the two (2) transactions by paying their outstanding balances in full. It then requested FNCB to provide a computation of the remaining balances. FNCB sent AUTOWORLD its computation requiring it to pay a total amount of P10,026,736.78, where P6,784,551.24 was the amount to settle the first transaction while P3,242,165.54 was the amount to settle the second transaction.9

On 20 December 1982 AUTOWORLD wrote FNCB that it disagreed with the latter's computation of its outstanding balances.10 On 27 December 1982 FNCB replied that it would only be willing to reconcile its accounting records with AUTOWORLD upon payment of the amounts demanded.11 Thus, despite its objections, AUTOWORLD reluctantly paid FNCB P10,026,736.78 through its UCPB account.12

On 5 January 1983 AUTOWORLD asked FNCB for a refund of its overpayments in the total amount of P3,082,021.84.13 According to AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and P418,262.00 to settle the second transaction.14

The parties attempted to reconcile their accounting figures but the subsequent negotiations broke down prompting AUTOWORLD to file an action before the Regional Trial Court of Makati to annul the Contract to Sell, the Deed of Assignment and the Real Estate Mortgage all dated 9 February 1981. It likewise prayed for the nullification of thePromissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June 1982.

In its complaint, AUTOWORLD alleged that the aforementioned contracts were only perfected to facilitate a usurious loan and therefore should be annulled. FNCB should refund the amounts of P2,586,035.44 as excess payment for the first transaction and P418,262.00 as excess payment for the second transaction. AUTOWORLD also asked for P500,000.00 as exemplary damages and P100,000.00 as attorney's fees.

FNCB argued that the contracts dated 9 February 1981 were not executed to hide a usurious loan. Instead, the parties entered into a legitimate Installment Paper Purchase ("IPP") transaction, or purchase of receivables at a discount, which FNCB could legally engage in as a financing company. With regard to the second transaction, the existence of a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the ceiling rates for loans having a period of more than three

hundred sixty-five (365) days. FNCB also prayed for P2,000,000.00 as moral damages and P500,000.00 as attorney's fees.

On 18 January 1985 FNCB filed a Third-Party Complaint against BARRETTO based on the Deed of Assignment, which expressly provided that FNCB as assignee had a right of recourse against BARRETTO as assignor in case AUTOWORLD defaulted in its payments.15

BARRETTO countered that it could not be held liable for AUTOWORLD's alleged default in its payments since theDeed of Assignment, together with the Contract to Sell and the Real Estate Mortgage, was simulated and perfected only to facilitate a usurious loan. It prayed for P1,600,000.00 as damages and P100,000.00 as attorney's fees.16

On 11 July 1988 the Regional Trial Court of Makati ruled in favor of FNCB declaring that the parties voluntarily and knowingly executed a legitimate "IPP" transaction or the discounting of receivables. AUTOWORLD was not entitled to any reimbursement since it was unable to prove the existence of a usurious loan. On the other hand, it was ordered to pay FNCB P50,000.00 for attorney's fees.17

The Court of Appeals modified the decision of the trial court and concluded that the "IPP" transaction, comprising of the three (3) contracts perfected on 9 February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered the annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest payments over the 12% ceiling rate. However, with regard to the second transaction, the appellate court ruled that at the time it was executed the ceiling rates imposed by the Usury Law had already been lifted thus allowing the parties to stipulate any rate of interest.18 The appellate court deleted the award of P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of the complaint against FNCB was exercised in good faith. Hence, this petition of FNCB.

We stress at the outset that this petition concerns itself only with the first transaction involving the alleged' "IPP" worth P6,980,000.00, which was implemented through the three (3) contracts of 9 February 1981. As to the second transaction, which involves the P3,000,000.00 loan, we agree with the appellate court that it was executed when the ceiling rates of interest had already been removed, hence the parties were free to fix any interest rate.

The pivotal issue therefore is whether the three (3) contracts all dated 9 February 1981 were executed to implement a legitimate Installment Paper Purchase ("IPP") transaction or merely to conceal a usurious loan. Generally, the courts only need to rely on the face of written contracts to determine the intention of the parties. "However, the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury."19 The following circumstances show that such scheme was indeed employed:

First, petitioner claims that it was never a party to the Contract to Sell between AUTOWORLD and BARRETTO.20As far as it was concerned, it merely purchased receivables at a discount from BARRETTO as evidenced by the Deed of Assignment dated 9 February 1981. Whether the Contract to Sell was fictitious or not would have no effect on its right to claim the receivables of BARRETTO from AUTOWORLD since the two contracts were entirely separate and distinct from each other.

Curiously however, petitioner admitted that its lawyers were the ones who drafted all the three (3) contracts involved21 which were executed on the same day.22 Also, petitioner was the one who procured the services of the Asian Appraisal Company to determine the fair market value of the land to be sold way back in September of 1980 or six (6) months prior to the sale.23 If it were true that petitioner was never privy to the Contract to Sell, then why was it interested in appraising the lot six (6) months prior to the sale? And why did petitioner's own lawyers prepare the Contract to Sell? Obviously,

3

petitioner actively participated in the sale to ensure that the appraised lot would serve as adequate collateral for the usurious loan it gave to AUTOWORLD.

Second, petitioner insists that the 9 February 1981 transaction was a legitimate "IPP" transaction where it only bought the receivables of BARRETTO from AUTOWORLD amounting to P12,999,999.60 at a discounted price of P6,980,000.00. However, per instruction of petitioner in its letter to BARRETTO dated 17 November 1980 the whole purchase price of the receivables was to be "flowed back" to AUTOWORLD.24 And in its subsequent letter of 24 February 1981 petitioner also gave instructions on how BARRETTO should apply the proceeds worth P6,980,000.00, thus —

Gentlemen:

This serves to inform you of-the various application of the proceeds (P6,980,000.00) of your real estate transaction per your authorization/letter dated 2.10.81:

1. P1,937,884.20 — Paid to Paramount Finance Corp. on Feb. 16, 1981, inclusive of P2.00 SC for Manager's Check.

2. P111,818.87 — Paid to Agcaoili and Associates of Feb. 16, 1981 inclusive of P2.00 SC for Manager's Check for the preparation of documents, legal review, registration and transfer of ownership.

3. P3,179,700.00 — Paid to FNCB Finance on Feb. 20, 1981 for full payment of DB transaction (Account No. 06156)

4. P3,108.40 — Payment for the appraisal fee conducted by the Asian Appraisal Company. Inc.

5. P100.00 — Payment for the title search fee conducted by Agcaoili and Associates.

6. P2,500.00 — Payment for legal and professional fee (Agcaoili and Associates)

7. P638,601.60 — Payment to FNCB Finance for the partial payment of DB transaction (Account No. 40150 — sold units)

8. P122,640.00 — Payment to FNCB Finance for the partial payment of DB transaction (Account No. 406149 — sold units)

9. P983,646.93 — Balance after application, Payable to Pio Barreto Dev. Inc.

P6,980,000.00 — Total

Should you need any clarification on the matter, please do not hesitate to call on the undersigned.

Very truly yours,

L.V. Araullo,

Asst. Vice-President2

5

It can be seen that out of the nine (9) items of appropriation stated above, Item Nos. 2-8 had to be returned to petitioner. Thus, in compliance with the aforesaid letter, BARRETTO had to yield P4,058,468.47 of the P6,980,000.00 to petitioner to settle some of AUTOWORLD's previous debts to it.26 Any remaining amount after the application of the proceeds would then be surrendered to AUTOWORLD in compliance with the letter of 17 November 1980; none went to BARRETTO.

The foregoing circumstances confirm that the P6,980,000.00 was really an indirect loan extended to AUTOWORLD so that it could settle its previous debts to petitioner. Had petitioner entered into a legitimate purchase of receivables, then BARRETTO, as seller, would have received the whole purchase price, and free to dispose of such proceeds in any manner it wanted. It would not have been obliged to follow the "Application of Proceeds" stated in petitioner's letter.

Third, in its 17 November 1980 letter to BARRETTO, petitioner itself designated the proceeds of the "IPP" transaction as a "loan."27 In that letter, petitioner stated that the "loan proceeds" amounting to P6,980,000.00 would be released to BARRETTO only upon submission of the documents it required. And as previously mentioned, one of the required documents was a letter agreement between BARRETTO and AUTOWORLD stipulating that the P6,980,000.00 should be "flowed back" to AUTOWORLD. If it were a genuine "IPP" transaction then petitioner would not have designated the money to be released as "loan proceeds" and BARRETTO would have been the end recipient of such proceeds with no obligation to turn them over to AUTOWORLD.

Fourth, after the interest rate ceilings were lifted on 21 July 1981 petitioner extended on 18 June 1982 a direct loan of P3,000,000.00 to AUTOWORLD. This time however, with no more ceiling rates to hinder it, petitioner imposed a 28% effective interest rate on the loan.28 And no longer having a need to cloak the exorbitant interest rate, the promissory note evidencing the second transaction glaringly bore the 28% interest rate on its face.29 We are therefore of the impression that had there been no interest rate ceilings in 1981, petitioner would not have resorted to the fictitious "IPP" transaction; instead, it would have directly loaned the money to AUTOWORLD with an interest rate higher than 12%. Gregorio Anonas, Senior Vice President of petitioner, effectively admitted that it only employed discounting of receivables due to the ceiling rates imposed by the Usury Law. Thus he testified —

Q:             And is it not a fact further that FNCB Finance at the time could not or would not want to extend direct loan because of a ceiling fixed by the Usury Law on interest?

A:             We haven't at that time giving direct loan, it is a discounting business.

Q:             You mean never have you extended direct loan?

A:             We did at a certain period of time and then we stopped, we go to discounting business because we transferred to direct loan.

Q:             After the ceiling was removed, ceiling on interest was removed, you again, FNCB, extended direct loan, correct?

4

A:             Yes, sir.

Q:             Shall we say that the reason why you did not extend direct loan was because you did not want to be confined on the ceiling on interest under Usury Law?

A:             Probably yes, because as you know the cost, in the operating cost of finance company is extremely different from a bank and we cannot survive, and this normally has been the case.

Q:             And so, therefore, the only way you could generate more income for your company would be to encourage discounting of receivables?

A:             That was our business. It is not to generate more income, that is our business. . .30

Thus, although the three (3) contracts seemingly show at face value that petitioner only entered into a legitimate discounting of receivables, the circumstances cited prove that the P6,980,000.00 was really a usurious loan extended to AUTOWORLD.

Petitioner anchors its defense on Sec. 7 of the Usury Law which states —

Provided, finally, That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there has been no intention on the part of said purchaser to evade the provisions of the Act and said purchase was not a part of the original usurious transaction. In any case however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in any case of litigation, also the costs and such attorney's fees as may be allowed by the court.

Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the provisions of the Usury Law and that the purchase was not a part of the original usurious transaction. Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides —

Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury shall be void. The borrower may recover in accordance with the laws on usury.

In the case at bar, the attending factors surrounding the execution of the three (3) contracts on 9 February 1981 clearly establish that the parties intended to transact a usurious loan. These contracts should therefore be declared void. Having declared the transaction between the parties as void, we are now tasked to determine how much reimbursement AUTOWORLD is entitled to. The Court of Appeals, adopting the computation of AUTOWORLD in its plaintiff-appellant's brief, ruled —

According to plaintiff-appellant, defendant-appellee was able to collect P3,921,217.7831 in interests from appellant. This is not denied by the appellee. Computed at 12% the effective interest should have been P1,545,400.00.32 Hence, appellant may recover P2,586,035.44,33 representing overpayment arising from usurious interest rate charged by appellee.34

While we do not dispute the appellate court's finding that the first transaction was a usurious loan, we do not agree with the amount of reimbursement awarded to AUTOWORLD. Indeed, it erred in awarding only

the interest paid in excess of the 12% ceiling. In usurious loans, the creditor can always recover the principal debt.35 However, the stipulation on the interest is considered void thus allowing the debtor to claim the whole interest paid. In a loan of P1,000.00 with interest at 20% per annum or P200.00 per year, if the borrower pays P200.00, the whole P200.00 would be considered usurious interest, not just the portion thereof in excess of the interest allowed by law.36

In the instant case, AUTOWORLD obtained a loan of P6,980,000.00. Thereafter, it paid nineteen (19) consecutive installments of P216,666.66 amounting to a total of P4,116,666.54, and further paid a balance of P6,784,551.24 to settle it. All in all, it paid the aggregate amount of P10,901,217.78 for a debt of P6,980,000.00. For the 23-month period of the existence of the loan covering the period February 1981 to January 1982, AUTOWORLD paid a total of P3,921,217.78 in interests.37 Applying the 12% interest ceiling rate mandated by the Usury Law, AUTOWORLD should have only paid a total of P1,605,400.00 in interests.38 Hence, AUTOWORLD is entitled to recover the whole usurious interest amounting to P3,921,217.78.

We are not unaware of Sanchez v. Buenviaje39 where the Court allowed the usurer to recover legal interest on the principal amount loaned. But such interest arose from the debtor's delay in paying the principal from the time of the creditor's demand. That is the reason why legal interest was counted only from the time the creditor filed his complaint for the recovery of a debt. In this case however, the debtor was never in delay. As a matter of fact, AUTOWORLD paid the principal of P6,980,000.00 and the whole usurious interest of P3,921,217.88 upon petitioner's insistent demand. Thus, the case of Sanchez v. Buenviaje herein cited will not apply to petitioner and it will not be entitled to legal interest on the amount of the principal loan.

Under Sec. 6 of the Usury Law, AUTOWORLD is also entitled to reasonable attorney's fees and costs

SECTION 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid or delivered a higher rate or greater sum or value than is hereinbefore allowed, to be taken or received, may recover the whole interest, commission, premiums, penalties and surcharges paid or delivered with costs and attorney's fees in such sum as may be allowed by the court in an action against a person or corporation who took or received them if such action is brought within two years after such payment or delivery (emphasis ours).

Although the Court has discretion to fix the amount of attorney's fees, it has no discretion to deny it altogether. Thus, in Delgado v. Valgona,40 we held —

When the right of action to recover interest paid upon a usurious contract is established, a reasonable attorney's fee should be allowed as a matter of course, the same as costs are awarded. The purpose of the law is to encourage persons who have suffered from contracts of this character to come into court and vindicate their rights, and the imposition upon the usurer of the obligation to pay attorney's fee will serve at once as an encouragement to the oppressed and as a wholesome deterrent to the taking of usurious interests.

Quite obviously, Anthony Que, the President of AUTOWORLD, actively and knowingly participated in the execution of the usurious loan transaction. As a seasoned businessman he must have been aware of the consequences of his business dealings. But, although we find his actions extremely reprehensible, we must abide by the principle laid down in Go Chioco v. Martinez41 where we held that the pari delicto rule does not apply to usury cases which entitle the borrower to recover the whole interest paid; otherwise, the avowed policy of discouraging usurious transactions would not be served, for the mere invocation of the pari delicto rule would allow the usurer to reap the benefits of his unlawful act.

WHEREFORE, the assailed Decision of the Court of Appeals dated 24 May 1996 declaring the 9 February 1981 transaction as a usurious loan is

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AFFIRMED, subject to the MODIFICATION that petitioner Investors Finance Corporation is ordered to pay private respondent Autoworld Sales Corporation the amount of P3,921,217.78 representing the entire usurious interest it paid on the 9 February 1981 loan, as well as P50,000 00 as attorney's fees and the costs.

SO ORDERED.

Digest

Facts: Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB. However, since the Usury Law imposed an interest rate ceiling at that time, FNCB informed Anthony Que that it was not engaged in direct lending; consequently, AUTOWORLD's request for loan was denied. But however remedied to extend funds by purchasing any of its outstanding receivables at a discount, the parties agreed to execute an Installment Paper Purchase ("IPP") transaction to enable AUTOWORLD to acquire the additional capital it needed. The parties signed three contracts to implement the "IPP" transaction. After which it was concluded AUTOWORLD started paying the monthly installments to FNCB.

After paying nineteen (19) monthly installments on the first transaction ("IPP" worth P6,980,000.00) and three (3) monthly installments on the second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that it intended to pre-terminate the two (2) transactions by paying their outstanding balances in full. It then requested FNCB to provide a computation of the remaining balances. FNCB sent AUTOWORLD its computation requiring it to pay a total amount of P10,026,736.78.

AUTOWORLD disagreed with the latter's computation of its outstanding balances. However, FNCB replied that it would only be willing to reconcile its accounting records with AUTOWORLD upon payment of the amounts demanded. Thus, despite its objections, AUTOWORLD reluctantly paid.

AUTOWORLD asked FNCB for a refund of its overpayments in the total amount of P3,082,021.84. According to AUTOWORLD, it overpaid P2,586,035.44 to settle the first transaction and P418,262.00 to settle the second transaction.

The parties attempted to reconcile their accounting figures but the subsequent negotiations broke down prompting AUTOWORLD to file an action before the Regional Trial Court of Makati to annul the Contract to Sell, the Deed of Assignment and the Real Estate Mortgage all dated 9 February 1981. It likewise prayed for the nullification of the Promissory Note dated 18 June 1982 and the Real Estate Mortgage dated 24 June 1982.

In its complaint, AUTOWORLD alleged that the aforementioned contracts were only perfected to facilitate a usurious loan and therefore should be annulled. FNCB should refund the amounts of P2,586,035.44 as excess payment for the first transaction and P418,262.00 as excess payment for the second transaction.

FNCB argued that the contracts were not executed to hide a usurious loan. Instead, the parties entered into a legitimate Installment Paper Purchase ("IPP") transaction, or purchase of receivables at a discount, which FNCB could legally engage in as a financing company. With regard to the second transaction, the existence of a usurious interest rate had no bearing on the P3,000,000.00 loan since at the time it was perfected on 18 January 1982 Central Bank Circular No. 871 dated 21 July 1981 had effectively lifted the ceiling rates for loans having a period of more than three hundred sixty-five (365) days.

The Regional Trial Court of Makati ruled in favor of FNCB. The Court of Appeals modified the decision of the trial court and concluded that the "IPP" transaction, comprising of the three (3) contracts perfected on 9 February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered the annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44 as excess interest payments over the 12% ceiling rate. However, with regard to the second transaction, the appellate court ruled that at the time it was executed the ceiling rates

imposed by the Usury Law had already been lifted thus allowing the parties to stipulate any rate of interest. The appellate court deleted the award of P50,000.00 as attorney's fees in favor of FNCB explaining that the filing of the complaint against FNCB was exercised in good faith. Hence, this petition of FNCB.

Issue: Whether the three (3) contracts that were executed to implement a legitimate Installment Paper Purchase ("IPP") transaction are concealment to a usurious loan.

Held: We stress at the outset that this petition concerns itself only with the first transaction involving the alleged' "IPP" worth P6,980,000.00, which was implemented through the three 3 contracts of 9 February 1981. As to the second transaction, which involves the P3,000,000.00 loan, we agree with the appellate court that it was executed when the ceiling rates of interest had already been removed, hence the parties were free to fix any interest rate.

Generally, the courts only need to rely on the face of written contracts to determine the intention of the parties. "However, the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.” The following circumstances show that such scheme was indeed.

Thus, although the three (3) contracts seemingly show at face value that petitioner only entered into a legitimate discounting of receivables, the circumstances cited prove that the P6,980,000.00 was really a usurious loan extended to AUTOWORLD.

Indeed, the Usury Law recognizes the legitimate purchase of negotiable mercantile paper by innocent purchasers. But even the law has anticipated the potential abuse of such transactions to conceal usurious loans. Thus, the law itself made a qualification. It would recognize legitimate purchase of negotiable mercantile paper, whether usurious or otherwise, only if the purchaser had no intention of evading the provisions of the Usury Law and that the purchase was not a part of the original usurious transaction. Otherwise, the law would not hesitate to annul such contracts. Thus, Art. 1957 of the Civil Code provides — Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws on usury shall be void. The borrower may recover in accordance with the laws on usury.

In the case at bar, the attending factors surrounding the execution of the three (3) contracts on 9 February 1981 clearly establish that the parties intended to transact a usurious loan. These contracts should therefore be declared void.

Republic of the PhilippinesSUPREME COURT

Baguio City

FIRST DIVISION

 

G.R. No. 113412 April 17, 1996

Spouses PONCIANO ALMEDA and EUFEMIA P. ALMEDA, petitioner, vs.THE COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

 

KAPUNAN, J.:p

6

On various dates in 1981, the Philippine National Bank granted to herein petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda several loan/credit accommodations totaling P18.0 Million pesos payable in a period of six years at an interest rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate Mortgage Contract covering a 3,500 square meter parcel of land, together with the building erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. A credit agreement embodying the terms and conditions of the loan was executed between the parties. Pertinent portions of the said agreement are quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to interest at the rate of twenty one per cent (21%) per annum, payable semi-annually in arrears, the first interest payment to become due and payable six (6) months from date of initial release of the loan. The loan shall likewise be subject to the appropriate service charge and a penalty charge of three per cent (30%) per annum to be imposed on any amount remaining unpaid or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate. 1

Between 1981 and 1984, petitioners made several partial payments on the loan totaling. P7,735,004.66, 2 a substantial portion of which was applied to accrued interest. 3 On March 31, 1984, respondent bank, over petitioners' protestations, raised the interest rate to 28%, allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon increased from an initial 21% to a high of 68% between March of 1984 to September, 1986.  4

Petitioner protested the increase in interest rates, to no avail. Before the loan was to mature in March, 1988, the spouses filed on February 6, 1988 a petition for declaratory relief with prayer for a writ of preliminary injunction and temporary restraining order with the Regional Trial Court of Makati, docketed as Civil Case No. 18872. In said petition, which was raffled to Branch 134 presided by Judge Ignacio Capulong, the spouses sought clarification as to whether or not the PNB could unilaterally raise interest rates on the loan, pursuant to the credit agreement's escalation clause, and in relation to Central Bank Circular No. 905. As a preliminary measure, the lower court, on March 3, 1988, issued a writ of preliminary injunction enjoining the Philippine National Bank from enforcing an interest rate above the 21% stipulated in the credit agreement. By this time the spouses were already in default of their loan obligations.

Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB countered by ordering the extrajudicial foreclosure of petitioner's mortgaged properties and scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however, the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction, staying the public auction of the mortgaged property.

On January 15, 1990, upon the posting of a counterbond by the PNB, the trial court dissolved the supplemental writ of preliminary injunction. Petitioners filed a motion for reconsideration. In the interim, respondent bank once more set a new date for the foreclosure sale of Marvin Plaza which was March 12, 1990. Prior to the scheduled date, however, petitioners tendered to respondent bank the amount of P40,142,518.00, consisting of the principal (P18,000,000.00) and accrued interest calculated at the originally stipulated rate of 21%. The PNB refused to accept the payment. 5

As a result of PNB's refusal of the tender of payment, petitioners, on March 8, 1990, formally consigned the amount of P40,142,518.00 with the Regional Trial Court in Civil Case No. 90-663. They prayed therein for a writ of preliminary injunction with a temporary restraining order. The case was raffled to Branch 147, presided by Judge Teofilo Guadiz. On March 15, 1990, respondent bank sought the dismissal of the case.

On March 30, 1990 Judge Guadiz in Civil Case No. 90-663 issued an order granting the writ of preliminary injunction enjoining the foreclosure sale of "Marvin Plaza" scheduled on March 12, 1990. On April 17, 1990 respondent bank filed a motion for reconsideration of the said order.

On August 16, 1991, Civil Case No. 90-663 we transferred to Branch 66 presided by Judge Eriberto Rosario who issued an order consolidating said case with Civil Case 18871 presided by Judge Ignacio Capulong.

For Judge Ignacio's refusal to lift the writ of preliminary injunction issued March 30, 1990, respondent bank filed a petition for Certiorari, Prohibition and Mandamus with respondent Court of Appeals, assailing the following orders of the Regional Trial Court:

1. Order dated March 30, 1990 of Judge Guadiz granting the writ of preliminary injunction restraining the foreclosure sale of Mavin Plaza set on March 12, 1990;

2. Order of Judge Ignacio Capulong dated January 10, 1992 denying respondent bank's motion to lift the writ of injunction issued by Judge Guadiz as well as its motion to dismiss Civil Case No. 90-663;

3. Order of Judge Capulong dated July 3, 1992 denying respondent bank's subsequent motion to lift the writ of preliminary injunction; and

4. Order of Judge Capulong dated October 20, 1992 denying respondent bank's motion for reconsideration.

On August 27, 1993, respondent court rendered its decision setting aside the assailed orders and upholding respondent bank's right to foreclose the mortgaged property pursuant to Act 3135, as amended and P.D. 385. Petitioners' Motion for Reconsideration and Supplemental Motion for Reconsideration, dated September 15, 1993 and October 28, 1993, respectively, were denied by respondent court in its resolution dated January 10, 1994.

Hence the instant petition.

7

This appeal by certiorari from the respondent court's decision dated August 27, 1993 raises two principal issues namely: 1) Whether or not respondent bank was authorized to raise its interest rates from 21% to as high as 68% under the credit agreement; and 2) Whether or not respondent bank is granted the authority to foreclose the Marvin Plaza under the mandatory foreclosure provisions of P.D. 385.

In its comment dated April 19, 1994, respondent bank vigorously denied that the increases in the interest rates were illegal, unilateral, excessive and arbitrary, it argues that the escalated rates of interest it imposed was based on the agreement of the parties. Respondent bank further contends that it had a right to foreclose the mortgaged property pursuant to P.D. 385, after petitioners were unable to pay their loan obligations to the bank based on the increased rates upon maturity in 1984.

The instant petition is impressed with merit.

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. 6 Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.

It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956 that "No interest shall be due unless it has been expressly stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when 1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed by law; and 3) upon agreement.

Indeed, the interest rate which appears to have been agreed upon by the parties to the contract in this case was the 21% rate stipulated in the interest provision. Any doubt about this is in fact readily resolved by a careful reading of the credit agreement because the same plainly uses the phrase "interest rate agreed upon," in reference to the original 21% interest rate. The interest provision states:

(c) interest and Charges

(1) The Bank reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future; provided, that the interest rate on this/these accommodations shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease of the maximum interest rate.

In Philippine National Bank v. Court of Appeals, 7 this Court disauthorized respondent bank from unilaterally raising the interest rate in the borrower's loan from 18% to 32%, 41% and 48% partly because the aforestated increases violated the principle of mutuality of contracts expressed in Article 1308 of the Civil Code. The Court held:

CB Circular No. 905, Series of 1982 (Exh. 11) removed the Usury Law ceiling on interest rates —

. . . increases in interest rates are not subject to any ceiling prescribed by the Usury Law.

but it did not authorize the PNB, or any bank for that matter, to unilaterally and successively increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation of P.D. 116 which limits such changes to once every twelve months.

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private respondent's loan, violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or lease it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.

PNB's successive increases of the interest rate on the private respondent's loan, over the latter's protest, were arbitrary as they violated an express provision of the Credit Agreement (Exh. 1) Section 9.01 that its terms "may be amended only by an instrument in writing signed by the party to be bound as burdened by such amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides that "no interest shall be due unless it has been expressly stipulated in writing."

The debtor herein never agreed in writing to pay the interest increases fixed by the PNB beyond 24%per annum, hence, he is not bound to pay a higher rate than that.

That an increase in the interest rate from 18% to 48% within a period of four (4) months is excessive, as found by the Court of Appeals, is indisputable.

Clearly, the galloping increases in interest rate imposed by respondent bank on petitioners' loan, over the latter's vehement protests, were arbitrary.

Moreover, respondent bank's reliance on C.B. Circular No. 905, Series of 1982 did not authorize the bank, or any lending institution for that matter, to progressively increase interest rates on borrowings to an extent which would have made it virtually impossible for debtors to comply with their own obligations. True, escalation clauses in credit agreements are perfectly

8

valid and do not contravene public policy. Such clauses, however, (as are stipulations in other contracts) are nonetheless still subject to laws and provisions governing agreements between parties, which agreements — while they may be the law between the contracting parties — implicitly incorporate provisions of existing law. Consequently, while the Usury Law ceiling on interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be read as granting respondent bank carte blanche authority to raise interest rates to levels which would either enslave its borrowers or lead to a hemorrhaging of their assets. Borrowing represents a transfusion of capital from lending institutions to industries and businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the instant case.

Apart from violating the principle of mutuality of contracts, there is authority for disallowing the interest rates imposed by respondent bank, for the credit agreement specifically requires that the increase be "within the limits allowed by law". In the case of PNB v. Court of Appeals, cited above, this Court clearly emphasized that C.B. Circular No. 905 could not be properly invoked to justify the escalation clauses of such contracts, not being a grant of specific authority.

Furthermore, the escalation clause of the credit agreement requires that the same be made "within the limits allowed by law," obviously referring specifically to legislative enactments not administrative circulars. Note that the phrase "limits imposed by law," refers only to the escalation clause. However, the same agreement allows reduction on the basis of law or the Monetary Board. Had the parties intended the word "law" to refer to both legislative enactments and administrative circulars and issuances, the agreement would not have gone as far as making a distinction between "law or the Monetary Board Circulars" in referring to mutually agreed upon reductions in interest rates. This distinction was the subject of the Court's disquisition in the case of Banco Filipino Savings and Mortgage Bank v. Navarro 8 where the Court held that:

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase.

the interest rate stipulated in this contract without advance notice to me/us in the event.

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly

a statute or a law, it has, however, the force and effect of law." (Emphasis supplied). "An administrative regulation adopted pursuant to law has the force and effect of law." "That administrative rules and regulations have the force of law can no longer be questioned."

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the latter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.' (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

Petitioners never agreed in writing to pay the increased interest rates demanded by respondent bank in contravention to the tenor of their credit agreement. That an increase in interest rates from 18% to as much as 68% is excessive and unconscionable is indisputable. Between 1981 and 1984, petitioners had paid an amount equivalent to virtually half of the entire

9

principal (P7,735,004.66) which was applied to interest alone. By the time the spouses tendered the amount of P40,142,518.00 in settlement of their obligations; respondent bank was demanding P58,377,487.00 over and above those amounts already previously paid by the spouses.

Escalation clauses are not basically wrong or legally objectionable so long as they are not solely potestative but based on reasonable and valid grounds. 9 Here, as clearly demonstrated above, not only the increases of the interest rates on the basis of the escalation clause patently unreasonable and unconscionable, but also there are no valid and reasonable standards upon which the increases are anchored.

We go now to respondent bank's claim that the principal issue in the case at bench involves its right to foreclose petitioners' properties under P.D. 385. We find respondent's pretense untenable.

Presidential Decree No. 385 was issued principally to guarantee that government financial institutions would not be denied substantial cash inflows necessary to finance the government's development projects all over the country by large borrowers who resort to litigation to prevent or delay the government's collection of their debts or loans.10 In facilitating collection of debts through its automatic foreclosure provisions, the government is however, not exempted from observing basic principles of law, and ordinary fairness and decency under the due process clause of the Constitution.11

In the first place, because of the dispute regarding the interest rate increases, an issue which was never settled on merit in the courts below, the exact amount of petitioner's obligations could not be determined. Thus, the foreclosure provisions of P.D. 385 could be validly invoked by respondent only after settlement of the question involving the interest rate on the loan, and only after the spouses refused to meet their obligations following such determination. In Filipinas Marble Corporation v. Intermediate Appellate Court, 12 involving P.D. 385's provisions on mandatory foreclosure, we held that:

We cannot, at this point, conclude that respondent DBP together with the Bancom people actually misappropriated and misspent the $5 million loan in whole or in part although the trial court found that there is "persuasive" evidence that such acts were committed by the respondent. This matter should rightfully be litigated below in the main action. Pending the outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven that respondent DBP is responsible for the misappropriation of the loan, even if only in part, then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, its employees and their families.

Only after trial on the merits of the main case can the true amount of the loan which was applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent of the loan where there was no failure of consideration and which may be properly satisfied by foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a trial on the merits.

In Republic Planters Bank v. Court of Appeals 13 the Court reiterating the dictum in Filipinas Marble Corporation, held:

The enforcement of P.D. 385 will sweep under the rug' this iceberg of a scandal in the sugar industry during the Marcos Martial Law years. This we can not allow to happen. For the benefit of future generations, all the dirty linen in the PHILSUCUCOM/NASUTRA/RPB

closets have to be exposed in public so that the same may NEVER be repeated.

It is of paramount national interest, that we allow the trial court to proceed with dispatch to allow the parties below to present their evidence.

Furthermore, petitioners made a valid consignation of what they, in good faith and in compliance with the letter of the Credit Agreement, honestly believed to be the real amount of their remaining obligations with the respondent bank. The latter could not therefore claim that there was no honest-to-goodness attempt on the part of the spouse to settle their obligations. Respondent's rush to inequitably invoke the foreclosure provisions of P.D. 385 through its legal machinations in the courts below, in spite of the unsettled differences in interpretation of the credit agreement was obviously made in bad faith, to gain the upper hand over petitioners.

In the face of the unequivocal interest rate provisions in the credit agreement and in the law requiring the parties to agree to changes in the interest rate in writing, we hold that the unilateral and progressive increases imposed by respondent PNB were null and void. Their effect was to increase the total obligation on an eighteen million peso loan to an amount way over three times that which was originally granted to the borrowers. That these increases, occasioned by crafty manipulations in the interest rates is unconscionable and neutralizes the salutary policies of extending loans to spur business cannot be disputed.

WHEREFORE, PREMISES CONSIDERED, the decision of the Court of Appeals dated August 27, 1993, as well as the resolution dated February 10, 1994 is hereby REVERSED AND SET ASIDE. The case is remanded to the Regional Trial Court of Makati for further proceedings.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 122079 June 27, 1997

SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. CONCEPCION, petitioners, vs.HON. COURT OF APPEALS, HOME SAVINGS BANK AND TRUST COMPANY, and as nominal party-defendants, THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, and who conducted the auction sale and the REGISTER OF DEEDS or his representative of San Juan, Metro Manila, and ASAJE REALTY CORPORATION, respondents.

 VITUG, J.:

The spouses Antonio E.A. Concepcion and Manuela S. Concepcion assail, via the instant petition for review oncertiorari, the decision, 1 dated 15 September 1995, of the Court of Appeals, affirming with modification the judgment of the Regional Trial Court ("RTC"), 2 Branch 157, of Pasig City, 3 that dismissed the complaint of herein petitioners against private respondents.

The facts, hereunder narrated, are culled from the findings of the appellate court.

10

On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life Savings and Trust Company) granted to the Concepcions a loan amounting to P1,400,000.00. The Concepcions, in turn, executed in favor of the bank a promissory note and a real estate mortgage over their property located at 11 Albany St., Greenhills, San Juan, Metro Manila. The loan was payable in equal quarterly amortizations for a period of fifteen (15) years and carried an interest rate of sixteen percent (16%) per annum. The promissory note provided that the Concepcions had authorized —

. . . the Bank to correspondingly increase the interest rate presently stipulated in this transaction without advance notice to me/us in the event the Central Bank of the Philippines raises its rediscount rate to member banks, and/or the interest rate on savings and time deposit, and/or the interest rate on such loans and/or advances. 4

In accordance with the above provision, the bank unilaterally increased the interest rate from 16% to 21% effective 17 February 1980; from 21% to 30% effective 17 October 1984; and from 30% to 38% effective 17 November 1984, increasing the quarterly amortizations from P67,830.00 to, respectively, P77,619.72, P104,661.10, and P123,797.05 for the periods aforestated. The Concepcions paid, under protest, the increased amortizations of P77,619.72 and P104,661.10 until January 1985 but thereafter failed to pay the quarterly amortization of P123,797.05 (starting due date of 17 April 1985).

In a letter, dated 15 July 1985, the bank's President made a demand on the Concepcions for the payment of the arrearages. The Concepcions failed to pay, constraining the bank's counsel to send a final demand letter, dated 26 August 1985, for the payment of P393,878.81, covering the spouses' due account for three quarterly payments plus interest, penalty, and service charges. Still, no payment was received.

On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff of Pasig City a petition for extrajudicial foreclosure of the real estate mortgage executed by the Concepcions. A notice of sale was issued on 15 May 1986, setting the public auction sale on 11 June 1986. The notice was published in the newspaper "Mabuhay." A copy of the notice was sent to the Concepcions at 59 Whitefield St., White Plains Subdivision, Quezon City and/or at 11 Albany St., Greenhills Subdivision, San Juan, Metro Manila. The public auction sale went on as scheduled with the bank emerging as the highest bidder. A Certificate of Sale was issued in favor of the bank.

The Concepcions were unable to exercise their right of redemption within the one-year period provided under Act No. 3135. The bank thus consolidated its title over the property and, after the cancellation of the title in the name of the Concepcions, a new transfer certificate of title (No. 090-R) was issued in the name of Home Savings Bank and Trust Company.

On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje Realty Corporation and a new certificate of title was issued in the latter's name.

Meanwhile, on 29 July 1987, the Concepcions filed an action against Home Savings Bank and Trust Company, the Sheriff of San Juan, Metro Manila, and the Register of Deeds of San Juan, Metro Manila, for the cancellation of the foreclosure sale, the declaration of nullity of the consolidation of title in favor of the bank, and the declaration of nullity of the unilateral increases of the interest rates on their loan. The spouses likewise claimed damages against the defendants. The Concepcions, having learned of the sale of the property to Asaje Realty Corporation, filed an amended complaint impleading the realty corporation and so praying as well for the cancellation of the sale executed between said corporation and the bank and the cancellation of the certificate of title issued in the name of Asaje.

On 31 August 1992, the trial court found for the defendants and ruled:

In view of all the foregoing premises, this Court finally concludes that the plaintiffs have no cause of action either against defendant Home Savings Bank & Trust Company or defendant Asaje Realty Corporation; and under the circumstances of this case, it deems it just and equitable that attorney's fees and expenses of litigation should be recovered by said defendants.

WHEREFORE, judgment is hereby rendered dismissing the amended complaint of plaintiffs Spouses Antonio E.A. Concepcion and Manuela S. Concepcion against the defendants for lack of merit, and ordering the said plaintiffs to pay attorney's fees and expenses of litigation in the sum of P30,000.00 to defendant Home Savings Bank & Trust Company and in the amount of P25,000.00 to defendant Asaje Realty Corporation, in addition to their respective costs of suit.

SO ORDERED. 5

The Concepcions went to the Court of Appeals.

On 15 September 1995, the appellate court affirmed the trial court's decision, with modification, as follows:

Under the facts and circumstances of the case at bench, the award of attorney's fees, expenses of litigation and costs of suit in favor of defendant-appellee should be deleted. It is not a sound policy to place a penalty on the right to litigate, nor should counsel's fees be awarded everytime a party wins a suit (Arenas vs. Court of Appeals, 169 SCRA 558).

WHEREFORE, the appealed judgment is AFFIRMED with the modification that the award of attorneys fees, litigation expenses and costs of suit in favor of defendant-appellees are deleted from the dispositive portion.

SO ORDERED. 6

The Concepcions forthwith filed with this Court a petition for review on certiorari, contending that they have been denied their contractually stipulated right to be personally notified of the foreclosure proceedings on the mortgaged property.

There is some merit in the petition.

The three common types of forced sales arising from a failure to pay a mortgage debt include (a) an extrajudicial foreclosure sale, governed by Act No. 3135; (b) a judicial foreclosure sale, regulated by Rule 68 of the Rules of Court; and (c) an ordinary execution sale, covered by Rule 39 of the Rules of Court. 7 Each mode, peculiarly, has its own requirements.

In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135  8 is the law applicable; 9 the provision reads:

Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.

11

The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication of the same in a newspaper of general circulation. 10 Personal notice to the mortgagor is not necessary. 11, Nevertheless, the parties to the mortgage contract are not precluded from exacting additional requirements.

In the case at bar, the mortgage contract stipulated that —

All correspondence relative to this Mortgage, including demand letters, summons, subpoenas, or notifications of any judicial or extrajudicial actions shall be sent to the Mortgagor at the address given above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee, and the mere act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the Mortgagor for all legal purposes, and fact that any communication is not actually received by the Mortgagor, or that it has been returned unclaimed to the Mortgagee, or that no person was found at the address given, or that the address is fictitious or cannot be located, shall not excuse or relieve Mortgagor from the effects of such notice. 12

The stipulation, not being contrary to law, morals, good customs, public order or public policy, is the law between the contracting parties and should be faithfully complied with. 13

Private respondent bank maintains that the stipulation that "all correspondence relative to (the) Mortgage . . . shall be sent to the Mortgagor at the address given above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee" 14 gives the mortgagee an alternative to send its correspondence either at the old or the new address given. 15 This stand is illogical. It could not have been the intendment of the parties to defeat the very purpose of the provision referred to which is obviously to apprise the mortgagors of the bank's action that might affect the property and to accord to them an opportunity to safeguard their rights. The Court finds the bank's failure to comply with its agreement with petitioners an inexcusable breach of the mortgagee's covenant. Neither petitioners' subsequent opportunity to redeem the property nor their failed negotiations with the bank for a new schedule of payments, 16 can be a valid justification for the breach.

The foregoing notwithstanding, petitioners may no longer seek the reconveyance of the property from private respondent Asaje Realty Corporation, the latter having been, evidently, an innocent purchaser in good faith. 17The realty corporation purchased the property when the title was already in the name of the bank. It was under no obligation to investigate the title of the bank or to look beyond what clearly appeared to be on the face of the certificate. 18

Private respondent bank, however, can still be held to account for the bid price of Asaje Realty Corporation over and above, if any, the amount due the bank on the basis of the original interest rate, the unilateral increases made by the bank having been correctly invalidated by the Court of Appeals.

The validity of "escalation" or "escalator" clauses in contracts, in general, was upheld by the Supreme Court in Banco Filipino Savings and Mortgage Bank vs. Hen. Navarro and Del Valle. 19 Hence:

Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence actual meeting of the

minds of the parties or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.

The Court further finds as a matter of law that the cost of living index adjustment, or substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs. 20

In Philippine National Bank vs. Court of Appeals, 21 the Court further elucidated, as follows:

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who contracts his act has no more efficacy than if it had been done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. In Philippine National Bank v.Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held —

. . . (T)he unilateral action of the PNB in increasing the interest rate on the private respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force or law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon

12

the uncontrolled will of one of the contracting parties, is void . . . Hence, even assuming that the. . . loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not equal footing the weaker party's (the debtor) participation being reduced to the alternative to take it or leave it'. . . Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. (Citationsomitted.) 22

Even if we were to consider that petitioners were bound by their agreement allowing an increase in the interest rate despite the lack of advance notice to them, the escalation should still be subject, as so contractually stipulated, to a corresponding increase by the Central Bank of its rediscount rate to member banks, or of the interest rate on savings and time deposit, or of the interest rate on such loans and advances. The notices sent to petitioners merely read:

Letter of 19 July 1984:

Please be informed that the Bank has increased the interest rate of your existing loan from 21 to 30%per annum beginning October 17, 1984. This increase of interest rate is in accordance with the provision of Section 2 of Presidential Decree No. 1684 23 amending Act No. 2655. This provision of the decree is reiterated under paragraph 1 of your Promissory Note. Your quarterly amortization has been increased to P104,661.10.

We trust that you will be guided accordingly. 24

Letter of 14 November 1984:

On account of the prevailing business and economic condition, we are compelled to increase the interest rate of your existing loan from 30% to 38 % per annum effective November 17, 1984. This increase is in accordance with your agreement (escalation clause) in your promissory note/s.

In view of this increase in the interest rate of your loan, your Quarterly amortization correspondingly increased to P123,797.05 commencing on April 17, 1985.

We trust that you will understand our position and please be guided accordingly. 25

Given the circumstances, the Court sees no cogent reasons to fault the appellate court in its finding that there are no sufficient valid justifications aptly shown for the unilateral increases by private respondent bank of the interest rates on the loan.

WHEREFORE, the, decision of the appellate court is AFFIRMED subject to the MODIFICATION that private respondent Home Savings Bank and Trust Company shall pay to petitioners the excess, if any, of the bid price it received from Asaje Realty Corporation for the foreclosed property in question over and above the unpaid balance of the loan computed at the original interest rate. This case is REMANDED to the trial court for the above determination. No costs.

SO ORDERED.

Digest

FACTS: Home Savings Bank and Trust Company granted to the Concepcions a

loan.  The Concepcions, in turn, executed in favor of the bank a promissory

note and a REM over their property.  The loan was payable in equal quarterly

amortizations for a period of fifteen (15) years and carried an interest rate of

sixteen percent (16%) per annum.  

·         Escalation Clause: The promissory note provided that the Concepcions had

authorized -"x x x  the Bank to correspondingly increase the interest rate

presently stipulated in this transaction without advance notice to me/us in

the event the Central Bank of the Philippines raises its rediscount rate to

member banks, and/or the interest rate on savings and time deposit, and/or

the interest rate on such loans and/or advances."

·         In accordance with the above provision, the bank unilaterally increased the

interest rate from 16% to 38%.

·         General Rule (GR): The validity of escalation clauses in contracts is upheld by

the SC.

·         Reason for validity: (a)   to maintain fiscal stability and (b) to retain the value

of money in long term contracts.  

·         Principle of mutuality of contracts:   ART. 1308.  The contract must bind both

contracting parties; its validity or compliance cannot be left to the will of one

of them.

Ø  A contract containing a condition which makes its fulfillment dependent

exclusively upon the uncontrolled will of one of the contracting parties, is

void.

Ø  An escalation clause that gives a creditor an unbridled right

to unilaterallyand upwardly adjust the interest on private respondentthe

debtor’s loan would completely take away from the debtor the right to assent

to an important modification in their agreement, and would negate the

element of mutuality in contracts.

·         Basis of the increase of interest rates in this case: on account of the revailing

business and economic condition.

PD 1684 “Usury Law”:   SEC. 7-a.  Parties to an agreement pertaining to a loan

or forbearance of money, goods or credits may stipulate that the rate of

interest agreed upon may be increased in the event that the applicable

maximum rate of interest is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a

stipulation in the agreement that the rate of interest agreed upon shall be

reduced in the event that the applicable maximum rate of interest is reduced

by law or by the Monetary Board: xxx.'

13

RULING: Even if we were to consider that petitioners were bound by their

agreement allowing an increase in the interest rate despite the lack of

advance notice to them, the escalation should still be subject, as so

contractually stipulated, to a corresponding increase by the Central Bank of

its rediscount rate to member banks, or of the interest rate on savings and

time deposit, or of the interest rate on such loans and advances.  There are

no sufficient valid justifications aptly shown for the unilateral increases by

private respondent bank of the interest rates on the loan.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 119379 September 25, 1998

RODELO G. POLOTAN, SR., petitioner, vs.HON. COURT OF APPEALS (Eleventh Division), REGIONAL TRIAL COURT IN MAKATI CITY (Branch 132), and SECURITY DINERS INTERNATIONAL CORPORATION, respondents.

 ROMERO, J.:

Assailed before this Court in a Petition for Review on Certiorari is the decision 1 of the Court of Appeals in CA-G.R. CV No. 33270 affirming the decision of Branch 132 of the Regional Trial Court of Makati City.

Private respondent Security Diners International Corporation (Diners Club), a credit card company, extends credit accommodations to its cardholders for the purchase of goods and other services from member establishments. Said goods and services are reimbursed later on by cardholders upon proper billing.

Petitioner Rodelo G. Polotan, Sr. applied for membership and credit accommodations with Diners Club in October 1985. The application form contained terms and conditions governing the use and availment of the Diners Club card, among which is for the cardholder to pay all charges made through the use of said card within the period indicated in the statement of account and any remaining unpaid balance to earn 3% interest per annum plus prime rate of Security Bank & Trust Company. Notably, in the application form submitted by petitioner, Ofricano Canlas obligated himself to pay jointly and severally with petitioner the latter's obligation to private respondent.

Upon acceptance of his application, petitioner was issued Diners Club card No. 3651-212766-3005. As of May 8, 1987, petitioner incurred credit charges plus appropriate interest and service charges in the aggregate amount of P33,819.84 which had become due and demandable.

Demands for payment made against petitioner proved futile. Hence, private respondent filed a Complaint for Collection of Sum of Money against petitioner before the lower court.

The lower court rued, thus:

WHEREFORE, judgment is hereby rendered ordering defendants to pay jointly and severally plaintiff:

a) The amount of P33,819.84 and interest of 3% per annum plus prime rate of SBTC and service charges of 2% per month starting May 9, 1987 until the entire obligation is fully paid;

b) An amount equivalent to 25% of any and all amounts due and payable as attorney's fees, plus costs of suit.

With respect to the cross-claim of defendant Ofricano Canlas, defendant Rodelo G. Polotan, Sr. is ordered to indemnify and/or reimburse the former for whatever he may be ordered to pay plaintiff.

The Court of Appeals affirmed the ruling of the lower court. Hence, this petition. Petitioner assigns the following errors:

I

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING AS VALID AND LEGAL THE FOLLOWING PROVISION ON INTEREST IN THE DINERS CARD CONTRACT, TO WIT:

PAYMENT OF CHARGES — . . . The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. . . . Provided that if there occurs any change in the prevailing market rates the new interest rate shall be the guiding rate of computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder.

The Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates and to charge additional service fees as may be deemed necessary in order to maintain its service to the Cardholder.

II

RESPONDENT COURT OF APPEALS COMMITTED AN ERROR OF LAW IN RULING IN EFFECT THAT PRIVATE RESPONDENT'S STATEMENT OF ACCOUNT (Exh. "2"). AS A JUDICIAL ADMISSION THAT MRS. POLOTAN HAD ALREADY PAID COULD BE CONTRADICTED WITHOUT THE PRIVATE RESPONDENT LAYING THE PROPER BASIS FOR THE INTRODUCTION OF CONTRARY EVIDENCE;

III

RESPONDENT COURT OF APPEALS COMMITTED A GRIEVOUS ERROR OF FACT IN FINDING AS CREDIBLE THE ILLOGICAL AND ABSURD EXPLANATION OF PRIVATE RESPONDENT'S MR. VICENTE;

IV

RESPONDENT COURT OF APPEALS ERRED IN NOT AWARDING DAMAGES TO PETITIONER.

In the first assignment of error, petitioner argues that the provision on interest rate is "obscure and ambiguous and not susceptible of reasonable interpretation" particularly the terms "prime rate", "prevailing market rate"

14

and "guiding rate". In effect, there was no meeting of minds. As such, this being a contract of adhesion, any ambiguity should be resolved against the one who caused it.

Petitioner added that the said provision was also illegal as it violated the laws and Central Bank Circulars. While said proviso allowed for the escalation of interest, it did not allow for a downward adjustment of the same.

In his second and third assignment of error, petitioner claimed that Diners Club admitted, through its statement of account, that petitioner's wife, Mrs. Polotan, had no more account with it. But then, he claimed that the lower court and the Court of Appeals allowed the testimony of one Mr. Vicente explaining that the reason why Mrs. Polotan had no more account with it was that being a supplementary cardholder, her account was consolidated with that of petitioner in accordance with its new policy. He argued that since Diners Club admitted that Mrs. Polotan had no more account with it, the only way it could contradict such admission was by declaring that the same was a result of a palpable mistake in accordance with Section 4 of Rule 129 of the Revised Rules on Evidence. In admitting said explanation, the lower court and the Court of Appeals violated the rule on the weight to be accorded conflicting evidence. In effect, petitioner insists that both courts favored the uncorroborated testimonial evidence of Mr. Vicente over the documentary evidence presented by petitioner and admitted by Diners Club.

In its fourth assignment of error, petitioner claimed that he should have been awarded damages because of Diners Club's bad faith.

This Court finds Petitioner's contentions without merit.

The issues presented by petitioner are clearly questions of law. Notwithstanding petitioner's submission of the above errors, however, the core issue is basically one of fact. This case stemmed from a simple complaint for collection of sum of money. The lower court and the Court of Appeals found that petitioner indeed owed Diners Club the amount being demanded.

In the case of Reyes v. CA, 2 this Court held that factual findings of the trial court, adopted and confirmed by the Court of Appeals, are final and conclusive and may not be reviewed on appeal. The exceptions to this rule are as follows: (1) when the inference made is manifestly mistaken, absurd or impossible; (2) when there is a grave abuse of discretion; (3) when the finding is grounded entirely on speculations, surmises or conjectures; (4) when the judgment of the Court of Appeals is based on misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion and (10) when the findings of fact of the Court of Appeals are premised on the absence of evidence and are contradicted by the evidence on record.

Only a clear showing that any of the above-cited exceptions exists would justify a review of the findings of fact made by the lower court and upheld by the Court of Appeals. In the instant case, a review of the decisions of the lower court, as well as the Court of Appeals, shows that the conclusions have been logically arrived at and substantially supported by the evidence presented by the parties.

Be that as it may, this Court sees it fit and proper to discuss the merits of this petition based on petitioner's claim that since the contract he signed with Diners Club was a contract of adhesion, the obscure provision on interest should be resolved in his favor.

A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while

the other party merely affixes his signature or his "adhesion" thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. 3

Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by Diners Club. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against private respondent.

Indeed, the terms "prime rate", "prevailing market rate", "2% penalty charge", "service fee", and "guiding rate" are technical terms which are beyond the ken of an ordinary layman. To be sure, petitioner hardly falls into the category of an "ordinary layman." As aptly observed by the Court of Appeals:

. . . [A]ppellant by his own admission is a "lawyer by profession, a reputable businessman and a note leader of a number of socio-civic organizations." With such impressive credentials, this Court is hard-put to fathom someone of his calibre entering into a contract with eyes "blindfolded". 4

Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely. 5

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. 6 It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided. 7

In this case, petitioner, in effect, claims that the subject contract is one-sided in that the contract allows for the escalation of interests, but does not provide for a downward adjustment of the same in violation of Central Bank Circular 905.

The claim is without basis. First, by signing the contract, petitioner and private respondent agreed upon the rate as stipulated in the subject contract. Such is now allowed by C.B. Circular 905. 8 Second, petitioner failed to cite any particular provision of said Circular which was allegedly violated by the subject contract.

Be that as it may, there is nothing inherently wrong with escalation clauses. Escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.  9

Petitioner further argues that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by Diners Club.

In Florendo v. CA, 10 this Court has held that:

. . . the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB v. CA (196 SCRA 536 [1991]):

15

In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. . . .

The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required posting on the monthly statement served to the Cardholder." This could not be considered an escalation clause for the reason that it neither states all increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate.

Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction.

Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in prevailing market rates . . ." is an escalation clause. However, it cannot be said to be dependent solely on the will of private respondent as it is also dependent on the prevailing market rates.

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds. 11 Obviously, the fluctuation in the markets rates is beyond the control of private respondent.

As to the second and third assignments of error, it is misleading for petitioner to say that private respondent had judicially admitted that its statement of account is proof that Mrs. Polotan has already paid her account with private respondent. Proceeding from said premise, it is further misleading for petitioner to conclude that private respondent's testimonial evidence about a new policy contradicted its judicially admitted documentary evidence without laying the proper basis for the introduction of contrary evidence and in violation of Section 2, Rule 129 of the Revised Rules on Evidence, which provides that:

Admissions made by the parties in the pleadings, or in the course of the trial or other proceedings do not require proof and can be contradicted unless previously shown to have been made through palpable mistake.

Certainly, Diners Club could not deny the existence of Exhibit "2" which is the Statement of Account issued to Mrs. Polotan since, precisely, it was the one which issued said statement. But to conclude that said Statement of Account was likewise an admission that Mrs. Polotan has no more account with Diners Club would be equivocatory, or non-sequitur.

While private respondent admitted the existence of Exhibit "2", it could not have agreed to the purpose for which the exhibit was presented. As satisfactorily found by the Court of Appeals and to which this Court agrees:

Appellant's allegation is misleading. On the contrary, appellee's rebuttal witness, Alfredo Vicente, categorically stated that the reason the Statement of Account in the name of Alicia Polotan showed a zero balance (Exh. "2") was due to the fact that effective February 1989, under a new system, separate monthly statements were produced on supplementary card

members. Prior to February 1989, the availment of Mr. and Mrs. Polotan were incorporated under one statement.

Moreover, it is to be observed that while the Complaint was filed on 15 May 1987, the Diners Club Monthly Statement in the name of Alicia B. Polotan is dated almost two (2) years later or "02/08/89" (Exh. "2"). This bolsters the testimony of Alfredo Vicente regarding the entry of zero balance in Mrs. Polotan's name.

Although said exhibit would, by itself, show that Mrs. Polotan had no more account with Diners Club, it would not have been conclusive to prove that said account was already paid. The proper evidence would have been a receipt of payment.

Significantly, petitioner did not contest the purchases as indicated in the statements of account but merely alleged that some of the purchases being claimed to have been made by petitioner were not supported by invoices. The lower court found otherwise. 12

In light of the above, this Court sees no reason to award damages to petitioner.

WHEREFORE, in view of the foregoing, the petition for certiorari is hereby DENIED and the Decision of the Court of Appeals AFFIRMED with the MODIFICATION that the attorney's fees are reduced to 15%.

SO ORDERED.

Digest

Private respondent Security Diners International Corporation (Diners Club), a credit card company, extends credit accommodations to its cardholders for the purchase of goods and other services from member establishments.

Petitioner argues that the provision on interest rate is obscure and ambiguous and not susceptible of reasonable interpretation particularly the terms prime rate, prevailing market rate and guiding rate. In effect, there was no meeting of minds. As such, this being a contract of adhesion, any ambiguity should be resolved against the one who caused it.

Petitioners contract with private respondent in this case, expressly provides for an escalation clause but not a de-escalation clause. The Supreme Court ruled that notwithstanding this, the contract provides a leeway for the interest rate to be reduced in case the prevailing market rates dictate its reduction and that said provision on the increase of interest rates is not dependent solely on the will of private respondent as it is also dependent on the prevailing market rates. A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject, but cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. Admittedly, the contract containing standard stipulations imposed upon those who seek to avail of its credit services was prepared by the Company. There is no way a prospective credit card holder can object to any onerous provision as it is offered on a take-it-or-leave-it basis. Being a contract of adhesion, any ambiguity in its provisions trust be construed against the Company. Nevertheless, these types of contracts have been declared as binding ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely. The binding effect of any agreement

16

between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. It is important to stress that the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-46591               July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs.HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE DEL VALLE, respondents.

MELENCIO-HERRERA, J.:

This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees:

WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan.

SO ORDERED.

The facts are not in dispute:

On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads:

3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions,

including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum.

x x x           x x x          x x x

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended."

CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides:

Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months.

The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated.

On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows:

September 24, 1976

Mr. Florante del Valle14 Palanca StreetB.F. Homes, ParanaqueRizal

Dear Mr. del Valle:

This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum.

A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note:

I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.

In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi-

17

banking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498:

l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that:

a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and

2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date.

The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent court of justice the legality or validity of such escalation clauses.

We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino.

Very truly yours,

(Sgd.) MERCEDES C. PAREDESDirector

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494.

In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan.

It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no force

and effect as if the case was never filed," since the parties would like to end this matter once and for all."

However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings.

At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court allowed the intervention of Lolita Perono2and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO.

The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan."

The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased rate imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."3

The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid.

Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open price-provision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.4

The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the

18

cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.5

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in the event a lawshould be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no longer be questioned. "8

The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest

is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board."

While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender.

2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage.

Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty.

On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).1avvphi1

On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section,10 the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property. The two sections read:

SEC. 3. Section two of the same Act is hereby amended to read as follows:

SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly

19

registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board.

SEC. 4. Section three of the same Act is hereby amended to read as follows:

SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty.

WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan.

The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494.

SO ORDERED.

Digest

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-31125             January 21, 1930

TIBURCIO LUTERO, plaintiff-appellant, vs.SIULIONG and CO., defendant-appellant.

Guevara, Francisco and Recto and Tiburcio Lutero for plaintiff-appellant.Power and Hill for defendant-appellant.

VILLA-REAL, J.:

These are two appeals taken by plaintiff Tiburcio Lutero and by defendant Siuliong & Co. from the judgment of the Court of First Instance of Iloilo absolving the defendant from the complaint, and the plaintiff from the cross-complaint, without costs.

In support of his appeal, the plaintiff assigns the following alleged errors as committed by the court below in its judgment, to wit:

The lower court erred:

1. In refusing to permit witness Rufino Abordo to testify with regard to a conversation between the plaintiff and the deceased manager of the defendant.

2. In holding: (a) That Exhibits A and C are contracts of sale of sugar; (b) that the P3,000 and P5,600 mentioned in said contracts are advances on the selling price of 500 and 800 piculs of sugar, respectively.

3. In not holding: (a) That Exhibits A and C are contracts of loans of money payable in sugar; (b) that said contracts are usurious; (c) therefore, the current market price at the time of delivery, or P30 per picul, should be fixed as the price of the sugar delivered by the plaintiff to the defendant; (d) consequently, the plaintiff is entitled to a balance of P8,187.75 against the defendant.

4. In not ordering the defendant to pay plaintiff said amount of P8,187.75.

5. In denying the plaintiff's motion for a new trial.

On the other hand, the defendant, in support of its appeal, assigns the following alleged errors as committed by the court below in its judgment, to wit:

The court erred in all of the following particulars:

1. In finding that the defendant by its silence had renounced its rights under its contracts with the plaintiff.

2. In refusing to allow defendant interest at eight per cent per annum as provided for in Exhibit C.

3. In refusing to allow defendant attorney's fees as provided for in contracts Exhibits A and C.

4. In not rendering judgment in favor of the defendant and against plaintiff for all of the amounts prayed for in defendant's counter-complaint, including interest, attorney's fees, penalties and payment for sugar at prices agreed upon in the contracts between plaintiff and defendant.

The following facts were proved at the trial without dispute:

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On June 30, 1919, the plaintiff Tiburcio Lutero and the defendant Siuliong & Co. entered into a contract (Exhibit A), the pertinent parts of which are as follows:

Know all men by these presents:

That I, Tiburcio Lutero, of age, married, and a resident of the municipality of January, Province of Iloilo, Philippine Islands,

DO HEREBY STATE:

That I own a sugar plantation located in the municipality of January, Iloilo, called San Ramon, from which I expect a crop of at least 1,200 to 1,500 piculs of sugar, more or less.

That I have agreed with the firm of Siuliong & Co., of this City of Iloilo, represented by Mr. Yap-Inchong, to fix the selling price of 500 piculs of my sugar crop from said plantation during the season of 1919-1920 at the rate of P12 per picul for high class No. 1 sugar; P11.50 for No. 2, and P11 for No. 3, to be delivered to said firm in the month of March of next year, 1920.

That by virtue of this agreement to sell, the firm of Siuliong & Co., through its manager, binds, itself to advance to Mr. Tiburcio Lutero the amount of P3,000, Philippine currency, or, at the rate of P6 a picul for No. 1; and P0.50 less for each succeeding picul, as an advance upon the sale of said 500 piculs, and the remainder shall be paid to said Mr. Lutero from time to time, as he sends his sugar to the Iloilo market, until the full price of said 500 piculs of sugar is covered.

I further state that should I be unable to deliver said 500 piculs, I bind myself to pay in specie to said form of Siuliong & Co., the price of the undelivered portion according to the current market price during said month of March.

I state likewise that for the security of Siuliong & Co., I, Tiburcio Lutero, constitute a second mortgage in favor of said firm on a sugar plantation located in the barrio of Ramirez, municipality of Janiuay, Province of Iloilo, with all the improvements thereon, consisting of a six-horse power steam engine with an eight-horse power boiler; a battery with two ovens and eight cauas and a warehouse of mixed materials, which plantation is encumbered by a first mortgage in favor of the National Bank, and is described as follows: . . . .

That for the security of Siuliong & Co., I, Maximino Jalandoni, farmer, landowner, and resident of the municipality of Jaro, Province of Iloilo, P. I., do hereby bind myself as joint and several surety for Mr. Tiburcio Lutero in favor of Messrs. Siuliong & Co., for the sum of three thousand pesos (P3,000) in case said Mr. Lutero should be unable to fulfill his obligations stipulated in this contract. "Any of the parties failing to fulfill the terms of this contract hereby binds himself to pay an indemnity of P200 as costs and attorney's fees.

In witness whereof, we sign these presents in Iloilo, this thirtieth day of June, 1919.

(Sgd.) TIBURCIO LUTERO SIULIONG & CO.

(Sgd.) YAP-INCHONG

On August 21, 1919, the same parties entered into another contract (Exhibit C), the pertinent parts of which are as follows:

Know all men by these presents:

That I, Tiburcio Lutero, of age, married, and resident of the municipality of Janiuay, Province of Iloilo, P. I.

DO HEREBY STATE:

That I, Tiburcio Lutero, own a sugar plantation located in the municipality of Janiuay, Province of Iloilo, P. I., from which I expect a crop of one thousand two hundred to one thousand five hundred piculs of sugar more or less.

That I have agreed with the firm Siuliong & Co., through its branch in this City of Iloilo, Province of Iloilo, to fix the selling price of Eight hundred (800) piculs of sugar from my crop from said plantation during the season of 1919-1920 at the rate of fourteen pesos (P14) a picul for No. 1 sugar; thirteen pesos and fifty centavos (P13.50) a picul for No. 2 sugar; thirteen pesos (P13) for No. 3; twelve pesos and fifty centavos (P12.50) for No. 4; and twelve pesos (P12) for No. 5; to be delivered to said firm in the months of December, January, February, March, and April of said year of 1920.

That by virtue of this agreement to sell, the firm Siuliong & Co., through its manager, binds itself to advance to me the amount of five thousand six hundred pesos (P5,600), Philippine currency, that is, at the rate of P7 per picul as an advance payment upon the selling price of said eight hundred piculs of sugar, and the balance shall be paid to me from time to time as I forward my sugar to the Iloilo market, until the full price of said eight hundred piculs (800) is covered.

I likewise state that should I be unable to deliver said eight hundred piculs of sugar of any part thereof, I bind myself to pay in specie the price of the undelivered portion to said firm of Siuliong & Co., according to the current market price in said months and on the day of the settlement of my account.

I state further that to secure to said firm of Siuliong & Co., the sum of five thousand six hundred pesos (P5,600) which I have received from the same as an advance upon this sale, I hereby mortgaged to said firm all the sugar cane now planted on my said San Ramon plantation, situated in the municipality of Janiuay, Province of Iloilo, P. I., with the exception of the five hundred (500) piculs, which was the subject of my contract with the same firm of Siuliong & Co., dated June 30th of this year.

That for a further security of said firm of Siuliong & Co., and by virtue of the power of attorney conferred upon me by Mr. Ramon Masa, attorney, farmer, and resident of the municipality of Sibalum, Province of Antique, P.I., which power remains to this day unrevoked, duly acknowledged before the justice of the peace of Sibalum, Province of Antique, Mr. Nicolas Tordecillas, on August 15, of this year, I do hereby mortgage in favor of said firm of Siuliong & Co., the forty head of cattle, consisting of cows and carabaos, all of which are at present on said Mr. Masa's farm in the municipality of San Remigio, Province of Antique, which are free from all liens and incubrances, and of which the documents of ownership are described as follows:

x x x           x x x           x x x

Should any or all of said animals thus mortgaged die, I bind myself to replace the loss with my own carabaos.

I hereby state that the amount of five thousand six hundred pesos (P5,600) Philippine currency, advanced to me by the firm of Siuliong & Co., shall earn 8 per cent annual interest until full settlement of my account.

21

I hereby state that the date of maturity of this contract was fixed as April 30, 1920.

I, Florentino Magalona, of age, married, resident of the district of Molo, municipality of Iloilo, Province of Iloilo, P.I., farmer, landowner, do hereby state that I hereby bind myself as joint and several surety for Mr. Tiburcio Lutero in favor of the firm of Siuliong & Co., should he be unable to meet his obligation stipulated in this contract.

Any of the parties who fails to comply with the terms of this contract shall be bound to pay an indemnity of five hundred pesos (P500) as costs and attorney's fees.

In witness whereof, we have hereunto set our hands in Iloilo, this 21st day of August, 1919.

(Sgd.) TIBURCIO LUTERO (Sgd.) FLORENTINO MAGALONA

SIULIONG & CO. By (Sgd.) YAP-INCHONG

By virtue of the contract Exhibit A, the plaintiff delivered to the defendant a total of 337 piculs and 57 cates of muscovado sugar of different classes, and on different dates, the total price of which amounts of P3,405.58 (Exhibit 1), leaving an undelivered balance of 162 piculs and 44 cates. The plaintiff received from the defendant in kind and specie the amount of P4,606.15.

In conformity with the contract Exhibit C, the plaintiff delivered to the defendant 309 piculs and 77 cates of muscovado sugar, the total price of which amounts to P3,822.40 (Exhibit 2), leaving an undelivered balance of 490 piculs and 24 cates. The plaintiff received by virtue of said contract Exhibit C, in kind and specie, the sum of P6,862 (Exhibit 2).

The first question to be decided in the present appeal is whether the contracts Exhibits A and C, entered into by and between the plaintiff Tiburcio Lutero and the defendant Siuliong & Co. are for usurious loans of money payable in sugar.

By contract Exhibit A, the plaintiff bound himself to sell to the defendant during the month of March, 1920, 500 piculs of sugar from the crop of the agricultural year 1919-1920, at the rate of P12 a picul for No. 1 superior sugar; P11.50 for No. 2; and P11 for No. 3.

By virtue of the second contract Exhibit C, the plaintiff bound himself to sell to the defendant 800 piculs of sugar from his crop of the agricultural year 1919-1920 at the rate of P14 a picul for No. 1 sugar; P13.50 for No. 2; P13 for No. 3; P12.50 for No. 4; and P12 for No. 5, to be delivered in the months of December, January, February, March, and April, of the year 1920.

It is contended by the plaintiff-appellant that the defendant having advanced money to the plaintiff upon both contracts, said money was given as a loan payable in sugar, which, according to the law, must be computed on the basis of the market price at the time of delivery; and that as the maximum price of sugar on the respective dates of delivery was P30, and the price stipulated in said contracts was not even one-half of the market price, said contracts are usurious.

According to both contracts, the defendant was bound to buy the 500 piculs of sugar mentioned in the contract Exhibit A, and the 800 piculs of sugar mentioned in the contract Exhibit C, at the price stipulated in said contracts. It is no contended by the plaintiff-appellant that contracts for the sale of agricultural products to be delivered in future cannot be entered into. If so, the contracts made by the plaintiff and the defendant are perfectly valid, and the fact that on the date of delivery of the sugar, its market price is higher than that stipulated, does not make them usurious or illegal, because the defendant assumed the same risk of a loss taken by the plaintiff, due to difference in price, and if the price, instead of rising, had slumped, the

defendant would have had to pay the price stipulated, and not the market price, as has happened to many farmers and merchants due to the sudden slump of prices at the end of the world war.

For the foregoing considerations, we are of the opinion and so hold that the contracts of sale of agricultural products to be delivered in future, fixing a selling price, are not usurious or illegal, even when the market price of the products sold should turn out to be higher at the time of delivery.

The second question to be decided in the present appeal is whether or not the plaintiff must pay to be defendant for the sugar which the former failed to deliver in accordance with the aforesaid contracts, Exhibits A and C.

The court below, considering the price of each picul of sugar to be P30, held that the defendant had been more than paid with the sugar delivered by the plaintiff, and considering also that from the month of July, 1921, when the defendant demanded of the plaintiff the delivery of the remaining portion of the sugar, until December 8, 1927, when the cross-complaint was filed, almost six years had elapsed, said court held that the defendant had renounced its rights and had been satisfied with the sugar theretofore received from plaintiff. This opinion of the court below is based neither on law nor on equity. That the defendant had not waived its rights to the balance of the amount of sugar specified in said contracts, is shown by the fact that it several times required the plaintiff, by means of letters, to deliver said balance and that the latter kept on asking for extension of time by reason of his critical financial situation. The defendant, taking this circumstance into account, did not press its demands on the plaintiff, and allowed some six years to elapse, until the plaintiff brought this action against the defendant, praying that said contracts be declared usurious, and that the defendant be sentenced to return the amount of P16,410, as the sum collected in excess of plaintiff's debt.

For laches and neglect on the part of those, who, under the law are entitled to require of others the fulfillment of their obligations, the statute of limitations has been enacted, which provides that such rights prescribe after a certain period of time, in order that it may serve alike as a punishment for those who do not know how to look after their own interest, and as a source of reassurance to those who may have rested in the belief that their creditors had waived their rights, and also to insure economic stability and the certainty of rights. In the case before us, there are written contracts by virtue of which the parties incurred mutual obligations, and, according to section 43, No. 1 of the Code of Civil Procedure, the action which one of the parties may bring against the other to require the fulfillment of his obligation, does not prescribed until after ten years. Inasmuch as only six years, more or less, have elapsed from the time the defendant last demanded of the plaintiff the fulfillment of the obligation incurred by him by virtue of the contracts Exhibits A and C until it filed its counterclaim herein, said action has not prescribed, and the defendant is entitled to have a judicial pronouncement thereon.

Now then, if the defendant is entitled to demand of the plaintiff the fulfillment of his obligations under the terms of the contracts Exhibits A and C, and if of the 500 piculs of sugar which the plaintiff bound himself to deliver in pursuance of the contract Exhibit A, he only delivered 337 piculs and 57 cates of sugar, thus incurring a shortage of 162 piculs and 44 cates; and if out of the 800 piculs of sugar which he bound himself to deliver in accordance with the contract Exhibit C, he only delivered 309 piculs and 77 cates, thereby defaulting with respect to 490 piculs and 23 cates, and as he cannot now deliver said shortages since the period for delivery has elapsed, what damages is the defendant entitled to?

Under contract Exhibit A, the plaintiff had received from the defendant in cash, goods, and other expenses the amount of P4,606.15. Having delivered 337 piculs and 57 cates of muscovado, the total value of which is P3,405.58, he had still a balance of P1,199.87 to pay, and 162 piculs and 44 cates of sugar to deliver.

Under contract Exhibit C, the plaintiff received from the defendant in cash, goods, and other expenses the total sum of P6,862. Having delivered 319 piculs and 77 cates of muscovado, the full value whereof is P3,822.44, he had

22

still a balance of P3,031.54 to pay, and 490 piculs and 24 cates of sugar to deliver.

In accordance with contracts Exhibits A and C, mentioned above, the plaintiff bound himself to pay in cash, according to the current market price, for the undelivered difference.

The minimum market price of muscovado in the month of May, 1920, was P19 per picul. Fixing the average price of the sugar, which the plaintiff failed to deliver to the defendant, according to the respective contracts, at P10 under the contract Exhibit A, and at P12 under the contract Exhibit C, the difference between said respective contracts and the minimum market price would be the loss sustained by the defendant through plaintiff's failure to deliver the sugar at the proper time according to said contracts.

The undelivered quantity of 162 piculs and 44 cates of sugar under contract Exhibit A, at P19 a picul, yields a total sum of P3,086.36, and at P10 a picul, a total of P1,624.40, leaving a difference of P1,461.96. Inasmuch as under said contract the plaintiff owned the defendant P1,199.87, this amount and the difference just mentioned, give a total of P2,661.83, which is the aggregate amount which the plaintiff should pay to the defendant under said contract Exhibit A.

The undelivered quantity of 490 piculs and 24 cates of sugar under the contract Exhibit C, at the minimum price of P19 yields a total of P9,314.56, and at P12, a total of P5,882.88, leaving a difference of P3,431.68. Inasmuch as the plaintiff owed a balance of P3,031.54, this amount and the difference just mentioned, give a total of P6,463.22, which is the aggregate amount which the plaintiff should pay to the defendant under the aforesaid contract Exhibit C.

With respect to interest upon the sums advanced by the defendant to the plaintiff, and the attorney's fees, we do not believe it equitable to award them, considering the circumstances of this case.

For the foregoing considerations, we are of opinion and so hold: (1) That the sale of sugar to be delivered at a future definite time and for a fixed price, a part of which is advanced by the purchaser to the vendor, is neither usurious nor illegal even though said price should prove to be much less than the market price on the date of delivery; (2) that the fact that the purchaser does not bring suit against the vendor immediately upon the latter's default in the delivery of the sugar sold, and that he allows six years to elapse, does not deprive him of his right to bring such action on account of laches, inasmuch as such action, arising from a written contract, does not prescribed until after ten years from the time the cause of action arises. (section 43, Code of Civil Procedure); and (3) that the purchaser is entitled to damages sustained on account of the vendor's default, said damages consisting in the difference between the price stipulated and the market price of the goods at the time delivery thereof should have been made.

By virtue whereof, the judgment appealed from is reversed, and the defendant is absolved from the complaint; and the plaintiff is ordered, by virtue of the defendant's counterclaim to pay to the latter, under contract Exhibit A, the sum of P2,661.83 with legal interest from the date of the filing of the counterclaim until fully paid; and, under contract Exhibit C, the sum of P6,463.22 with legal interest from the date of the filing of the counterclaim until fully paid, with costs against the appellee. So ordered.

Digest

Doctrine:Contracts of sale of agricultural products to be delivered in future, fixing a selling price, are not usurious or illegal, even when the market price of the products sold should turn out to be higher at the time of delivery.

Facts:Plaintiff entered into a contract with defendant to sell the former’s future sugar crop harvest to the latter at a price depending on the class of the sugar.

The defendant bound itself to pay an advance amount of Php. 3,000 and the remainder shall be paid from time to time. The contract also stated that should the plaintiff fail to deliver, he shall pay the amount of the undelivered portion to the defendant. The plaintiff also entered into a mortgage agreement to secure his performance in the contract.

Issue:

Whether or not future products are invalid subjects in a contract of sale

Held:

No. The contracts of sale of agricultural products to be delivered in future,

fixing a selling price, are not usurious or illegal, even when the market price

of the products sold should turn out to be higher at the time of delivery.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-17165             September 26, 1962

EMMA R. GENIZA, AURELIO GENIZA, LORENZO RIVERA, CATALINA CARREON RIVERA and ZACARIAS RIVERA, plaintiffs-appellants, vs.HENRY SY and ASIA MERCANTILE CORPORATION, defendants-appellants.

Vicente J. Francisco for plaintiffs-appellants.Dakila F. Castro for defendants-appellees.

LABRADOR, J.:

The original decision rendered by Us in the above entitled case refers to a first decision rendered by the Court of First Instance of Quezon City, Hon. Nicasio Yatco, presiding, dated March 30, 1960. It so happened, however, that the above decision was amended by said court on May 18, 1960, but upon our study of the record of the case the amended decision was overlooked. The original decision of the court of first instance refers to the mortgage contract, Exhibit "A", while the amended decision refers to both contracts of mortgage, Exhibits "A" and "E", executed on the same date. The appeal was made against the amended decision and involves identical questions on the foreclosure of the two mortgages above mentioned. In view of the fact that We overlooked the amended decision, especially as regards the second contract of mortgage, it has become necessary to render this amended decision on both of the contracts of mortgage, already referred to.

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551 of the Piedad estate subdivision for P50,000.00, payable within a period of thirty days with interest at the rate of 12% per annum. Paragraph 4 of the contract provides that upon failure of the mortgagor to pay the indebtedness and the interest when due, the mortgage shall become due and demandable and without necessity of demand the mortgagee may immediately foreclose the mortgage, judicially or extrajudicially, and for this purpose the mortgagor appoints the mortgagee as his attorney-in-fact to sell the property and to sign all documents and perform any act requisite and necessary to accomplish said purpose. It was further expressly agreed that in case of foreclosure the mortgagor binds himself to pay the mortgagee 30% of the sum owing and unpaid as attorney's fees and liquidated damages, exclusive of costs and expenses of the sale.

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On the same date another mortgage was executed by plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo Rivera over two parcels of registered land for the sum of P50,000.00, and with the same conditions as the mortgage executed by the spouses Catalina Carreon and Zacarias Rivera. Copies of the contracts of mortgage are annexed to the complaint in this case as Annex "A" an Annex "B". The mortgagors in both mortgage contract defaulted in the payment of their respective obligations. The mortgage executed by Catalina Carreon Rivera an Zacarias Rivera was foreclosed extra-judicially and the proceeds of the sale of the land amounting to P68,567.57 was disposed of by the mortgagee as follows:

1. P50,000.00 — as mortgage loan

2. P12,500.00 — as the 12% interest on the loan as December 7, 1957 plus daily interest thereafter until the obligation is legally terminated.

3. P15,000.00 — as Attorney's fees and liquidated damages.1awphîl.nèt

4. The fees and expense of foreclosure and sale.

Plaintiffs brought this action to obtain a judicial declaration that the stipulation in the deeds of mortgage fixing the amount of 30% as attorney's fees and liquidated damages is excessive, unconscionable and iniquitous and that the same should be reduced to P200.00. The complainants also asked for P5,000.00 as attorney's fees for bringing this action. The defendants set up the defense that the complaint states no cause of action; that the mortgage executed by Emma R. Geniza and Aurelio Geniza has not yet been foreclosed; that the mortgagors are estopped from alleging that the stipulation regarding liquidated damages and attorney's fees is excessive and unreasonable.

The case having been tried in the Court of First Instance of Quezon City, Hon. Nicasio Yatco, presiding, rendered judgment dismissing the action of plaintiffs Emma Geniza and Aurelio Geniza as premature, and ordering the defendant Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of P13,567.57 which represents the excess of the total obligations of the mortgagor based on the following computation:

Proceeds of Sale (TCT No. 7464) P68,567.57Less:

Amount of Loan P50,000.0012% Interest 2,000.005% Attorney's fees and liquidated damages

2,500.00

Total Obligation P55,000.00

Excess Recoverable 13,567.57

A motion for reconsideration having been presented to the effect that the parcels of land subject of the mortgage in Exhibit "A" were foreclosed on March 22, 1960 and sold to the defendant Henry Sy for P51,965.80, the court on May 18, 1960 rendered an amended decision the dispositive parts of which read as follows:

WHEREFORE, judgment is hereby rendered one in favor of the plaintiffs and against the defendant by ordering the reduction of the stipulated 30% attorney's fees and liquidated damages to 5% in the mortgage contracts entered into by them (Exhs. A and B); ordering the defendant Henry Sy to return to plaintiffs Aurelio Geniza, Emma Geniza and Lorenzo Rivera the sum of P5,277.30 representing the excess of the public sales of said plaintiffs' mortgaged properties (TCT No. 39230, TCT No. T-22028 and TCT No. 20384) in the total amount of P60,277.30 over the obligations of same plaintiffs in the amount of P55,000.00 based on the following computation:

Proceeds of Sales (TCT No. 39230, TCT No. 22028 and TCT No. 20384) P60,277.30

Less:Amount of Loan P50,000.0012% Interest 2,500.005% Attorney's fees and liquidated damages

2,500.00

Total Obligations P55,000.00

Excess Recoverable5,277.30

ordering the defendant Asia Mercantile Corporation to return to plaintiff Catalina C. Rivera the sum of P13,567.57 representing the excess of the public sale of said plaintiff's mortgaged land (TCT No. 7464) in the amount of P68,567.57 over the total obligations of same plaintiff in the amount of P55,000.00 based also on the following computation:

Proceeds of Sale (TCT No. 7464 P68,167.57Less:

Amount of Loan P50,000.0012% Interest 2,500.005% Attorney's fees and liquidated damages

2,500.00

Total Obligations P55,000.00

Excess Recoverable13,567.57

without pronouncement as to costs.

SO ORDERED.

It is against the above judgment that the plaintiff have prosecuted the appeal to this Court, claiming that the lower court erred in not reducing the liquidated damages and the attorney's fees to not more than P500.00 and in not declaring the stipulation exacting attorney's fees and liquidated damages as a usurious stipulation, by reason of which plaintiffs (appellants herein) should be entitled to attorney's fees amounting to P5,000.00.

In reducing the 30% attorney's fees and liquidated damages to 5%, the judge below appears to be fully justified. As the loans were for a period of thirty days only, damages amounting to 30% of the loans of P50,000.00 each would appear to be iniquitous and subject to reduction in accordance with the provisions of Articles 1227 and 1229 of the Civil Code of the Philippines. We do not agree with counsel for plaintiffs-appellants that the contract was a usurious contract there being no allegation of fact that the mortgagee's intention was to exact a usurious interest, nor evidence to that effect. Neither is there any allegation or claim that the mortgage is contra bonos mores, so that we may assume that he demanded the insertion of the iniquitous clause or 30% damages to cover a usurious deal. Under these circumstances we cannot sustain the claim of the plaintiffs-appellants that the agreement was a usurious one; so that we hold that the trial court was fully justified in considering the provision only as an iniquitous clause subject to reduction.

We also find the reduced liquidated damages and attorney's fees to be fair and we find no reason for disturbing the discretion of the court below in this respect.

WHEREFORE, the judgment appealed from is hereby affirmed, with costs against the plaintiffs-appellants.

Digest

4. GENIZA VS HENRY SY

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Facts: 

On July 8, 1959, Catalina Carreon, with the consent of her husband Zacarias Rivera, mortgaged to the defendant Asia Mercantile Corporation Lot No. 551 of the Piedad estate subdivision for P50,000.00, payable within a period of thirty days with interest at the rate of 12% per annum. 

Paragraph 4 of the contract provides that upon failure of the mortgagor to pay the indebtedness and the interest when due, the mortgage shall become due and demandable and without necessity of demand the mortgagee may immediately foreclose the mortgage, judicially or extra judicially. It was further expressly agreed that

in case of foreclosure the mortgagor binds himself to pay the mortgagee 30% of the sum owing and unpaid as attorney's fees and liquidated damages, exclusive of costs and expenses of the sale.

 On the same date another mortgage was executed by plaintiffs Emma R. Geniza, Aurelio Geniza and Lorenzo Rivera overtwo parcels of registered land for the sum of P50,000.00, and with the same conditions as the mortgage executed by thespouses Catalina Carreon and Zacarias Rivera.

 The mortgagors in both mortgage contract defaulted in the payment of their respective obligations Plaintiffs brought this action to obtain a judicial declaration that the stipulation in the deeds of mortgage fixing the amountof 30% as attorney's fees and liquidated damages is excessive, unconscionable and iniquitous and that the same should be reduced to P200.00.

 Trial court ruled did reduced the 30% attorney’s fees and liquidation fees to 5% of the mortgage contract Plaintiffs further appealed that stating that the court erred in not declaring the 30% attorneys fees and liquidateddamages unconscionable and reducing it to P200.

Issue:

Whether or not the trial court erred in reducing the 30% to 5% rather than declaring it as P200.00.

Ruling:

 In reducing the 30% attorney's fees and liquidated damages to 5%, the judge below appears to be fully justified.

 As the loans were for a period of thirty days only, damages amounting to 30% of the loans of P50,000.00 each wouldappear to be Iniquitous and subject to reduction in accordance with the provisions of Articles 1227 and 1229 of the CivilCode of the Philippines.

 We do not agree with counsel for plaintiffs-appellants that the contract was a usurious contract there being no allegation of fact that the mortgagee's intention was to exact a usurious interest, nor evidence to that effect.

 Neither is there any allegation or claim that the mortgage is contra bonos mores, so that we may assume that he demanded the insertion of the iniquitous clause or 30% damages to cover a usurious deal.

 Under these circumstances we cannot sustain the claim of the plaintiffs-appellants that the agreement was a usurious one; so that we hold that the trial court was fully justified in considering the provision only as an iniquitous clause subject to reduction.

 We also find the reduced liquidated damages and attorney's fees to be fair and we find no reason for disturbing the discretion of the court below in this respect

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 141811            November 15, 2001

FIRST METRO INVESTMENT CORPORATION, petitioner, vs. ESTE DEL SOL MOUNTAIN RESERVE, INC., VALENTIN S. DAEZ, JR., MANUEL Q. SALIENTES, MA. ROCIO A. DE VEGA, ALEXANDER G. ASUNCION, ALBERTO * M. LADORES, VICENTE M. DE VERA, JR., and FELIPE B. SESE, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals2 dated November 8, 1999 in CA-G.R. CV No. 53328 reversing the Decision3 of the Regional Trial Court of Pasig City, Branch 159 dated June 2, 1994 in Civil Case No. 39224. Essentially, the Court of Appeals found and declared that the fees provided for in the Underwriting and Consultancy Agreements executed by and between petitioner First Metro Investment Corp. (FMIC) and respondent Este del Sol Mountain Reserve, Inc. (Este del Sol) simultaneously with the Loan Agreement dated January 31, 1978 were mere subterfuges to camouflage the usurious interest charged by petitioner FMIC.

The facts of the case are as follows:

It appears that on January 31, 1978, petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the Este del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal.4

Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly amortizations to commence at the beginning of the thirteenth month from the date of the first release in accordance with the Schedule of Amortization.5 In case of default, an acceleration clause was, among others, provided and the amount due was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate permitted by law from the date of default until full payment thereof plus liquidated damages at the rate of two (2%) percent per month compounded quarterly on the unpaid balance and accrued interests together with all the penalties, fees, expenses or charges thereon until the unpaid balance is fully paid, plus attorney's fees equivalent to twenty-five (25%) percent of the sum sought to be recovered, which in no case shall be less than Twenty Thousand Pesos (P20,000.00) if the services of a lawyer were hired.6

In accordance with the terms of the Loan Agreement, respondent Este del Sol executed several documents7 as security for payment, among them, (a) a Real Estate Mortgage dated January 31, 1978 over two (2) parcels of land being utilized as the site of its development project with an area of approximately One Million Twenty-Eight Thousand and Twenty-Nine (1,028,029) square meters and particularly described in TCT Nos. N-24332 and N-24356 of the Register of Deeds of Rizal, inclusive of all improvements, as well as all the machineries, equipment, furnishings and furnitures existing thereon; and (b) individual Continuing Suretyship agreements by co-respondents Valentin S. Daez, Jr., Manuel Q. Salientes, Ma. Rocio A. De Vega, Alexander G. Asuncion, Alberto M. Ladores, Vicente M. De Vera, Jr. and Felipe B. Sese, all dated February 2, 1978, to guarantee the payment of all the obligations of respondent Este del Sol up to the aggregate sum of Seven Million Five Hundred Thousand Pesos (P7,500,000.00) each.8

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Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting Agreement on January 31, 1978 whereby petitioner FMIC shall underwrite on a best-efforts basis the public offering of One Hundred Twenty Thousand (120,000) common shares of respondent Este del Sol's capital stock for a one-time underwriting fee of Two Hundred Thousand Pesos (P200,000.00). In addition to the underwriting fee, the Underwriting Agreement provided that for supervising the public offering of the shares, respondent Este del Sol shall pay petitioner FMIC an annual supervision fee of Two Hundred Thousand Pesos (P200,000.00) per annum for a period of four (4) consecutive years. The Underwriting Agreement also stipulated for the payment by respondent Este del Sol to petitioner FMIC a consultancy fee of Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for a period of four (4) consecutive years. Simultaneous with the execution of and in accordance with the terms of the Underwriting Agreement, a Consultancy Agreement was also executed on January 31, 1978 whereby respondent Este del Sol engaged the services of petitioner FMIC for a fee as consultant to render general consultancy services.9

In three (3) letters all dated February 22, 1978 petitioner billed respondent Este del Sol for the amounts of [a] Two Hundred Thousand Pesos (P200,000.00) as the underwriting fee of petitioner FMIC in connection with the public offering of the common shares of stock of respondent Este del Sol; [b] One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00) as consultancy fee for a period of four (4) years; and [c] Two Hundred Thousand Pesos (P200,000.00) as supervision fee for the year beginning February, 1978, in accordance to the Underwriting Agreement.10 The said amounts of fees were deemed paid by respondent Este del Sol to petitioner FMIC which deducted the same from the first release of the loan.

Since respondent Este del Sol failed to meet the schedule of repayment in accordance with a revised Schedule of Amortization, it appeared to have incurred a total obligation of Twelve Million Six Hundred Seventy-Nine Thousand Six Hundred Thirty Pesos and Ninety-Eight Centavos (P12,679,630.98) per the petitioner's Statement of Account dated June 23, 1980,11 to wit:

STATEMENT OF ACCOUNT OF ESTE DEL SOL MOUNTAIN RESERVE, INC.AS OF JUNE 23, 1980

PARTICULARS

Total amount due as of 11-22-78 per revised amortization schedule dated 1-3-78

Interest on P7,999,631.42 @ 16% p.a. from 11-22-78 to 2-22-79 (92 days)

Balance

One time penalty of 20% of the entire unpaid obligations under Section 6.02 (ii) of Loan Agreement

Past due interest under Section 6.02 (iii) of loan Agreement:@ 19% p.a. from 2-22-79 to 11-30-79 (281 days)@ 21% p.a. from 11-30-79 to 6-23-80 (206 days)

Other charges — publication of extra judicial foreclosure of REM made on 5-23-80 & 6-6-80

Total Amount Due and Collectible as of June 23, 1980

Accordingly, petitioner FMIC caused the extrajudicial foreclosure of the real estate mortgage on June 23, 1980.12At the public auction, petitioner FMIC was the highest bidder of the mortgaged properties for Nine Million Pesos (P9,000,000.00). The total amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (P3,188,630.75) was deducted therefrom, that is, for the publication fee for the publication of the Sheriff's Notice of Sale, Four Thousand Nine Hundred Sixty-Four Pesos (P4,964.00); for Sheriff's fees for conducting the foreclosure proceedings, Fifteen Thousand Pesos (P15,000.00); and for Attorney's fees, Three Million One Hundred Sixty-Eight Thousand Six Hundred Sixty-Six Pesos and Seventy-Five Centavos (P3,168,666.75). The remaining balance of Five Million Eight Hundred Eleven Thousand Three Hundred Sixty-Nine Pesos and Twenty-Five Centavos (P5,811,369.25) was applied to interests and penalty charges and partly against the principal, due as of June 23, 1980, thereby leaving a balance of Six Million Eight Hundred

Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) on the principal amount of the loan as of June 23, 1980.13

Failing to secure from the individual respondents, as sureties of the loan of respondent Este del Sol by virtue of their continuing surety agreements, the payment of the alleged deficiency balance, despite individual demands sent to each of them,14 petitioner instituted on November 11, 1980 the instant collection suit15 against the respondents to collect the alleged deficiency balance of Six Million Eight Hundred Sixty-Three Thousand Two Hundred Ninety-Seven Pesos and Seventy-Three Centavos (P6,863,297.73) plus interest thereon at twenty-one (21%) percent per annum from June 24, 1980 until fully paid, and twenty-five (25%) percent thereof as and for attorney's fees and costs.

In their Answer, the respondents sought the dismissal of the case and set up several special and affirmative defenses, foremost of which is that the Underwriting and Consultancy Agreements executed simultaneously with and as integral parts of the Loan Agreement and which provided for the payment of Underwriting, Consultancy and Supervision fees were in reality subterfuges resorted to by petitioner FMIC and imposed upon respondent Este del Sol to camouflage the usurious interest being charged by petitioner FMIC.16

The petitioner FMIC presented as its witnesses during the trial: Cesar Valenzuela, its former Senior Vice-President, Felipe Neri, its Vice-President for Marketing, and Dennis Aragon, an Account Manager of its Account Management Group, as well as documentary evidence. On the other hand, co-respondents Vicente M. De Vera, Jr. and Valentin S. Daez, Jr., and Perfecto Doroja, former Senior Manager and Assistant Vice-President of FMIC, testified for the respondents.

After the trial, the trial court rendered its decision in favor of petitioner FMIC, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering defendants jointly and severally to pay to plaintiff the amount of P6,863,297.73 plus 21% interest per annum, from June 24, 1980, until the entire amount is fully paid, plus the amount equivalent to 25% of the total amount due, as attorney's fees, plus costs of suit.

Defendants' counterclaims are dismissed, for lack of merit.

Finding the decision of the trial court unacceptable, respondents interposed an appeal to the Court of Appeals. On November 8, 1999, the appellate court reversed the challenged decision of the trial court. The appellate court found and declared that the fees provided for in the Underwriting and Consultancy Agreements were mere subterfuges to camouflage the excessively usurious interest charged by the petitioner FMIC on the loan of respondent Este del Sol; and that the stipulated penalties, liquidated damages and attorney's fees were "excessive, iniquitous, unconscionable and revolting to the conscience," and declared that in lieu thereof, the stipulated one time twenty (20%) percent penalty on the amount due and ten (10%) percent of the amount due as attorney's fees would be reasonable and suffice to compensate petitioner FMIC for those items. Thus, the appellate court dismissed the complaint as against the individual respondents sureties and ordered petitioner FMIC to pay or reimburse respondent Este del Sol the amount of Nine Hundred Seventy-One Thousand Pesos (P971,000.00) representing the difference between what is due to the petitioner and what is due to respondent Este del Sol, based on the following computation:17

A: DUE TO THE [PETITIONER]

Principal of Loan P7,382,500.00

Add: 20% one-time          Penalty          Attorney's fees

1,476,500.00      900,000.00

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Less: Proceeds of foreclosure Sale

Deficiency

B. DUE TO [RESPONDENT ESTE DEL SOL]

Return of usurious interest in the form of:          Underwriting fee          Supervision fee          Consultancy fee

P 200,000.00200,000.00

    1,330,000.00

Total amount due Este

The appellee is, therefore, obliged to return to the appellant Este del Sol the difference of P971,000.00 or (P1,730,000.00 less P759,000.00).

Petitioner moved for reconsideration of the appellate court's adverse decision. However, this was denied in a Resolution18 dated February 9, 2000 of the appellate court.

Hence, the instant petition anchored on the following assigned errors:19

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT:

a] HELD THAT ALLEGEDLY THE UNDERWRITING AND CONSULTANCY AGREEMENTS SHOULD NOT BE CONSIDERED SEPARATE AND DISTINCT FROM THE LOAN AGREEMENT, AND INSTEAD, THEY SHOULD BE CONSIDERED AS A SINGLE CONTRACT.

b] HELD THAT THE UNDERWRITING AND CONSULTANCY AGREEMENTS ARE "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" BY THE PETITIONER.

c] REFUSED TO CONSIDER THE TESTIMONIES OF PETITIONER'S WITNESSES ON THE SERVICES PERFORMED BY PETITIONER.

d] REFUSED TO CONSIDER THE FACT [i] THAT RESPONDENTS HAD WAIVED THEIR RIGHT TO SEEK RECOVERY OF THE AMOUNTS THEY PAID TO PETITIONER, AND [ii] THAT RESPONDENTS HAD ADMITTED THE VALIDITY OF THE UNDERWRITING AND CONSULTANCY AGREEMENTS.

e] MADE AN ERRONEOUS COMPUTATION ON SUPPOSEDLY "WHAT IS DUE TO EACH PARTY AFTER THE FORECLOSURE SALE", AS SHOWN IN PP. 34-35 OF THE ASSAILED DECISION, EVEN GRANTING JUST FOR THE SAKE OF ARGUMENT THAT THE APPELLATE COURT WAS CORRECT IN STIGMATIZING [i] THE PROVISIONS OF THE LOAN AGREEMENT THAT REFER TO STIPULATED PENALTIES, LIQUIDATED DAMAGES AND ATTORNEY'S FEES AS SUPPOSEDLY "EXCESSIVE, INIQUITOUS AND UNCONSCIONABLE AND REVOLTING TO THE CONSCIENCE" AND [ii] THE UNDERWRITING, SUPERVISION AND CONSULTANCY SERVICES AGREEMENT AS SUPPOSEDLY "MERE SUBTERFUGES TO CAMOUFLAGE THE USURIOUS INTEREST CHARGED" UPON THE RESPONDENT ESTE BY PETITIONER.

f] REFUSED TO CONSIDER THE FACT THAT RESPONDENT ESTE, AND THUS THE INDIVIDUAL RESPONDENTS, ARE STILL OBLIGATED TO THE PETITIONER.

Petitioner essentially assails the factual findings and conclusion of the appellate court that the Underwriting and Consultancy Agreements were executed to conceal a usurious loan. Inquiry upon the veracity of the appellate court's factual findings and conclusion is not the function of this Court for the Supreme Court is not a trier of facts. Only when the factual

findings of the trial court and the appellate court are opposed to each other does this Court exercise its discretion to re-examine the factual findings of both courts and weigh which, after considering the record of the case, is more in accord with law and justice.

After a careful and thorough review of the record including the evidence adduced, we find no reason to depart from the findings of the appellate court.

First, there is no merit to petitioner FMIC's contention that Central Bank Circular No. 905 which took effect on January 1, 1983 and removed the ceiling on interest rates for secured and unsecured loans, regardless of maturity, should be applied retroactively to a contract executed on January 31, 1978, as in the case at bar, that is, while the Usury Law was in full force and effect. It is an elementary rule of contracts that the laws, in force at the time the contract was made and entered into, govern it.20 More significantly, Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity.21 The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law.22 Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed.23

Second, when a contract between two (2) parties is evidenced by a written instrument, such document is ordinarily the best evidence of the terms of the contract. Courts only need to rely on the face of written contracts to determine the intention of the parties. However, this rule is not without exception.24 The form of the contract is not conclusive for the law will not permit a usurious loan to hide itself behind a legal form. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury. If from a construction of the whole transaction it becomes apparent that there exists a corrupt intention to violate the Usury Law, the courts should and will permit no scheme, however ingenious, to becloud the crime of usury.25

In the instant case, several facts and circumstances taken altogether show that the Underwriting and Consultancy Agreements were simply cloaks or devices to cover an illegal scheme employed by petitioner FMIC to conceal and collect excessively usurious interest, and these are:

a) The Underwriting and Consultancy Agreements are both dated January 31, 1978 which is the same date of the Loan Agreement.26 Furthermore, under the Underwriting Agreement payment of the supervision and consultancy fees was set for a period of four (4) years27 to coincide ultimately with the term of the Loan Agreement.28 This fact means that all the said agreements which were executed simultaneously were set to mature or shall remain effective during the same period of time.

b) The Loan Agreement dated January 31, 1978 stipulated for the execution and delivery of an underwriting agreement29 and specifically mentioned that such underwriting agreement is a condition precedent30 for petitioner FMIC to extend the loan to respondent Este del Sol, indicating and as admitted by petitioner FMIC's employees,31that such Underwriting Agreement is "part and parcel of the Loan Agreement."32

c) Respondent Este del Sol was billed by petitioner on February 28, 1978 One Million Three Hundred Thirty Thousand Pesos (P1,330,000.00)33 as consultancy fee despite the clear provision in the Consultancy Agreement that the said agreement is for Three Hundred Thirty-Two Thousand Five Hundred Pesos (P332,500.00) per annum for four (4) years and that only the first year consultancy fee shall be due upon signing of the said consultancy agreement.34

d) The Underwriting, Supervision and Consultancy fees in the amounts of Two Hundred Thousand Pesos (P200,000.00), and one Million Three Hundred Thirty Thousand Pesos (P1,330,000.00), respectively, were billed by petitioner to respondent Este del Sol on February 22, 1978,35 that is, on the same occasion of the first partial release of the loan in the amount of Two Million Three Hundred Eighty-Two Thousand Five Hundred Pesos (P2,382,500.00).36 It is from this first partial release of the loan that the said corresponding bills for Underwriting, Supervision and Constantly fees were

27

conducted and apparently paid, thus, reverting back to petitioner FMIC the total amount of One Million Seven Hundred Thirty Thousand Pesos (P1,730,000.00) as part of the amount loaned to respondent Este del Sol.37

e) Petitioner FMIC was in fact unable to organize an underwriting/selling syndicate to sell any share of stock of respondent Este del Sol and much less to supervise such a syndicate, thus failing to comply with its obligation under the Underwriting Agreement.38 Besides, there was really no need for an Underwriting Agreement since respondent Este del Sol had its own licensed marketing arm to sell its shares and all its shares have been sold through its marketing arm.39

f) Petitioner FMIC failed to comply with its obligation under the Consultancy Agreement,40 aside from the fact that there was no need for a Consultancy Agreement, since respondent Este del Sol's officers appeared to be more competent to be consultants in the development of the projected sports/resort complex.41

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the Loan, Underwriting and Consultancy Agreements are separate and independent transactions. The Underwriting and Consultancy Agreements which were executed and delivered contemporaneously with the Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of the loan. An apparently lawful loan is usurious when it is intended that additional compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender's services which are of little value or which are not in fact to be rendered, such as in the instant case.42 In this connection, Article 1957 of the New Civil Code clearly provides that:

Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.

In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest.43 The reason for this rule was adequately explained in the case of Angel Jose Warehousing Co., Inc. v. Chelda Enterprises44 where this Court held:

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.

Thus, the nullity of the stipulation on the usurious interest does not affect the lender's right to receive back the principal amount of the loan. With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily.45

This Court agrees with the factual findings and conclusion of the appellate court, to wit:

We find the stipulated penalties, liquidated damages and attorney's fees, excessive, iniquitous and unconscionable and revolting to the conscience as they hardly allow the borrower any chance of survival in case of default. And true enough, ESTE folded up when the appellee extrajudicially foreclosed on its (ESTE's) development project and literally closed its offices as both the appellee and ESTE were at the time holding office in the same building. Accordingly, we hold that 20% penalty on the amount due and 10% of the proceeds of the foreclosure sale as attorney's

fees would suffice to compensate the appellee, especially so because there is no clear showing that the appellee hired the services of counsel to effect the foreclosure, it engaged counsel only when it was seeking the recovery of the alleged deficiency.

Attorney's fees as provided in penal clauses are in the nature of liquidated damages. So long as such stipulation does not contravene any law, morals, or public order, it is binding upon the parties. Nonetheless, courts are empowered to reduce the amount of attorney's fees if the same is "iniquitous or unconscionable."46 Articles 1229 and 2227 of the New Civil Code provide that:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.

In the case at bar, the amount of Three Million One Hundred Eighty-Eight Thousand Six Hundred Thirty Pesos and Seventy-Five Centavos (93,188,630.75) for the stipulated attorney's fees equivalent to twenty-five (25%) percent of the alleged amount due, as of the date of the auction sale on June 23, 1980, is manifestly exorbitant and unconscionable. Accordingly, we agree with the appellate court that a reduction of the attorney's fees to ten (10%) percent is appropriate and reasonable under the facts and circumstances of this case.

Lastly, there is no merit to petitioner FMIC's contention that the appellate court erred in awarding an amount allegedly not asked nor prayed for by respondents. Whether the exact amount of the relief was not expressly prayed for is of no moment for the reason that the relief was plainly warranted by the allegations of the respondents as well as by the facts as found by the appellate court. A party is entitled to as much relief as the facts may warrant 47

In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged Decision.

WHEREFORE, the instant petition is hereby DENIED, and the assailed Decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

Digest

FACTS

            FMIC granted Este del Sol a loan to finance a sports/resort complex in

Montalban, Rizal. Under the agreement, the interest was 16% pa based on

the diminishing balance. In case of default, an acceleration clause was

provided and the amount due is subject to 20% one-time penalty on the

amount due and such amount shall bear interest at the highest rate

permitted by law. respondent executed a REM, individual continuing

suretyship and an underwriting agreement whereby FMIC shall underwrite

the public offering of one P120,000 common shares of respondent’s capital

stock for one-time underwriting fee of P200,000. For failure to pay its

obligation, FMIC caused the foreclosure of the REM. At the public auction, FIC

was the highest bidder. Petitioner filed to collect for alleged deficiency

balance against respondents since it failed to collect from the sureties, plus

28

interest at 21% pa. the trial court ruled in favor of FMIC. Respondents

appealed before the CA which held that the fees provided for in the

Underwriting and Consultacy Agreements were mere subterfuges to

camouflage the excessively usurious interest charged. The CA ordered FMIC

to reimburse petitioner representing what is ue to petitioner and what is due

to respondent.

ISSUE

            Whether or not the interests are lawful

HELD

            No. an apparently lawful loan is usurious when it is intended that

additional compensation for the loan be disguised by an ostensibly unrelated

contract for the payment by the borrower for the lender’s services which re

of little value or which are not in fact to be rendered. Article 1957 clearly

provides: contracts and stipulations, under any cloak or device whatever,

intended to circumvent the law agaistn usury shall be void. The borrower

may recover in accordance with the laws on usury.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 125944      June 29, 2001

SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners, vs.JOSE AVELINO SALAZAR, respondents.

SANDOVAL-GUTIERREZ, J.:

Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming the decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No. 375-M-91, "Spouses Danilo and Ursula Solangon vs. Jose Avelino Salazar" for annulment of mortgage. The dispositive portion of the RTC decision reads:

"WHEREFORE, judgment is hereby rendered against the plaintiffs in favor of the defendant Salazar, as follows:

1. Ordering the dismissal of the complaint;

2. Ordering the dissolution of the preliminary injunction issued on July 8, 1991;

3. Ordering the plaintiffs to pay the defendant the amount of P10,000.00 by way of attorney’s fees; and

4. To pay the costs.

SO ORDERED."1

The facts as summarized by the Court of Appeals in its decision being challenged are:

"On August 22, 1986, the plaintiffs-appellants executed a deed or real estate mortgage in which they mortgaged a parcel of land situated in Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure payment of a loan of P60,000.00 payable within a period of four (4) months, with interest thereon at the rate of 6% per month (Exh. "B").

On May 27, 1987, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land to the defendant-appellee, to secure payment of a loan of P136,512.00, payable within a period of one (1) year, with interest thereon at the legal rate (Exh. "1").

On December 29, 1990, the plaintiffs-appellants executed a deed of real estate mortgage in which they mortgaged the same parcel of land in favor of defendant-appellee, to secure payment of a loan in the amount of P230,000.00 payable within a period of four (4) months, with interest thereon at the legal rate (Exh. "2", Exh. "C").

This action was initiated by the plaintiffs-appellants to prevent the foreclosure of the mortgaged property. They alleged that they obtained only one loan form the defendant-appellee, and that was for the amount of P60,000.00, the payment of which was secured by the first of the above-mentioned mortgages. The subsequent mortgages were merely continuations of the first one, which is null and void because it provided for unconscionable rate of interest. Moreover, the defendant-appellee assured them that he will not foreclose the mortgage as long as they pay the stipulated interest upon maturity or within a reasonable time thereafter. They have already paid the defendant-appellee P78,000.00 and tendered P47,000.00 more, but the latter has initiated foreclosure proceedings for their alleged failure to pay the loan P230,000.00 plus interest.1âwphi1.nêt

On the other hand, the defendant-appellee Jose Avelino Salazar claimed that the above-described mortgages were executed to secure three separate loans of P60,000.00 P136,512.00 and P230,000.00, and that the first two loans were paid, but the last one was not. He denied having represented that he will not foreclose the mortgage as long as the plaintiffs-appellants pay interest."

In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the following errors:

1. The Court of Appeals erred in holding that three (3) mortgage contracts were executed by the parties instead of one (1);

2. The Court of Appeals erred in ruling that a loan obligation secured by a real estate mortgage with an interest of 72% per cent per annum or 6% per month is not unconscionable;

4. The Court of Appeals erred in holding that the loan of P136,512.00 HAS NOT BEEN PAID when the mortgagee himself states in his ANSWER that the same was already paid; and

5. The Court of Appeals erred in not resolving the SPECIFIC ISSUES raised by the appellants.

In his comment, respondent Jose Avelino Salazar avers that the petition should not be given due course as it raises questions of facts which are not allowed in a petition for review on certiorari.

We find no merit in the instant petition.

The core of the present controversy is the validity of the third contract of mortgage which was foreclosed.

29

Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the amount of P60,000.00 secured by the first mortgage of August 1986. According to them, they signed the third mortgage contract in view of respondent’s assurance that the same will not be foreclosed. The trial court, which is in the best position to evaluate the evidence presented before it, did not give credence to petitioners’ corroborated testimony and ruled:

"The testimony is improbable. The real estate mortgage was signed not only by Ursula Solangon but also by her husband including the Promissory Note appended to it. Signing a document without knowing its contents is contrary to common experience. The uncorroborated testimony of Ursula Solangon cannot be given weight."2

Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the amount of P136,512.00, or the second loan. In fact, such payment was confirmed by respondent Salazar in his answer to their complaint.

It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, only questions of law may be raised and they must be distinctly set forth. The settled rule is that findings of fact of the lower courts (including the Court of Appeals) are final and conclusive and will not be reviewed on appeal except: (1) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and such findings are contrary to the admission of both appellant and appellee; (6) when the findings of the Court of Appeals are contrary to those of the trial court; and (7) when the findings of fact are conclusions without citation of specific evidence on which they are based.3

None of these instances are extant in the present case.

Parenthetically, petitioners are questioning the rate of interest involved here. They maintain that the Court of Appeals erred in decreeing that the stipulated interest rate of 72% per annum or 6% per month is not unconscionable.

The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since the Usury Law had been repealed by Central Bank Circular No. 905 there is no more maximum rate of interest and the rate will just depend on the mutual agreement of the parties. Obviously, this was in consonance with our ruling in Liam Law v. Olympic Sawmill Co.4

The factual circumstances of the present case require the application of a different jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.5 In Medel v. Court of Appeals,6 this court had the occasion to rule on this question - whether or not the stipulated rate of interest at 5.5% per month on a loan amounting to P500,000.00 is usurious. While decreeing that the aforementioned interest was not usurious, this Court held that the same must be equitably reduced for being iniquitous, unconscionable and exorbitant, thus:

"We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate ‘usurious’ because this Court has consistently held that Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now ‘legally inexistent.’

In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61 the Court held that CB Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. Indeed, we have held that ‘a Central Bank Circular can not repeal a law. Only a law can repeal another law. In the recent case of Florendo v. Court of Appeals, the Court reiterated the ruling that ‘by virtue of CB Circular 905, the Usury Law has been rendered ineffective.’ ‘Usury Law has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.’

Nevertheless, we find the interest at 5.5 % per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and hence, contrary to morals (‘contra bonos mores’), if not against the law. The stipulation is void. The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable." (Emphasis supplied)

In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.

WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12 % per annum.

SO ORDERED.

Digest

Facts:

Petitioner-spouses executed 3 real estate mortgages on a parcel of land situated in Bulacan, in favor of the same Respondent Salazar to secure payment of loans of P60 K, P136 K and P230 K payable within 4 months, 1 year, and 4 months in that order, with 6% monthly interest on the first loan, and legal interests on the others.

This action was initiated by the Petitioner-spouses to prevent the foreclosure of the mortgaged property.

They alleged that they obtained only one loan from the Respondent which was the P60 K secured by the first mortgage. Also, Petitioner-spouses opined that the 6% monthly interest was unconscionable.

The subsequent mortgages were merely continuations of the first one, which is null and void.

Moreover, the Respondent assured them that he will not foreclose the mortgage as long as they pay the stipulated interest upon maturity or within a reasonable time thereafter. Petitioner-spouses substantially paid the loans with interest but were unable to pay it in full.

On the other hand, the Respondent claimed that the mortgages were executed to secure 3 separate loans of and that the first two loans were paid, but the last one was not.

He denied having represented that he will not foreclose the mortgage as long as the Petitioner-spouses pay interest.

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

Issue:

Whether or not the 6% monthly interest is unconscionable?

Ruling:

Yes. The SC ruled that this is unconscionable.

30

While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

In Medel v. Court of Appeals, the Court decreed that the 5.5% interest or 66% per annum was not usurious but held that the same must be equitably reduced for being iniquitous, unconscionable and exorbitant , and hence, contrary to morals (‘contra bonos mores’), if not against the law.

In the case at bench, Petitioner-spouses stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and inordinate.

Hence, the interest rate must be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.

DEPOSIT

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-7593            March 27, 1913

THE UNITED STATES, plaintiff-appellee, vs.JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant. Office of the Solicitor-General Harvey for appellee.

ARELLANO, C.J.:

The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on deposit from the former to be at the latter's disposal. The document setting forth the obligation reads:

We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. — Iloilo, June 26, 1911, — Jose Igpuara, for Ramirez and Co.

The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and the costs.

The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the P2,498; and (3) classifying the facts in the case as the crime of estafa.

A deposit is constituted from the time a person receives a thing belonging to another with the obligation of keeping and returning it. (Art. 1758, Civil Code.)

That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that they remained in his possession, which he could not have said had he not received them. They remained in his possession, surely in no other sense than to take care of them, for they remained has no other purpose. They remained in the defendant's possession at the disposal of Veraguth; but on August 23 of the same year Veraguth demanded for him through a notarial instrument restitution of them, and to date he has not restored them.

The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the defendant to consider the operation of sale on commission closed, leaving the collection of said sum until later, which sum remained as a loan payable upon presentation of the receipt." (Brief, 3 and 4.)

Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance remained in the possession of the defendant, who drew up an instrument payable on demand, he has drawn two conclusions, both erroneous: One, that the instrument drawn up in the form of a deposit certificate could be indorsed or negotiated like any other commercial instrument; and the other, that the sum of P2,498 remained in defendant's possession as a loan.

It is erroneous to assert that the certificate of deposit in question is negotiable like any other commercial instrument: First, because every commercial instrument is not negotiable; and second, because only instruments payable to order are negotiable. Hence, this instrument not being to order but to bearer, it is not negotiable.

It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safe-keeping.

In order that the depositary may use or dispose oft he things deposited, the depositor's consent is required, and then:

The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed. (Art. 309, Code of Commerce.)

The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert the deposit into a loan, commission, or other contract.

That demand was not made for restitution of the sum deposited, which could have been claimed on the same or the next day after the certificate was signed, does not operate against the depositor, or signify anything except the intention not to press it. Failure to claim at once or delay for sometime in demanding restitution of the things deposited, which was immediately due, does not imply such permission to use the thing deposited as would convert the deposit into a loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:

The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be responsible for all damages that may accrue and shall respond to the depositor for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses the sacred nature of a deposit and as a means of preventing the desire of gain from leading him into speculations that may be disastrous to the depositor, who is much better secured while the deposit exists when he only has a personal action for recovery.

31

According to article 548, No. 5, of the Penal Code, those who to the prejudice of another appropriate or abstract for their own use money, goods, or other personal property which they may have received as a deposit, on commission, or for administration, or for any other purpose which produces the obligation of delivering it or returning it, and deny having received it, shall suffer the penalty of the preceding article," which punishes such act as the crime of estafa. The corresponding article of the Penal Code of the Philippines in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the crime ofestafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or abstracts money or goods received on commission for delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of the owner or owners of the securities, since he has not restored them, willfully and wrongfully disposed of them by appropriating them to himself or at least diverting them from the purpose to which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant.

Likewise erroneous is the construction apparently at tempted to be given to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited, but denial of having received same. In the first of said cases there was no evidence that the defendant had appropriated the grain deposited in his possession.

On the contrary, it is entirely probable that, after the departure of the defendant from Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was seized by the revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not sufficient, but that it was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to his own or another's benefit. He was accused or refusing to restore, and it was held that the code does not penalize refusal to restore but denial of having received. So much for the crime of omission; now with reference to the crime of commission, it was not held in that decision that appropriation or diversion of the thing deposited would not constitute the crime ofestafa.

In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were, he turned over to the owner;" and there being no proof of the appropriation, the agent could not be found guilty of the crime of estafa.

Being in accord and the merits of the case, the judgment appealed from is affirmed, with costs.

DIGEST:

FACTS: That the defendant received P2,498 is a fact proven. The defendant drew up a document declaring that they remained in his possession, which he could not have said had he not received them. They remained in his possession, surely in no other sense than to take care of them, for they remained has no other purpose. They remained in the defendant's possession at the disposal of Veraguth; but on August 23 of the same year Veraguth demanded for him through a notarial instrument restitution of them, and to date he has not restored them.

The defendant therein is charged with the crime of estafa, for having swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine

currency, which he had take on deposit from the former to be at the latter's disposal. The document setting forth the obligation reads:

We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. — Iloilo, June 26, 1911, — Jose Igpuara, for Ramirez and Co.

The Court of First Instance of Iloilo sentenced the defendant to two years of presidio correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty, and the costs.

The defendant appealed, alleging as errors: (1) Holding that the document executed by him was a certificate of deposit; (2) holding the existence of a deposit, without precedent transfer or delivery of the P2,498; and (3) classifying the facts in the case as the crime of estafa.

ISSUE: May he use the thing deposited?

HELD: NO.

RATIO

The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an instrument payable on demand, and as no attempt was made to cash it until August 23, 1911, he could indorse and negotiate it like any other commercial instrument. There is no doubt that if Veraguth accepted the receipt for P2,498 it was because at that time he agreed with the defendant to consider the operation of sale on commission closed, leaving the collection of said sum until later, which sum remained as a loan payable upon presentation of the receipt."

Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla; and (3) that this balance remained in the possession of the defendant, who drew up an instrument payable on demand, he has drawn two conclusions, both erroneous: One, that the instrument drawn up in the form of a deposit certificate could be indorsed or negotiated like any other commercial instrument; and the other, that the sum of P2,498 remained in defendant's possession as a loan.

It is also erroneous to assert that sum of money set forth in said certificate is, according to it, in the defendant's possession as a loan. In a loan the lender transmits to the borrower the use of the thing lent, while in a deposit the use of the thing is not transmitted, but merely possession for its custody or safe-keeping.

In order that the depositary may use or dispose of the things deposited, the depositor's consent is required, and then:

The rights and obligations of the depositary and of the depositor shall cease, and the rules and provisions applicable to commercial loans, commission, or contract which took the place of the deposit shall be observed. (Art. 309, Code of Commerce.)

The defendant has shown no authorization whatsoever or the consent of the depositary for using or disposing of the P2,498, which the certificate acknowledges, or any contract entered into with the depositor to convert the deposit into a loan, commission, or other contract.

That demand was not made for restitution of the sum deposited, which could have been claimed on the same or the next day after the certificate was signed, does not operate against the depositor, or signify anything except the intention not to press it. Failure to claim at once or delay for sometime in demanding restitution of the things deposited, which was immediately due,

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does not imply such permission to use the thing deposited as would convert the deposit into a loan.

Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:

The depositary of an amount of money cannot use the amount, and if he makes use of it, he shall be responsible for all damages that may accrue and shall respond to the depositor for the legal interest on the amount.

Whereupon the commentators say:

In this case the deposit becomes in fact a loan, as a just punishment imposed upon him who abuses the sacred nature of a deposit and as a means of preventing the desire of gain from leading him into speculations that may be disastrous to the depositor, who is much better secured while the deposit exists when he only has a personal action for recovery.

According to article 548, No. 5, of the Penal Code, those who to the prejudice of another appropriate or abstract for their own use money, goods, or other personal property which they may have received as a deposit, on commission, or for administration, or for any other purpose which produces the obligation of delivering it or returning it, and deny having received it, shall suffer the penalty of the preceding article," which punishes such act as the crime of estafa. The corresponding article of the Penal Code of the Philippines in 535, No. 5.

In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he commits the crime of estafa under article 548 of the Penal Code of Spain who to another's detriment appropriates to himself or abstracts money or goods received on commission for delivery, the court rightly applied this article to the appellant, who, to the manifest detriment of the owner or owners of the securities, since he has not restored them, willfully and wrongfully disposed of them by appropriating them to himself or at least diverting them from the purpose to which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully disposed of to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio Veraguth, belong to the defendant.

Likewise erroneous is the construction apparently at tempted to be given to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of money deposited, but denial of having received same. In the first of said cases there was no evidence that the defendant had appropriated the grain deposited in his possession.

On the contrary, it is entirely probable that, after the departure of the defendant from Libmanan on September 20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was seized by the revolutionalists and appropriated to their own uses.

In this connection it was held that failure to return the thing deposited was not sufficient, but that it was necessary to prove that the depositary had appropriated it to himself or diverted the deposit to his own or another's benefit. He was accused or refusing to restore, and it was held that the code does not penalize refusal to restore but denial of having received. So much for the crime of omission; now with reference to the crime of commission, it was not held in that decision that appropriation or diversion of the thing deposited would not constitute the crime of estafa.

In the second of said decisions, the accused "kept none of the proceeds of the sales. Those, such as they were, he turned over to the owner;" and there

being no proof of the appropriation, the agent could not be found guilty of the crime of estafa.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. L-66826 August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

 CORTES, J.:

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was substituted as party to the case.

Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal — Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI decision absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as modified, read:

IN VIEW OF THE FOREGOING, the Court renders judgment as follows:

1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the remaining balance of the said account at the rate fixed by the bank for dollar deposits under Central Bank Circular 343;

2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00 immediately upon the finality of this decision, without interest for the reason that the said amount was merely held in custody for safekeeping, but was not actually deposited with the defendant COMTRUST because being cash currency, it cannot by law be deposited with plaintiffs dollar account and defendant's only obligation is to return the same to plaintiff upon demand;

xxx xxx xxx

5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure of the defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left for safekeeping.

Costs against defendant COMTRUST.

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SO ORDERED. [Rollo, pp. 47-48.]

Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's liability with regard to the first and second causes of action and its liability for damages.

1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current account.

On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were to be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no indication of the name of the purchaser of the dollar draft.

On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109.

When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.

Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from private respondent's dollar account.

In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso current account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the peso current account, why did the bank still have to pay Ernesto?

At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.

As to the second explanation, even if we assume that there was such an agreement, the evidence do not show that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso

equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.

2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks) forsafekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made part of the complaint. The document reads:

Makati Cable Address:

Philippines "COMTRUST"

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines

Quezon City Branch

December 8, MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK

Sir/Madam:

We acknowledged (sic) having received from you today the sum of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.

Received by:

(Sgd.) VIRGIA

It was also alleged in the complaint that despite demands, the bank refused to return the money.

In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of the above instrument.

During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also accomplished by Garcia.

Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia.

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Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must be considered.

The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which document was attached to the complaint. In short, the second cause of action was based on an actionable document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power, to enter into the contract in question.

In the past, this Court had occasion to explain the reason behind this procedural requirement.

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have been granted

... Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646 (1918).]

Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation from liability every time an officer enters into a contract which is beyond corporate powers, even without the proper allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is only to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to them an excellence which does not belong to any created existence with which we are acquainted. The distinction between power and right is no more to be lost sight of in respect to artificial than in respect to natural persons." [Ibid.]

Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the correct nature of the contract, and its legal consequences, including its enforceability.

The document which embodies the contract states that the US$3,000.00 was received by the bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over five months later.

The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract.

Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the transaction involved in this case. The circular provides:

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them of whatever nature, including, where applicable their exportation and importation, shall NOT be effected, except with respect to deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit accounts are owned by and in the name of, banks.

(a) Any and all assets, provided they are held through, in, or with banks or banking institutions located in the Philippines, including money, checks, drafts, bullions bank drafts, deposit accounts (demand, time and savings), all debts, indebtedness or obligations, financial brokers and investment houses, notes, debentures, stocks, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security, expressed in foreign currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines;

(b) Any and all assets of the kinds included and/or described in subparagraph (a) above, whether or not held through, in, or with banks or banking institutions, and existent within the Philippines, which belong to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation not residing or located within the Philippines;

35

(c) Any and all assets existent within the Philippines including money, checks, drafts, bullions, bank drafts, all debts, indebtedness or obligations, financial securities commonly dealt in by bankers, brokers and investment houses, notes, debentures, stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of security expressed in foreign currencies, or if payable abroad, irrespective of the currency in which they are expressed, and belonging to any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation residing or located within the Philippines.

xxx xxx xxx

4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation shall be sold to the authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any person, firm, partnership, association, branch office, agency, company or other unincorporated body or corporation, residing or located within the Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, further, That within one day upon taking ownership, or receiving payment, of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to designated agents of the Central Bank.

xxx xxx xxx

8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation, foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in the Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6 provides:

SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold to authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange. Any resident person, firm, company or corporation residing or located within the Philippines, who acquires foreign exchange shall not,

unless authorized by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value, nor delay taking ownership thereof except as such delay is customary; Provided, That, within one business day upon taking ownership or receiving payment of foreign exchange the aforementioned persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank.

As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of depositum would never have been entered into at all.

Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of the parties a cause of action against the other. "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 cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for violating the law.

We thus rule that Zshornack cannot recover under the second cause of action.

3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and attorney's fees to be reasonable. The award is sustained.

WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed.

SO ORDERED.

Digest

Facts: A contract of depositum was entered into by Garcia, on behalf of COMTRUST (BPI), wherein he received US $3,000 (foreign exchange) from Zshornack for safekeeping. Later on or over five months later, Zshornack demanded the return of the money but the bank refused alleging that the amount was sold and transferred to her current account.

 Arguments: COMTRUST (BPI): The parties entered into a contract of depositum which banks do not enter into. Thus, Garcia exceeded his powers when he entered into the contract on behalf of the bank, hence, the bank cannot be liable under the contract.

 Issue: WON the contract entered into is a contract of depositum.

Held: Yes. The situation is one contemplated in Art. 1962 of the NCC:

 Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of

36

returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract.

 Note: But because the subject of the contract here is a foreign exchange, it is covered by Central Bank Circular No. 20   which requires that, “All receipts of foreign exchange by any resident person, firm, company or corporation shall be sold to authorized agents of the Central Bank by the recipients within one business day following the receipt of such foreign exchange.”

 Since the document and the subsequent acts of the parties show that they intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a Philippine resident, the parties did not intend to sell the US dollars to the Central Bank within one business day from receipt. Otherwise, the contract of   depositum   would never have been entered into at all.

 In other words, the transaction between Zshornack and the bank  was void having been executed against the provisions of a mandatory law (CB Circ No. 20). Being in pari delicto, the law cannot afford either of them remedy.

2nd digest

Facts: 

Rizaldy T. Zshornack and his wife maintained in COMTRUST a dollar savings

account and a peso current account. An application for a dollar drat was

accomplished by Virgillo Garcia branch manager of COMTRUST payable to a

certain Leovigilda Dizon. In the PPLICtion, Garcia indicated that the amount

was to be charged to the dolar savings account of the Zshornacks. There

wasa no indication of the name of the purchaser of the dollar draft. Comtrust

issued a check payable to the order of Dizon. When Zshornack noticed the

withdrawal from his account, he demanded an explainaiton from the bank. In

its answer, Comtrust claimed that the peso value of the withdrawal was

given to Atty. Ernesto Zshornack, brother of Rizaldy. When he encashed with

COMTRUST a cashiers check for P8450 issued by the manila banking

corporation payable to Ernesto. 

Issue: Whether the contract between petitioner and respondent bank is a

deposit?

Held: The document which embodies the contract states that the

US$3,000.00 was received by the bank for safekeeping. The subsequent acts

of the parties also show that the intent of the parties was really for the bank

to safely keep the dollars and to return it to Zshornack at a later time. Thus,

Zshornack demanded the return of the money on May 10, 1976, or over five

months later.

The above arrangement is that contract defined under Article 1962, New

Civil Code, which reads:

Art. 1962. A deposit is constituted from the moment a person receives a

thing belonging to another, with the obligation of safely keeping it and of

returning the same. If the safekeeping of the thing delivered is not the

principal purpose of the contract, there is no deposit but some other

contract.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 90027 March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs.THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

 DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?

This is the crux of the present controversy.

On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 1

After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as

37

petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.

In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim. 4

In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.

On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.

With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions are binding on the parties.

Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees.  8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed decision principally on the theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its contents while the Bank retained no right to open the said box because it had neither the possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:

Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid.

It invoked Tolentino vs. Gonzales 11 — which held that the owner of the property loses his control over the property leased during the period of the contract — and Article 1975 of the Civil Code which provides:

Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their value and the rights corresponding to them according to law.

The above provision shall not apply to contracts for the rent of safety deposit boxes.

and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The appellate court was quick to add, however, that under the contract of lease of the safety deposit box, respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the contract in question:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13

Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII, Book IV of the Civil Code of thePhilippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to Article 1972 of the said Code which provides:

Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must observe.

Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing rule in the United States, to wit:

The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and

38

the lessee takes possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail or is created between the parties to the transaction as to such securities or other valuables; the fact that thesafe-deposit company does not know, and that it is not expected that it shall know, the character or description of the property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the safe-deposit box can be had only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the depositor cannot gain access thereto without the consent and active participation of the company. . . . (citations omitted).

and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in consideration of a fixed amount at stated periods is a bailment for hire.

Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract 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.

After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to simultaneously submit their respective Memoranda.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so that both renters could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open the box without the renter being present.

We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation

between a bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because:

There is, however, some support for the view that the relationship in question might be more properly characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23pertinently provides:

Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safeguarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section asdepositories or as agents. . . . 24 (emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto 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. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed. 27Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:

13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith. 28

39

are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:

8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29

Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:

With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in rentingsafe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by agreement or stipulation. 30 (citations omitted)

Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the said box, without the other renter being present.

Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's

fees. To this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified.

WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the nature of the relationship between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for Review is otherwise DENIED for lack of merit.

No pronouncement as to costs.

SO ORDERED.

Digest

Facts:

On July 3, 1979, petitioner (through its President- Sergio Aguirre) and the

Spouses Ramon and Paula Pugao entered into an agreement whereby the

former purchase two parcel of lands from the latter. It was paid of

downpayment while the balance was covered by there postdated checks.

Among the terms and conditions embodied in the agreement were the titles

shall be transferred to the petitioner upon full payment of the price and the

owner's copies of the certificate of titles shall be deposited in a safety deposit

box of any bank. Petitioner and the Pugaos then rented Safety Deposit box of

private respondent Security Bank and Trust Company.

Thereafter, a certain Margarita Ramos offered to buy from the petitioner.

Mrs Ramos demand the execution of a deed of sale which necessarily

entailed the production of the certificate of titles. In view thereof, Aguirre,

accompanied by the Pugaos, then proceed to the respondent Bank to open

the safety deposit box and get the certificate of titles. However, when opened

in the presence of the Bank's representative, the box yielded no such

certificate. Because of the delay in the reconstitution of the title, Mrs Ramos

withdrew her earlier offer to purchase.

Hence this petition.

Issue:

Whether or not the contract of rent between a commercial bank and another

party for the use of safety deposit box can be considered alike to a lessor-

lessee relationship.

Ruling:

The petitioner is correct in making the contention that the contract for the

rent of the deposit box is not a ordinary contract of lease as defined in Article

1643 of the Civil Code. However, the Court do not really subscribe to its view

that the same is a contract of deposit that is to be strictly governed by the

provisions in Civil Code on Deposit; the contract in the case at bar is a special

kind of deposit. It cannot be characterized as an ordinary contract of lease

under Article 1643 because the full and absolute possession and control of

the safety deposit box was not given to the joint renters- the petitioner and

40

the Pugaos. The guard key of the box remained with the respondent bank;

without this key, neither of the renters could open the box. On the other

hand, the respondent bank could not likewise open the box without the

renter's key. The Court further assailed that the petitioner is correct in

applying American Jurisprudence. Herein, the prevailing view is that the

relation between the a bank renting out safe deposits boxes and its customer

with respect to the contents of the box is that of a bail or/ and bailee, the

bailment being for hire and mutual benefits. That prevailing rule has been

adopted in Section 72 of the General Banking Act.

Section 72. In addition to the operations specifically authorized elsewhere in

this Act, banking institutions other that building and loan associations may

perform the following services:

(a) Receive in custody funds, document and valuable objects and rents safety

deposits taxes for the safeguard of such effects.

xxx xxx xxx

The bank shall perform the services permitted under subsections (a) (b) and

(c) of this section as depositories or as agents. 

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner, vs.COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

 DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21 August 1991, 1reversing and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of the Regional Trial Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST CO.," is challenged in this petition for review on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp collection of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been rented from the defendant pursuant to a contract denominated as a Lease Agreement. 3 Judgment therein was rendered in favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant, Security Bank & Trust Company, ordering the defendant bank to pay the plaintiff the sum of —

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal expenses.

The counterclaim set up by the defendant are hereby dismissed for lack of merit.

No costs.

SO ORDERED. 4

The antecedent facts of the present controversy are summarized by the public respondent in its challenged decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the defendant bank at its Binondo Branch located at the Fookien Times Building, Soler St., Binondo, Manila wherein he placed his collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or at the lowest level of the safety deposit boxes of the defendant bank at its aforesaid Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into the defendant bank's premises, seeped into the safety deposit box leased by the plaintiff and caused, according to the plaintiff, damage to his stamps collection. The defendant bank rejected the plaintiff's claim for compensation for his damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant bank.

The defendant bank denied liability for the damaged stamps collection of the plaintiff on the basis of the "Rules and Regulations Governing the Lease of Safe Deposit Boxes" (Exhs. "A-1", "1-A"), particularly paragraphs 9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening of the safe by any person other than the Renter, his authorized agent or legal representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the plaintiff over safety deposit box No. 54 was one of lease and not of deposit and, therefore, governed by the lease agreement (Exhs. "A", "L") which should be the applicable law; that the destruction of the plaintiff's stamps collection was due to a calamity beyond obligation on its part to notify the plaintiff about the floodwaters that inundated its premises at Binondo branch which allegedly seeped into the safety deposit box leased to the plaintiff.

41

The trial court then directed that an ocular inspection on (sic) the contents of the safety deposit box be conducted, which was done on December 8, 1988 by its clerk of court in the presence of the parties and their counsels. A report thereon was then submitted on December 12, 1988 (Records, p. 98-A) and confirmed in open court by both parties thru counsel during the hearing on the same date (Ibid., p. 102) stating:

"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and the Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned, plaintiff's and defendant's counsel. Said Safety Box when opened contains two albums of different sizes and thickness, length and width and a tin box with printed word 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick. The leaves of the album are attached to every page and cannot be lifted without destroying it, hence the stamps contained therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick. Some of its pages can still be lifted. The stamps therein can still be distinguished but beyond restoration. Others have lost its original form.

3. The tin box is rusty inside. It contains an album with several pieces of papers stuck up to the cover of the box. The condition of the album is the second abovementioned album." 5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial court's decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that the latter erred in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the defendant had failed to exercise the required diligence expected of a bank in maintaining the safety deposit box; (c) awarding to the plaintiff actual damages in the amount of P20,000.00, moral damages in the amount of P100,000.00 and attorney's fees and legal expenses in the amount of P5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and instead the appellee's complaint is hereby DISMISSED. The appellant bank's counterclaim is likewise DISMISSED. No costs.6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found and ruled that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and conditions of the contract of lease which the appellee (now petitioner) had voluntarily and knowingly executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of deposit wherein the bank became a depositary of the subject stamp collection; hence, as contended by SBTC, the provisions of Book IV, Title XII of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box limiting SBTC's liability:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening of the Safe by any person other than the Renter, his authorized agent or legal representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public order or public policy; and

d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in maintaining the safety deposit box; what was proven was that the floods of 1985 and 1986, which were beyond the control of SBTC, caused the damage to the stamp collection; said floods were fortuitous events which SBTC should not be held liable for since it was not shown to have participated in the aggravation of the damage to the stamp collection; on the contrary, it offered its services to secure the assistance of an expert in order to save most of the stamps, but the appellee refused; appellee must then bear the lose under the principle of "res perit domino."

Unsuccessful in his bid to have the above decision reconsidered by the public respondent, 7 petitioner filed the instant petition wherein he contends that:

I

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF THE PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic) PROVING THE CONTRARY.

II

THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S FEES AND LEGAL EXPENSES, IN FAVOR OF THE PETITIONER. 8

42

We subsequently gave due course the petition and required both parties to submit their respective memoranda, which they complied with. 9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligence expected of a bank maintaining such safety deposit box . . . in the light of the environmental circumstance of said safety deposit box after the floods of 1985 and 1986." He argues that such a conclusion is supported by the evidence on record, to wit: SBTC was fully cognizant of the exact location of the safety deposit box in question; it knew that the premises were inundated by floodwaters in 1985 and 1986 and considering that the bank is guarded twenty-four (24) hours a day , it is safe to conclude that it was also aware of the inundation of the premises where the safety deposit box was located; despite such knowledge, however, it never bothered to inform the petitioner of the flooding or take any appropriate measures to insure the safety and good maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the Court of Appeals, when supported by substantial exidence, are not reviewable on appeal by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity between the factual findings and conclusions of the Court of Appeals and the trial court. 11 Such a disparity obtains in the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease Agreement " covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of lease — and not a contract of deposit, and that paragraphs 9 and 13 thereof, which expressly limit the bank's liability as follows:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening of the Safe by any person other than the Renter, his autliorized agent or legal representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession nor the control of the same. The Bank has no interest whatsoever said contents, except as herein provided, and it assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further avers that even without such a limitation of liability, SBTC should still be absolved from any responsibility for the damage sustained by the petitioner as it appears that such damage was occasioned by a fortuitous event and that the respondent bank was free from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be impressed with merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly rejected the contention that a contract for the use of a safety deposit box is a contract of lease governed by Title VII, Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to be strictly governed by the Civil Code provision on deposit; 14 it is, as We declared, a special kind of deposit. The prevailing rule in American jurisprudence — that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment for hire and mutual benefit 15 — has been adopted in this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear

that in this jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section asdepositories or as agents. . . ."(emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the Civil Code, the parties thereto 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. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree of diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and l4 of the questioned contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither the possession nor control of the same.

"14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it assumes absolutely no liability in connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72 (a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:

43

"8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be responsible for the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that, of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box in CA Agro-Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case. On the other hand, both condition No. 8 in CA Agro-Industrial Development Corp. and condition No. 9 in the present case limit the scope of the exercise of due diligence by the banks involved to merely seeing to it that only the renter, his authorized agent or his legal representative should open or have access to the safety deposit box. In short, in all other situations, it would seem that SBTC is not bound to exercise diligence of any kind at all. Assayed in the light of Our aforementioned pronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that both conditions No. 9 and No. 13 of the

"Lease Agreement" covering the safety deposit box in question (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy as they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the safety deposit box which may arise from its own or its agents' fraud, negligence or delay. Accordingly, SBTC cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of the stamp collection because the flooding was a fortuitous event and there was no showing of SBTC's participation in the aggravation of the loss or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada Española 17 says: "In a legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents (sic) 18 the following essential characteristics: (1) the cause of the unforeseen ands unexpected occurrence, or of the failure of the debtor to comply with his obligation, must be independent of the human will; (2) it must be impossible to foresee the event which constitutes the "caso fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the occurrence must be such as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the obligor must be free from any participation in the aggravation of the injury resulting to the creditor." (cited in Servando vs.Phil., Steam Navigation Co., supra). 19

Here, the unforeseen or unexpected inundating floods were independent of the will of the appellant bank and the latter was not shown to have participated in aggravating damage (sic) to the stamps collection of the appellee. In fact, the appellant bank offered its services to secure the assistance of an expert to save most of the then good stamps but the appelle refused and let (sic) these recoverable stamps inside the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately, however, the public respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty of negligence. The facts constituting negligence are enumerated in the petition and have been summarized in this ponencia. SBTC's negligenceaggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in

44

any manner contravene the tenor thereof, are liable for damages,

thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was, in the language of the trial court, the "product of 27 years of patience and diligence" 21 caused the petitioner pecuniary loss; hence, he must be compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the relationship between the petitioner and SBTC is based on a contract, either of them may be held liable for moral damages for breach thereof only if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud or bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of the public respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in CA-G.R. CV No. 26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of moral damages which is hereby set aside.

Costs against the private respondent.

SO ORDERED.

Digest

Facts:    Plaintiff Luzon Sia rented a safety deposit box of Security Bank and

Trust Co. (Security Bank) at its Binondo Branch wherein he placed his

collection of stamps. The said safety deposit box leased by the plaintiff was at

the bottom or at the lowest level of the safety deposit boxes of the defendant

bank. During the floods that took place in 1985 and 1986, floodwater entered

into the defendant bank’s premises, seeped into the safety deposit box leased

by the plaintiff and caused, according damage to his stamps collection.

Security Bank rejected the plaintiff’s claim for compensation for his damaged

stamps collection.

Sia, thereafter, instituted an action for damages against the defendant bank.

Security Bank contended that its contract with the Sia over safety deposit

box was one of lease and not of deposit and, therefore, governed by the lease

agreement which should be the applicable law; the destruction of the

plaintiff’s stamps collection was due to a calamity beyond obligation on its

part to notify the plaintiff about the floodwaters that inundated its premises

at Binondo branch which allegedly seeped into the safety deposit box leased

to the plaintiff. The trial court rendered in favor of plaintiff Sia and ordered

Sia to pay damages.

 Issue:    Whether or not the Bank is liable for negligence.

Held: Contract of the use of a safety deposit box of a bank is not a deposit but

a lease. Section 72 of the General Banking Act [R.A. 337, as amended]

pertinently provides: In addition to the operations specifically authorized

elsewhere in this Act, banking institutions other than building and loan

associations may perform the following services (a) Receive in custody

funds, documents, and valuable objects, and rent safety deposit boxes for the

safequarding of such effects.

As correctly held by the trial court, Security Bank was guilty of negligence.

The bank’s negligenceaggravated the injury or damage to the stamp

collection. SBTC was aware of the floods of 1985 and 1986; it also knew that

the floodwaters inundated the room where the safe deposit box was located.

In view thereof, it should have lost no time in notifying the petitioner in

order that the box could have been opened to retrieve the stamps, thus

saving the same from further deterioration and loss. In this respect, it failed

to exercise the reasonable care and prudence expected of a good father of a

family, thereby becoming a party to the aggravation of the injury or loss.

Accordingly, the aforementioned fourth characteristic of a fortuitous event is

absent. Article 1170 of the Civil Code, which reads “Those who in the

performance of their obligation are guilty of fraud, negligence, or delay, and

those who in any manner contravene the tenor thereof, are liable for

damages” is applicable. Hence, the petition was granted.

The provisions contended by Security Bank in the lease agreement which are

meant to exempt SBTC from any liability for damage, loss or destruction of

the contents of the safety deposit box which may arise from its own agents’

fraud, negligence or delay must be stricken down for being contrary to law

and public policy.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. Nos. L-26948 and L-26949             October 8, 1927

SILVESTRA BARON, plaintiff-appellant, vs.PABLO DAVID, defendant-appellant.

And

45

GUILLERMO BARON, plaintiff-appellant, vs.PABLO DAVID, defendant-appellant.

Jose Gutierrez David for plaintiff-appellant in case of No. 26948. Gregorio Perfecto for defendant-appellant in both cases. Francisco, Lualhati & Lopez and Jose Gutierrez David for plaintiff-appellant in case No. 26949.

 STREET, J.:

These two actions were instituted in the Court of First Instance of the Province of Pampanga by the respective plaintiffs, Silvestra Baron and Guillermo Baron, for the purpose of recovering from the defendant, Pablo David, the value of palay alleged to have been sold by the plaintiffs to the defendant in the year 1920. Owing to the fact that the defendant is the same in both cases and that the two cases depend in part upon the same facts, the cases were heard together in the trial court and determined in a single opinion. The same course will accordingly be followed here.

In the first case, i. e., that which Silvestra Baron is plaintiff, the court gave judgment for her to recover of the defendant the sum of P5,238.51, with costs. From this judgment both the plaintiff and the defendant appealed.

In the second case, i. e., that in which Guillermo Baron, is plaintiff, the court gave judgment for him to recover of the defendant the sum of P5,734.60, with costs, from which judgment both the plaintiff and the defendant also appealed. In the same case the defendant interposed a counterclaim in which he asked credit for the sum of P2,800 which he had advanced to the plaintiff Guillermo Baron on various occasions. This credit was admitted by the plaintiff and allowed by the trial court. But the defendant also interposed a cross-action against Guillermo Baron in which the defendant claimed compensation for damages alleged to have Ben suffered by him by reason of the alleged malicious and false statements made by the plaintiff against the defendant in suing out an attachment against the defendant's property soon after the institution of the action. In the same cross-action the defendant also sought compensation for damages incident to the shutting down of the defendant's rice mill for the period of one hundred seventy days during which the above-mentioned attachment was in force. The trial judge disallowed these claims for damages, and from this feature of the decision the defendant appealed. We are therefore confronted with five distinct appeals in this record.

Prior to January 17, 1921, the defendant Pablo David has been engaged in running a rice mill in the municipality of Magalang, in the Province of Pampanga, a mill which was well patronized by the rice growers of the vicinity and almost constantly running. On the date stated a fire occurred that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and put in operation again. Silvestra Baron, the plaintiff in the first of the actions before us, is an aunt of the defendant; while Guillermo Baron, the plaintiff in the other action; is his uncle. In the months of March, April, and May, 1920, Silvestra Baron placed a quantity of palay in the defendant's mill; and this, in connection with some that she took over from Guillermo Baron, amounted to 1,012 cavans and 24 kilos. During approximately the same period Guillermo Baron placed other 1,865 cavans and 43 kilos of palay in the mill. No compensation has ever been received by Silvestra Baron upon account of the palay delivered by Guillermo Baron, he has received from the defendant advancements amounting to P2,800; but apart from this he has not been compensated. Both the plaintiffs claim that the palay which was delivered by them to the defendant was sold to the defendant; while the defendant, on the other hand, claims that the palay was deposited subject to future withdrawal by the depositors or subject to some future sale which was never effected. He therefore supposes himself to be relieved from all responsibility by virtue of the fire of January 17, 1921, already mentioned.

The plaintiff further say that their palay was delivered to the defendant at his special request, coupled with a promise on his part to pay for the same at the highest price per cavan at which palay would sell during the year 1920; and they say that in August of that year the defendant promised to pay them

severally the price of P8.40 per cavan, which was about the top of the market for the season, provided they would wait for payment until December. The trial judge found that no such promise had been given; and the incredulity of the court upon this point seems to us to be justified. A careful examination of the proof, however, leads us to the conclusion that the plaintiffs did, some time in the early part of August, 1920, make demand upon the defendant for a settlement, which he evaded or postponed leaving the exact amount due to the plaintiffs undetermined.

It should be stated that the palay in question was place by the plaintiffs in the defendant's mill with the understanding that the defendant was at liberty to convert it into rice and dispose of it at his pleasure. The mill was actively running during the entire season, and as palay was daily coming in from many customers and as rice was being constantly shipped by the defendant to Manila, or other rice markets, it was impossible to keep the plaintiffs' palay segregated. In fact the defendant admits that the plaintiffs' palay was mixed with that of others. In view of the nature of the defendant's activities and the way in which the palay was handled in the defendant's mill, it is quite certain that all of the plaintiffs' palay, which was put in before June 1, 1920, been milled and disposed of long prior to the fire of January 17, 1921. Furthermore, the proof shows that when the fire occurred there could not have been more than about 360 cavans of palay in the mill, none of which by any reasonable probability could have been any part of the palay delivered by the plaintiffs. Considering the fact that the defendant had thus milled and doubtless sold the plaintiffs' palay prior to the date of the fire, it result that he is bound to account for its value, and his liability was not extinguished by the occurence of the fire. In the briefs before us it seems to have been assumed by the opposing attorneys that in order for the plaintiffs to recover, it is necessary that they should be able to establish that the plaintiffs' palay was delivered in the character of a sale, and that if, on the contrary, the defendant should prove that the delivery was made in the character of deposit, the defendant should be absolved. But the case does not depend precisely upon this explicit alternative; for even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value. Under article 1768 of the Civil Code, when the depository has permission to make use of the thing deposited, the contract loses the character of mere deposit and becomes a loan or acommodatum; and of course by appropriating the thing, the bailee becomes responsible for its value. In this connection we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely.

In view of what has been said it becomes necessary to discover the price which the defendant should be required to pay for the plaintiffs' palay. Upon this point the trial judge fixed upon P6.15 per cavan; and although we are not exactly in agreement with him as to the propriety of the method by which he arrived at this figure, we are nevertheless of the opinion that, all things considered, the result is approximately correct. It appears that the price of palay during the months of April, May, and June, 1920, had been excessively high in the Philippine Islands and even prior to that period the Government of the Philippine Islands had been attempting to hold the price in check by executive regulation. The highest point was touched in this season was apparently about P8.50 per cavan, but the market began to sag in May or June and presently entered upon a precipitate decline. As we have already stated, the plaintiffs made demand upon the defendant for settlement in the early part of August; and, so far as we are able to judge from the proof, the price of P6.15 per cavan, fixed by the trial court, is about the price at which the defendant should be required to settle as of that date. It was the date of the demand of the plaintiffs for settlement that determined the price to be paid by the defendant, and this is true whether the palay was delivered in the character of sale with price undetermined or in the character of deposit subject to use by the defendant. It results that the plaintiffs are respectively entitle to recover the value of the palay which they had placed with the defendant during the period referred to, with interest from the date of the filing of their several complaints.

46

As already stated, the trial court found that at the time of the fire there were about 360 cavans of palay in the mill and that this palay was destroyed. His Honor assumed that this was part of the palay delivered by the plaintiffs, and he held that the defendant should be credited with said amount. His Honor therefore deducted from the claims of the plaintiffs their respective proportionate shares of this amount of palay. We are unable to see the propriety of this feature of the decision. There were many customers of the defendant's rice mill who had placed their palay with the defendant under the same conditions as the plaintiffs, and nothing can be more certain than that the palay which was burned did not belong to the plaintiffs. That palay without a doubt had long been sold and marketed. The assignments of error of each of the plaintiffs-appellants in which this feature of the decision is attacked are therefore well taken; and the appealed judgments must be modified by eliminating the deductions which the trial court allowed from the plaintiffs' claims.

The trial judge also allowed a deduction from the claim of the plaintiff Guillermo Baron of 167 cavans of palay, as indicated in Exhibit 12, 13, 14, and 16. This was also erroneous. These exhibits relate to transactions that occurred nearly two years after the transactions with which we are here concerned, and they were offered in evidence merely to show the character of subsequent transactions between the parties, it appearing that at the time said exhibits came into existence the defendant had reconstructed his mill and that business relations with Guillermo Baron had been resumed. The transactions shown by these exhibits (which relate to palay withdrawn by the plaintiff from the defendant's mill) were not made the subject of controversy in either the complaint or the cross-complaint of the defendant in the second case. They therefore should not have been taken into account as a credit in favor of the defendant. Said credit must therefore be likewise of course be without prejudice to any proper adjustment of the rights of the parties with respect to these subsequent transactions that they have heretofore or may hereafter effect.

The preceding discussion disposes of all vital contentions relative to the liability of the defendant upon the causes of action stated in the complaints. We proceed therefore now to consider the question of the liability of the plaintiff Guillermo Baron upon the cross-complaint of Pablo David in case R. G. No. 26949. In this cross-action the defendant seek, as the stated in the third paragraph of this opinion, to recover damages for the wrongful suing out of an attachment by the plaintiff and the levy of the same upon the defendant's rice mill. It appears that about two and one-half months after said action was begun, the plaintiff, Guillermo Baron, asked for an attachment to be issued against the property of the defendant; and to procure the issuance of said writ the plaintiff made affidavit to the effect that the defendant was disposing, or attempting the plaintiff. Upon this affidavit an attachment was issued as prayed, and on March 27, 1924, it was levied upon the defendant's rice mill, and other property, real and personal. 1awph!l.net

Upon attaching the property the sheriff closed the mill and placed it in the care of a deputy. Operations were not resumed until September 13, 1924, when the attachment was dissolved by an order of the court and the defendant was permitted to resume control. At the time the attachment was levied there were, in the bodega, more than 20,000 cavans of palay belonging to persons who held receipts therefor; and in order to get this grain away from the sheriff, twenty-four of the depositors found it necessary to submit third-party claims to the sheriff. When these claims were put in the sheriff notified the plaintiff that a bond in the amount of P50,000 must be given, otherwise the grain would be released. The plaintiff, being unable or unwilling to give this bond, the sheriff surrendered the palay to the claimants; but the attachment on the rice mill was maintained until September 13, as above stated, covering a period of one hundred seventy days during which the mill was idle. The ground upon which the attachment was based, as set forth in the plaintiff's affidavit was that the defendant was disposing or attempting to dispose of his property for the purpose of defrauding the plaintiff. That this allegation was false is clearly apparent, and not a word of proof has been submitted in support of the assertion. On the contrary, the defendant testified that at the time this attachment was secured he was solvent and could have paid his indebtedness to the plaintiff if judgment had been rendered against him in ordinary course. His financial conditions was of course well known to the plaintiff, who is his uncle. The defendant also states that he had not conveyed away any of his property, nor

had intended to do so, for the purpose of defrauding the plaintiff. We have before us therefore a case of a baseless attachment, recklessly sued out upon a false affidavit and levied upon the defendant's property to his great and needless damage. That the act of the plaintiff in suing out the writ was wholly unjustifiable is perhaps also indicated in the circumstance that the attachment was finally dissolved upon the motion of the plaintiff himself.

The defendant testified that his mill was accustomed to clean from 400 to 450 cavans of palay per day, producing 225 cavans of rice of 57 kilos each. The price charged for cleaning each cavan rice was 30 centavos. The defendant also stated that the expense of running the mill per day was from P18 to P25, and that the net profit per day on the mill was more than P40. As the mill was not accustomed to run on Sundays and holiday, we estimate that the defendant lost the profit that would have been earned on not less than one hundred forty work days. Figuring his profits at P40 per day, which would appear to be a conservative estimate, the actual net loss resulting from his failure to operate the mill during the time stated could not have been less than P5,600. The reasonableness of these figures is also indicated in the fact that the twenty-four customers who intervened with third-party claims took out of the camarin 20,000 cavans of palay, practically all of which, in the ordinary course of events, would have been milled in this plant by the defendant. And of course other grain would have found its way to this mill if it had remained open during the one hundred forty days when it was closed.

But this is not all. When the attachment was dissolved and the mill again opened, the defendant found that his customers had become scattered and could not be easily gotten back. So slow, indeed, was his patronage in returning that during the remainder of the year 1924 the defendant was able to mill scarcely more than the grain belonging to himself and his brothers; and even after the next season opened many of his old customers did not return. Several of these individuals, testifying as witnesses in this case, stated that, owing to the unpleasant experience which they had in getting back their grain from the sheriff to the mill of the defendant, though they had previously had much confidence in him.

As against the defendant's proof showing the facts above stated the plaintiff submitted no evidence whatever. We are therefore constrained to hold that the defendant was damaged by the attachment to the extent of P5,600, in profits lost by the closure of the mill, and to the extent of P1,400 for injury to the good-will of his business, making a total of P7,000. For this amount the defendant must recover judgment on his cross-complaint.

The trial court, in dismissing the defendant's cross-complaint for damages resulting from the wrongful suing out of the attachment, suggested that the closure of the rice mill was a mere act of the sheriff for which the plaintiff was not responsible and that the defendant might have been permitted by the sheriff to continue running the mill if he had applied to the sheriff for permission to operate it. This singular suggestion will not bear a moment's criticism. It was of course the duty of the sheriff, in levying the attachment, to take the attached property into his possession, and the closure of the mill was a natural, and even necessary, consequence of the attachment. For the damage thus inflicted upon the defendant the plaintiff is undoubtedly responsible.

One feature of the cross-complaint consist in the claim of the defendant (cross-complaint) for the sum of P20,000 as damages caused to the defendant by the false and alleged malicious statements contained in the affidavit upon which the attachment was procured. The additional sum of P5,000 is also claimed as exemplary damages. It is clear that with respect to these damages the cross-action cannot be maintained, for the reason that the affidavit in question was used in course of a legal proceeding for the purpose of obtaining a legal remedy, and it is therefore privileged. But though the affidavit is not actionable as a libelous publication, this fact in no obstacle to the maintenance of an action to recover the damage resulting from the levy of the attachment.

Before closing this opinion a word should be said upon the point raised in the first assignment of error of Pablo David as defendant in case R. G. No. 26949. In this connection it appears that the deposition of Guillermo Baron

47

was presented in court as evidence and was admitted as an exhibit, without being actually read to the court. It is supposed in the assignment of error now under consideration that the deposition is not available as evidence to the plaintiff because it was not actually read out in court. This connection is not well founded. It is true that in section 364 of the Code of Civil Procedure it is said that a deposition, once taken, may be read by either party and will then be deemed the evidence of the party reading it. The use of the word "read" in this section finds its explanation of course in the American practice of trying cases for the most part before juries. When a case is thus tried the actual reading of the deposition is necessary in order that the jurymen may become acquainted with its contents. But in courts of equity, and in all courts where judges have the evidence before them for perusal at their pleasure, it is not necessary that the deposition should be actually read when presented as evidence.

From what has been said it result that judgment of the court below must be modified with respect to the amounts recoverable by the respective plaintiffs in the two actions R. G. Nos. 26948 and 26949 and must be reversed in respect to the disposition of the cross-complaint interposed by the defendant in case R. G. No. 26949, with the following result: In case R. G. No. 26948 the plaintiff Silvestra Baron will recover of the Pablo David the sum of P6,227.24, with interest from November 21, 1923, the date of the filing of her complaint, and with costs. In case R. G. No. 26949 the plaintiff Guillermo Baron will recover of the defendant Pablo David the sum of P8,669.75, with interest from January 9, 1924. In the same case the defendant Pablo David, as plaintiff in the cross-complaint, will recover of Guillermo Baron the sum of P7,000, without costs. So ordered.

Avanceña, C.J., Johnson, Malcolm, Villamor, Romualdez and Villa-Real, JJ., concur.

Digest

FACTS:

- The defendant owns a rice mill, which was well patronized by the rice growers of the vicinity.

- On January 17, 1921, a fire occurred that destroyed the mill and its contents, and it was some time before the mill could be rebuilt and put in operation again.

- Silvestra Baron (P1) and Guillermo Baron (P2) each filed an action for the recovery of the value of palay from the defendant (D), alleged that:

o The palay have been sold by both plaintiffs to the D in the year 1920

o Palay was delivered to D at his special request, with a promise of compensation at the highest price per cavan

- D claims that the palay was deposited subject to future withdrawal by the depositors or to some future sale, which was never effected. D also contended that in order for the plaintiffs to recover, it is necessary that they should be able to establish that the plaintiffs' palay was delivered in the character of a sale, and that if, on the contrary, the defendant should prove that the delivery was made in the character of deposit, the defendant should be absolved.

ISSUE: WoN there was deposit

SC: NO

- Art. 1978. When the depositary has permission to use the thing deposited, the contract loses the concept of a deposit and becomes a loan or commodatum, except where safekeeping is still the principal purpose of the contract. The permission shall not be presumed, and its existence must be proved.

- The case does not depend precisely upon this explicit alternative; for even supposing that the palay may have been delivered in the character of deposit, subject to future sale or withdrawal at plaintiffs' election, nevertheless if it was understood that the defendant might mill the palay and he has in fact appropriated it to his own use, he is of course bound to account for its value.

- In this connection we wholly reject the defendant's pretense that the palay delivered by the plaintiffs or any part of it was actually consumed in the fire of January, 1921. Nor is the liability of the

defendant in any wise affected by the circumstance that, by a custom prevailing among rice millers in this country, persons placing palay with them without special agreement as to price are at liberty to withdraw it later, proper allowance being made for storage and shrinkage, a thing that is sometimes done, though rarely.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 93849 December 20, 1991

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs.DICK ONG y CHAN, LINO MORFE y GUTIERREZ, RICARDO VILLARAN and LUCILA TALABIS, accused, DICK ONG y CHAN, accused-appellant.

The Solicitor General for plaintiff-appellee.

Leoncio T. Mercado for accused-appellant.

 MEDIALDEA, J.:p

The accused, Dick Ong y Chan, Lino Morfe y Gutierrez, Ricardo Villaran and Lucila Talabis, were charged with the crime of estafa in Criminal Case No. 44080 before the Regional Trial Court of Manila, Branch 35. The information filed in said case reads, as follows (pp. 8-9, Rollo):

That in (sic) or about and during the period comprised between December 6, 1978 and January 31, 1979, both dates inclusive, in the City of Manila, Philippines, the said accused, conspiring and confederating together and helping one another, did then and there wilfully, unlawfully and feloniously defraud the Home Savings Bank in the following manner, to wit: the said accused Dick Ong y Chan, by means of false manifestations and fraudulent representations which he made to the management of the Home Savings Bank, Aurea Annex Branch, located at 640 Rizal Avenue, Sta. Cruz, in said City, to the effect that the following checks, to wit:

NUMBER PAYBLE TO

DATE

82508 Cash 1-30-79

27624961 do. do.

T1907249 do. do.

T1907249 do. do.

QCO86174A

do. 1-31-79

PCB 238056 S

do. 1-31-

48

C 987955 do.

27624963 do.

1915852 do.

1915855 do.

1915856 do.

or all in the total amount of P575,504.00, are good and covered with sufficient funds in the banks, and by means of other similar deceits with the conspiracy of his co-accused Lino Morfe y Gutierrez, Ricardo Villaran and Lucila Talabis, in their capacities as officer-in-charge, branch accountant and bank branch cashier, respectively, of said bank (Home Savings Bank), induced and succeeded in inducing the management of the said bank to accept said checks as deposits, all the said accused well knowing that his (Dick Ong y Chan's) representations and manifestations are false and untrue and were made solely for the purpose of defrauding the said bank, and, in accordance with the conspiracy, his co-accused Lino Morfe y Gutierrez, Ricardo Villara and Lucila Talabis, facilitated the opening of a savings account in the name of accused Dick Ong y Chan and, thereafter, approved said deposits; that on the strength of such deposits made and the opening of an account, the said accused were able to withdraw the total amount of P575,504.00, which once in their possession, with intent defraud, they thereafter wilfully, unlawfully and feloniously misappropriated, misapplied and converted to their own personal use and benefit, to the damage and prejudice of said Home Savings Bank in the said amount of P575,504.00, Philippine Currency.

Contrary to law.

On October 15, 1979, the prosecution moved for the dismissal of the case, insofar as accused Lino Morfe y Gutierrez is concerned, on the ground that after a reinvestigation, it was found that the evidence against him is not sufficient to sustain the allegations contained in the information (p. 54, Records). On October 31, 1979, the trial court granted the motion (p. 6 Records).

Upon being arraigned, the remaining three (3) accused entered the plea of not guilty to the crime charged. After trial on the merits, the trial court rendered its decision on January 11, 1990, the dispositive portion of which reads, as follows (p. 26,Rollo):

WHEREFORE, judgment is rendered: (1) pronouncing accused DICK ONG y CHAN guilty beyond reasonable doubt, as principal, of ESTAFA defined under No. 2 (d) of Article 315 of the Revised Penal Code, as amended by Republic Act 4885, and penalized under the lst paragraph of the same Code as amended by Presidential Decree No. 818, and sentencing said accused to RECLUSION PERPETUA; (2) ACQUITTING accused Lucila Talabis and Ricardo Villaran, their guilt of (sic) the felony charged against them not having been established beyond reasonable doubt; (3) ordering accused Dick Ong to pay the Home Saving Bank and

Trust Company the sum of P559,381.34 as partial reparation of the damage caused to said Bank; (4) ordering forfeited in favor of the Home Savings Bank and Trust Company the sum of P16,122.66 the positive balance remaining outstanding in Savings Account No. 6-1981 of accused Dick Ong with, and in the possession of, said Bank to complete the reparation of the damage caused by Dick Ong to the Bank; (5) ordering accused Dick Ong to pay one-third (1/3) of the costs; and (6) ordering two-thirds (2/3) of the costs charged de oficio.

SO ORDERED.

On February 15, 1990, the accused-appellant filed a motion for reconsideration. On March 22, 1990, he filed a supplemental memorandum in support of the motion for reconsideration. On April 3, 1990, said motion was denied for lack of merit (pp. 575-576, Records). Hence, the present appeal by Dick Ong y Chan.

The facts of this case were summarized by the trial court, as follows (pp. 18-20, Rollo):

Accused Dick Ong was one of the depositors of the Home Savings Bank and Trust Company in its Aurea Annex Branch at Rizal Avenue, Sta. Cruz, Manila, hereafter, to be referred to as the Bank. He opened his savings account on December 6, 1978, under the Bank's Saving Account No. 6-1981, with an initial deposit of P22.14 in cash and P10,000.00 in (a) check.

On the same date, December 6, 1978, without his check undergoing the usual and reglamentary (sic) clearance, which normally takes about five working days, Dick Ong was allowed to withdraw from his savings account with the Bank the sum of P5,000.00. The corresponding withdrawal slip was signed and approved by Lino Morfe, then the Branch Manager, and accused Lucila Talabis, the Branch Cashier.

That initial transaction was followed by other similar transactions where Dick Ong, upon depositing checks in his savings account with the Bank, was allowed to withdraw against those uncleared checks and uncollected deposits. The withdrawals were authorized and approved by accused Ricardo Villaran and Lucila Talabis, sometimes jointly, sometimes by aither (aic) of them alone, and at other times by one of them together with another official of the Bank. But all of those uncleared checks deposited by Dick Ong prior to January 3, 1979 and against which he was allowed to withdraw were subsequently honored and paid by the drawee banks. (TSN, Mar. 9, 1981, pp. 101-104; TSN, Mar. 18, 1981, pp. 144 -146.)

On January 30, 1979, Dick Ong issued and deposited in his savings account with the Bank the following checks:

Drawee Bank Check No. Payee

1. Metropolitan Bank & Trust Co.

82508 Cash

2. Equitable Bank 27624961

Cash

3. Phil. Bank of Comm.

T-1907265

Cash

49

4. Phil. Bank of Comm.

T-1907249

Cash

TOTAL  

Afterwards but before these checks could be cleared and the Bank could collect their amounts from the drawee banks, Lucila Talabis allowed and approved the withdrawal of Dick Ong against the amounts of said checks. (TSN, Mar. 18, 1981, pp. 47-48.)

On the following day, January 31, 1979, Dick Ong also issued and deposited in his savings account with the Bank the following check;

Drawee Bank Check No. Payee

1. China Banking Corporation

QC08617A Cash

2. Pacific Banking Corporation

PCB238056 S

Cash

3. Producers Bank of the Phil.

C987955 Cash

4. Equitable Banking

27624963 Cash

5. Phil. Bank of Communications

1915852 Cash

6. Phil. Bank of Communications

1915855 Cash

7. Phil. Bank of Communications

1915856 Cash

  TOTAL

Subsequently, but before said seven checks were cleared and the Bank had collected their amounts, Lucila Talabis and then officer in charge of the Bank Grace Silao allowed and approved the withdrawals of Dick Ong against the amounts of these seven checks. (TSN, lbid., pp. 47-48.)

However, when the Bank presented those eleven checks issued and deposited by Dick Ong on January 30, 1979 and January 3l, 1979 and against which he made withdrawals against (sic) their amounts, to their respective drawee banks for payment, they were all dishonored for lack or insufficiency of funds. (TSN, Jan. 7, 1981, pp. 90-101; TSN, May 8, 1981, pp. 74-75.)

The accused-appellant neither took the witness stand to testify in his behalf, nor presented any witness to testify in his favor. Instead, he offered the following documents (p. 20, Rollo):

1. Exhibit 1 — Ong. — The letter dated June 27, 1980 of the Central Bank Governor to all banks authorized to accept demand deposits, enjoining strict compliance with Monetary Board Resolution No. 2202 dated December 21, 1979, prohibiting, as a matter of policy,

drawing against uncollected deposits effective July 1, 1980.

2. Exhibit 2 — Ong. — The Memorandum of the Central Bank Governor dated July 9, 1980, to all banks for their guidance, that Monetary Board Resolution No. 2202 dated December 21, 1979, prohibiting, as a matter of policy, drawing against uncollected deposits effective July 1, 1980, covers drawing against demand deposits as well as withdrawals from savings deposits.

3. Exhibits 3 — Ong. — and 3-a. — Clippings from the Bulletin Today issue on July 25, 1980 regarding on (sic) ban on DAUD (drawn against uncollected deposits) effective July 1, 1980, and the one-day loan which replaced the DAUD arrangement.

4. Exhibit 4 — Ong. — The sworn statement of Lino Morfe before the METROCOM taken on February 11, 1979.

5. Exhibit 5 — Ong. — The letter dated July 6, 1979, of Lino Morfe to the Assistant Fiscal of Manila, transmitting his (Morfe's) affidavit.

6. Exhibits 5-a — Ong to 5-a-3-Ong. — Affidavit of Lino Morfe sworn on June 28, 1979.

7. Exhibit 5-b — Ong. — The Bank's Memorandum dated January 31, 1979, to all Branch Manager/Extension Office O.I.C. (sic) requiring them to furnish the Head Office of the Bank every Monday and Thursday with a list of all "drawn against" and "encashment" acommodations (sic) of P1,000.00 and above granted by the Branch during the week.

8. Exhibit 6 — Ong. — The sworn statement of accused Dick Ong.

On the other hand, accused Lucila Talabis admitted that she approved the withdrawals of the accused-appellant against uncleared checks. However, she explained that her approval thereof was in accordance with the instruction of then bank manager Lino Morfe; that this accommodation given or extended to the accused-appellant had been going on even before she started giving the same accommodation; that this was common practice in the bank; that she approved those withdrawals together with one other bank official, namely, either the bank manager, the bank accountant, the other bank cashier, or the bank assistant cashier; and that they reported those withdrawals against, and the dishonor of, the subject checks always sending copies of their reports to the head office.

Accused Ricardo Villaran testified on his behalf that the accused-appellant was able to withdraw against his uncleared checks because of the accommodations extended to him by bank officials Lino Morfe, co-accused Lucila Talabis, Grace Silao, Precy Salamat, and Cora Gascon; that this practice of drawing against uncollected deposits was a common practice in branches of the Bank; that on December 14, 1978, the accused-appellant withdrew the sum of P75,000.00 against his uncleared checks; that on December 21, 1978, the accused-appellant deposited several checks in the total amount of P197,000.00 and withdrew on the same date the sum of P120,000.00; that on January 23, 1979, the accused-appellant again deposited several checks in the aggregate sum of P260,000.00 and withdrew also on the same date, the amount of P28,000.00; and that he (Villaran) approved these three withdrawals of the accused-appellant against his uncollected deposits.

In this appeal, the accused-appellant assigns the following errors committed by the trial court:

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1) it concluded that the withdrawals against the amounts of the subject checks before clearance and collection of the corresponding amounts thereof by the depository bank from the drawee banks is deceit or fraud constituting estafa under Article 315, paragraph 2(d) of the Revised Penal Code, in the total absence of evidence showing criminal intent to defraud the depository bank; and not a case which is civil in nature governed solely by the Negotiable Instruments Law;

2) it stated that he issued and deposited the subject checks when he is not the issuer, maker, nor drawer thereof but merely an indorser; hence, his liability, if any, is that of a general indorser under the Negotiable Instruments Law;

3) it convicted him on mere presumption, without any evidence that he had prior knowledge of the lack or insufficiency of funds in the drawee banks to cover the amounts of the subject checks; and

4) it failed to consider that a general indorser under the Negotiable Instruments Law warrants payment of the value of the checks indorsed by him; no damage could have been suffered by the depository bank because he had offered payment thereof.

To support the aforementioned assignment of errors, the accused-appellant alleges that based on the testimonies of co-accused Lucila Talabis and Ricardo Villaran, he did not employ any deceit or fraud on the Bank because the practice of deposit and withdrawal against uncleared checks and uncollected deposits was tolerated by it. As soon as he learned of the dishonor of the subject checks, he offered to pay the amounts thereof (see pp. 48-49, tsn of Felix Hocson, May 8, 1981) and put up as security his property. The subject checks were not in payment of an obligation but were deposited in his savings account. He was merely a general indorser of the subject checks and this being the case, his obligations as such, if any, should be governed by Section 66 of the Negotiable Instruments Law. * The subject checks were issued or drawn by his customers and paid to him. He could not have had any knowledge as to the sufficiency of their funds in the drawee banks.

The Office of the Solicitor General disputes the allegations of the accused-appellant. According to it, by reason of the accused-appellant's antecedent acts of issuing and depositing check and withdrawing the amounts thereof before clearing by the drawee banks, which checks were later honored and paid by drawee banks, he was able to gain the trust and confidence the Bank, such that the practice, albeit contrary to sound banking policy, was tolerated by the Bank. After thus having gained the trust and confidence of the Bank, the accused-appellant issued and deposited the subject checks, the amounts of which he later withdrew, fully aware that he had no sufficient funds to cover the amounts of said checks in the drawee banks. Contrary to the accused-appellant's allegation, the trial court found that he issued and deposited the subject checks in his savings account. As drawer of the subject checks, the accused-appellant had the obligation to maintain funds in his current account in the drawee banks sufficient to cover the amounts thereof or, in case of dishonor, to deposit within three (3) days from receipt notice of dishonor, the amounts necessary to cover the check. The testimony of Felix Hocson, Senior Vice President and Treasurer of the Bank, apart from being hearsay, does not prove that the accused-appellant made an offer to pay the amounts covered by the subject checks. Even assuming arguendo that accused-appellant made an offer to pay the amounts covered by the subject checks, said offer is not sufficient to rebut the prima facie evidence of deceit. There is no showing that the accused-appellant deposited the amounts necessary to cover the subject checks within three (3) days from receipt of notice from Bank and/or the payee or holder that said checks have been dishonored. The damage suffered by the Bank consists in its inability to make use of the P575,504.00 it had delivered to the accused-appellant.

We are convinced that the accused-appellant is innocent of the crime charged against him.

Article 315, paragraph 2(d) of the Revised Penal Code, as amended by Republic Act No. 4885, provides:

Art. 315. Swindling (estafa) — Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by:

..., provided that in the four cases mentioned, the fraud be committed by any of the following means:

xxx xxx xxx

2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneously with the commission of the fraud:

xxx xxx xxx

(d) By post-dating a check, or issuing a check in payment of an obligation when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check. The failure of the drawer of the check to deposit the amount necessary to cover his check within three (3) days from receipt of notice from the bank and/or the payee or holder that said check has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act.

The following are the elements of this kind of estafa: (1) postdating or issuance of a check in payment of an obligation contracted at the time the check was issued; (2) lack or insufficiency of funds to cover the check; and (3) damage to the payee thereof (People v. Tugbang, et al;, G.R. No. 76212, April 26, 1991; Sales v. Court of Appeals, et al., G.R. No. L-47817, August 29, 1988, 164 SCRA 717; People v. Sabio, Sr., etc., et al., G.R. No. L-45490, November 20, 1978, 86 SCRA 568). Based thereon, the trial court concluded that the guilt of the accused-appellant has "been duly established by the required quantum of evidence adduced by the People against (him)" (p. 22, Rollo). We shall confine Our discussion only on the first element because there is no argument that the second and third elements are present in this case. For an orderly discussion of this element, We will divide it into two (2) parts: first, "postdating or issuance of a check," and second, "in payment of an obligation contracted at the time the check was issued."

Inasmuch as the first part of the first element of Article 315 paragraph 2(d) of the Revised Penal Code is concerned with the act of "postdating or issuance of a check," the accused-appellant raises the defense that he was neither the issuer nor drawer of the subject checks, but only an indorser thereof. Thus, his liability, if any, should be governed by the provision of the Negotiable Instruments Law, particularly Section 66 thereof, supra. Also, he could not have had any knowledge as to the sufficiency of the drawers' funds in their respective banks. The Office of the Solicitor General contend's that the trial court found as a fact that the accused-appellant issued the subject checks.

The contention of the Office of the Solicitor General is accurate only in part. In the trial court's disquisition on the liability of the accused-appellant, it said (p. 22, Rollo):

There is no question that on January 30, 1979, accused Dick Ong issued or used and indorsed, and deposited in

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his Savings Account No. 6-1981 with the Bank the four checks ... .

There is likewise no dispute that on the following date, January 31, 1979, Dick Ong issued or used and indorsed,and deposited in his savings account with the Bank seven checks ... . (emphasis supplied)

On this subject matter, Fernando Esguerra, Intemal Auditor of the Bank and a witness for the prosecution, testified that (pp. 101-103, tsn, January 7, 1981):

Court —

Q: You mentioned these checks, Mr. Witness. Did you or anybody for that matter ever verify the actual depositors of these checks whether it is Mr. Dick Ong himself.?

A: Yes, Your Honor. Our Vice-President for Bank Operations verified said checks and found out that one of or rather, two of those checks are in the account of Mr. Dick Ong but the other checks are not in his account.

Court —

Q: In other words, there are checks where the depositor himself was also Mr. Dick Ong?

A: Could I go over the checks, Your Honor.

Q: Is it indicated there?

A: Yes, Your Honor, it.is.

Q: All right, go over the checks.

A: There is one check, Your Honor. It is a China Banking Corporation check in the amount of P69,850.00 (Witness referring to Exhibit "Z").

Q: Now, why do you say that the current checking account or current account was opened by Mr. Dick Ong himself.

A: Because he is the drawer of the check, Your Honor.(emphasis supplied)

Thus, the fact established by the prosecution and adopted by the trial court is that the subject checks were either issued or indorsed by the accused-appellant.

In the case of People v. Isleta, et al., 61 Phil. 332, which was recently reiterated in the case of Zagado v. Court of Appeals, G.R. No. 76612, September 29, 1989, 178 SCRA 146, We declared the accused-appellant, who only negotiated the check drawn by another, guilty of estafa. This case

of People v. Isleta, et al. was relied upon by the trial court in its order dated April 3, 1990, which denied the accused-appellant's motion for reconsideration based on the same defense. The trial court erred in doing so. It must have overlooked the ratio decidendi of the aforementioned case. We held the accused-appellant therein guilty of estafa because he "had guilty knowledge of the fact that (the drawer) had no funds in the bank when he negotiated the (subject) check" (at p. 334). In the present case, the prosecution failed to prove that the accused-appellant had such knowledge with respect to the subject checks that he indorsed. In applying Our decisions, it is not enough that courts take into account only the facts and the dispositive portions thereof. It is imperative that the rationale of these decisions be read and comprehended thoroughly.

It goes without saying that with respect to the subject checks wherein the accused-appellant was the issuer/drawer, the first part of the first element of Article 315, paragraph 2(d) of the Revised Penal Code is applicable. However, this statement will lose its significance in Our next discussion.

Regarding the second part of the first element of Article 315, paragraph 2(d) of the Revised Penal Code, the accused-appellant alleges that when he deposited the subject checks in his savings account, it was clearly not in payment of an obligation to the Bank. The Office of the Solicitor General misses this point of the accused-appenant.

This single argument of the accused-appellant spells tilting the scale to his advantage. In several cases, We were categorical that 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 loans and are to be covered by the law on loans. Current and savings deposits are loans to a bank because it can use the same (Serrano v. Central Bank of the Philippines, et al., G.R. No. 30511, February 14, 1980, 96 SCRA 96; Gullas v. Philippine National Bank, 62 Phil. 519; Central Bank of the Philippines v Morfe, etc., et al., G.R. No. L-38427, March 12, 1975, 63 SC 114; Guingona, Jr., et al. v. The City Fiscal of Manila, et al. G.R. No. 60033, April 4, 1984, 128 SCRA 577).

The elements of estafa in general are: (1) that the accused defrauded another (a) by abuse of confidence, or (b) by means of deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused to the offended party or third person. Aside from the elements that We have discussed earlier, in the crime of estafa by postdating or issuing a bad check, deceit and damage are essential elements of the offense and have to be established with satisfactory proof to warrant conviction (U.S v. Rivera, 23 Phil. 383; People, et al. v. Grospe, etc., et al., G.R No. 74053-54, January 20, 1988,157 SCRA 154; Buaya v. Polo etc., et al., G.R. No. 75079, January 26, 1989, 169 SCRA 471).

In this connection, the Office of the Solicitor General advances the view that by reason of the accused-appellant's antecedent acts of issuing and depositing checks, and withdrawing the amounts thereof before clearing by the drawee banks, which checks were later honored and paid by the drawee banks, he was able to gain the trust and confidence of the Bank, such that the practice, albeit contrary to sound banking policy, was tolerated by the Bank. After thus having gained the trust and confidence of the Bank, he issued and deposited the subject checks, the amounts of which he later withdrew, fully aware that he had no sufficient funds to cover the amounts of said checks in the drawee banks.

This view is not supported by the facts of this case. Rather, the evidence for the prosecution proved that the Bank on its own accorded him a drawn against uncollected deposit (DAUD) privilege without need of any pretensions on his part (pp. 7-8,supra). Moreover, this privilege was not only for the subject checks, but for other past transactions. Fernando Esguerra and Felix Hocson even testified that in some instances prior to July 1, 1980, especially where the depositor is an important client, the Bank relaxed its rule and internal policy against uncleared checks and uncollected deposits, and allowed such depositor to withdraw against his uncleared checks and uncollected deposits. Admittedly, the accused-appellant was one of the important depositors of the Bank (pp. 24-25, Rollo). Granting, in gratia argumenti, that he had in fact acted fraudulently, he could not have done so without the active cooperation of the Banks employees. Therefore,

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since Lucila Talabis and Ricardo Villaran were declared innocent of the crimes charged against them, the same should be said for the accused-appellant (see People v. Jalandoni, G.R. No. 57555, May 30, 1983, 122 SCRA 588). True it is that the Bank suffered damage in the amount of P575,504.00 but the accused-appellant's liability thereon is only civil.

One additional statement made by the trial court in its decision requires correction. It said that "[t]he circumstances that the drawer of a check had insufficient or no funds in the drawee bank to cover the amount of his check at the time of its issuance and he did not inform the payee or holder of such fact, are sufficient to make him liable for estafa" (p. 23, Rollo). This statement is no longer controlling. We have clarified in the case of People v. Sabio, Sr., etc., et al., supra, that Republic Act No. 4885 has eliminated the requirement under the old provision for the drawer to inform the payee that he had no funds in the bank or the funds deposited by him were not sufficient to cover the amount of the check.

We, therefore, find that the guilt of the accused-appellant for the crime of estafa under Article 315, paragraph 2(d) of the Revised Penal Code has not been proven beyond reasonable doubt. However, We find him civilly liable to the bank in the amount of P575,504.00, less the balance remaining in his savings account with it (p. 26, Rollo), with legal interest from the date of the filing of this case until full payment.

ACCORDINGLY, the decision and order appealed from are hereby SET ASIDE. The accused-appellant is ACQUITTED of the crime charged against him but ordered to pay the aforementioned amount. No costs.

SO ORDERED.

Digest

Facts:

Accused Dick Ong, one of the depositors of the Home Savings Bank and Trust Company (HSBTC) opened a savings account with HSBTC with an initial deposit of P22.14 in cash and P10,000.00 in check.

Ong was allowed to withdraw from his savings account with the Bank the sum of P5,000.00, without his check undergoing the usual and reglementary clearance. The withdrawal slip was signed and approved by Lino Morfe, then the Branch Manager, and accused Lucila Talabis, the Branch Cashier.

Subsequently, Ong deposited eleven checks in his savings account with the Bank and against which he made withdrawals against its amount. Again, the withdrawal of the amount by Ong was made before said checks were cleared and the Bank had collected their amounts and with the approval of Talabis.

However, when the Bank presented the eleven checks issued, deposited and against which Ong made withdrawals against its amounts, to their respective drawee banks for payment, they were all dishonored for lack or insufficiency of funds. Because of this, the Bank filed a criminal action for Estafa against Ong, and the Bank’s officer in charge Villaran and Talabis.

Talabis testified that the approval of the withdrawals of Ong against his uncleared checks was in accordance with the instruction of their then bank manager and that it is a kind of accommodation given to Ong and also a common practice of the Bank.

RTC ruled Ong as guilty for the crime of estafa but acquitted Villarin and Talabis as their guilt were not proven beyond reasonable doubt. CA affirmed RTCs decisions.

Issue: 1. What is the nature of bank deposits?2. WON Ong is guilty of Estafa. No.

Ruling:

1. The Supreme Court held that bank deposits are in the nature of irregular deposits.Bank deposits are really loans because they earn interest. Whether fixed, savings, or current, all bank Adeposits are to be treated as loans and are to be covered by the law on loans.

2. The elements of this kind of estafa are the following: (1) postdating or issuance of a check in payment of an obligation contracted at the time the check was issued; (2) lack or insufficiency of funds to cover the check; and (3) damage to the payee thereof.

In this case, the fact was established that Ong either issued or indorsed the subject checks. However, it must be remembered that the reason for the conviction of an accused of the crime of estafa is his guilty knowledge of the fact that he had no funds in the bank when he negotiated the spurious check.In the present case, however, the prosecution failed to prove that Ong had knowledge with respect to the checks he indorsed. Moreover, it has also been proven that it was the Bank which granted him a drawn against uncollected deposit (DAUD) privilege without need of any pretensions on his part. The privilege this privilege was not only for the subject checks, but for other past transactions. If ever, he, indeed acted fraudulently, he could not have done so without the active cooperation of the Banks employees. Since Talabis and Villaran were declared innocent of the crimes charged against them, the same should be said for the Ong.

Thus, Ong cannot be held criminally liable against the Bank. He can only be held civilly liable as the Bank incurred damages.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

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

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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.

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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.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 113420 March 7, 1997

REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, petitioner, vs.SANDIGANBAYAN (Third Division), PROVIDENT INTERNATIONAL RESOURCES CORP., and PHILIPPINE CASINO OPERATORS CORPORATION, respondents.

 PANGANIBAN, J.:

Two principal questions are presented for resolution in this petition: one, whether a proper judicial action was filed against respondent corporations in compliance with, and within the period contemplated in, Section 26, Article XVIII of the Constitution; and two, the validity of the sequestration order signed and issued "For The Commission" by only one PCGG Commissioner.

These questions are resolved by the Court in this special civil action for certiorari and mandamus with prayer for a writ of preliminary injunction and/or temporary restraining order, seeking to set aside the Resolutions dated December 4, 1991, 1 and October 27, 1993, 2 of the Sandiganbayan (Third Division) in Civil Case No. 0132 entitled "Provident International Resources Corporation and Philippine Casino Operators Corporation vs. Presidential Commission on Good Government."

The earlier Resolution granted the motion for judgment on the pleadings filed by petitioners below, declaring as automatically lifted the writ of sequestration issued against petitioner-corporations and ordering the Presidential Commission on Good Government ("PCGG") to restore to them their assets, properties, records and documents subject of the writ. The second Resolution denied PCGG's motion for reconsideration.

The Facts

On March 19, 1986, pursuant to powers vested upon it by the President of the Philippines under Executive Order No. 1, promulgated on February 28, 1986, the PCGG issued a writ 3 of sequestration against all assets, movable and immovable, of Provident International Resources Corporation 4 and Philippine Casino Operators Corporation ("respondent corporations").

On July 29, 1987, Petitioner Republic of the Philippines, through the Solicitor General, filed before the Sandiganbayan a complaint, 5 docketed as Civil Case No. 0021, against Edward T. Marcelo, Fabian C. Ver, Ferdinand E. Marcos and Imelda R. Marcos for reconveyance, reversion, accounting, restitution and

damages. Said complaint sought to recover from named defendants alleged ill-gotten wealth. Among the corporations listed 6 in the complaint as being held and/or controlled by Defendant Marcelo, and among the assets apparently acquired illegally by defendants, were respondent corporations. Later, on October 30, 1991, the complaint was amended 7 to include both corporations as parties-defendants.

Prior to such amendment, specifically on September 11, 1991, respondent corporations filed before the Sandiganbayan a petition 8 for mandamus praying for the lifting of the writ of sequestration issued by PCGG against them and for the restoration of their sequestered assets, properties, records and documents, on the ground that PCGG failed to file the appropriate judicial action against them within the period prescribed, under Section 26, 9 Article XVIII of the 1987 Constitution.

On December 4, 1991, public respondent issued the assailed Resolution, the dispositive portion of which states:

WHEREFORE, the Motion for Judgment on the Pleadings is hereby granted. As prayed for, judgment is hereby rendered, as follows:

1) The writs of sequestration issued against herein petitioner-corporations are hereby declared automatically lifted, as of August 2, 1987, for failure of the respondent to file the proper judicial action against them within the period fixed in Section 26 of Article XVIII of the 1987 Constitution.

2) The respondent PCGG is hereby ordered to restore to the petitioners' all their assets, properties, records and documents, subject of the sequestration.

Without pronouncement as to costs. 10

Respondent Sandiganbayan based its ruling on PCGG vs. International Copra Export Corporation 11 ("PCGG vs. Interco") and Republic vs. Sandiganbayan and Olivares 12 ("Republic vs. Olivares") which similarly held that the mere listing or inclusion of corporations among certain properties allegedly amassed, beneficially owned or controlled by individual party-defendants in a complaint filed for recovery of ill-gotten wealth, does not justify the failure of PCGG to implead said corporations in a proper judicial action within the period fixed in Section 26, Article XVIII of the Constitution.

PCGG filed a motion for reconsideration. In denying said motion on the ground that the allegations therein were "essentially a mere rehash of respondent's Answer to the Petition as well as Opposition to the Motion for Judgment on the Pleading," public respondent further noted that the sequestration order dated March 19, 1986, was issued and signed by only one PCGG commissioner in violation of Section 3 of the PCGG Rules and Regulations. 13

Issues

In imputing against Respondent Sandiganbayan grave abuse of discretion amounting to lack or excess of jurisdiction in granting respondent corporations' petition for mandamus, petitioner assigns the following errors 14 in the assailed Resolutions:

1. declaring the writ of sequestration to have been automatically lifted for alleged failure of petitioner to file the proper judicial action against respondent corporations within the period fixed in Section 26, Article XVIII of the 1987 Constitution;

55

2. applying the rulings in PCGG vs. Interco and Republic vs. Olivares that the filing by petitioner of the judicial action against a stockholder of the sequestered company is not the judicial action contemplated by the Constitution; and

3. ruling that the sequestration order dated March 19, 1986, signed by only one PCGG commissioner, violated Section 3 of the PCGG Rules and Regulations requiring the authority of two (2) PCGG commissioners for the issuance of such order.

The errors assigned may be condensed into two principal issues, to wit :

1. Whether a proper judicial action was filed against respondent corporations in compliance with, and within the period contemplated in, Section 26, Article XVIII of the Constitution; and

2. Whether the sequestration order issued on March 19, 1986 against respondent-corporations was valid and effective despite having been signed by only one commissioner, contrary to the PCGG Rules and Regulations requiring the authority of at least two commissioners therefor.

Petitioner contends that the complaint docketed as Civil Case No. 0021 filed on July 29, 1987, against Edward Marcelo, et al. and amended on September 11, 1991, to implead respondent corporations as defendants, is the proper judicial action contemplated under the subject provision of the Constitution that would warrant the continuance of the sequestration. The Solicitor General further claims that Civil Case No. 0021 justifies the application of the doctrine of "piercing the veil of corporate fiction" since the records bear prima facie evidence that respondent corporations, which are wholly owned and controlled by defendants therein, were used to hide their ill-gotten wealth. Anyhow, he says, this issue has even been rendered moot and academic with the amendment of the complaint impleading respondent corporations as parties-defendants in the aforementioned case. In addition, petitioner postulates that Civil Case No. 0021 which sought to recover ill-gotten wealth was an action in rem or quasi in rem, the alleged ill-gotten wealth (respondent corporations, among others) of individual defendants, being the res or subject matter of the case.

As regards the second issue, petitioner avers that one signatory to the sequestration order complies with the requirement under the PCGG Rules since said order was signed "FOR THE COMMISSION." Petitioner explains that during the organizational stage of the PCGG, the rule of the Commission in the issuance of sequestration orders was that "any Commissioner can file or issue a sequestral order provided the order has the conformity, verbal or written, of another Commissioner." 15 It cites the minutes of the meeting of the Commission on October 15, 1987, in support of this contention:

The authority of at least two commissioners which is required under Sec. 3 of the PCGG Rules and Regulations may be written or verbal authority. Such authority may be reflected in the Minutes or the Commission meeting held en banc covering the pertinent recommendation/approval on the issuance of

the order; or the Commissioner-in-charge intending to issue the Order may simply obtain the concurrence of anotehr (sic) Commissioner after explaining the evidence supporting such order.

It is sufficient for only one Commissioner to sign the Order "FOR THE COMMISSION". After April 11, 1986, the Commission has encouraged the practice of two Commissioners signing the Order. (Excerpt from Minutes of PCGG Meeting on 15 October 1987, Annex "L") 16

Respondent corporations, on the other hand, pray for the denial of the instant petition because petitioner allegedly failed to take the appropriate remedy which should have been an appeal under Rule 45 of the Rules of Court, and not a certiorari proceeding under Rule 65, since the petition does not proffer a question of jurisdiction.

With respect to the issues raised by petitioner, respondent corporations aver that Republic vs. Sandiganbayan, Lobregat, et a1. 17 ("Republic vs. Lobregat"), modifying PCGG vs. Interco and Republic vs. Olivares, cannot be made to apply to the case at bench since the assailed Resolutions had already become final and executory prior to the promulgation of the decision in the first case mentioned. They also contend that the sequestration order signed by only one PCGG Commissioner is null and void.

The Court's Ruling

Preliminary Issue: Propriety of Rule 65as Mode of Appeal

Before proceeding to the resolution of the principal issues raised in the petition, we first dispose of the procedural question on the propriety of certiorari under Rule 65 of the Rules of Court as the remedy in assailing the subject Sandiganbayan Resolutions.

We answer in the affirmative, and treat this case as an exception to the general rule governing petitions forcertiorari. Normally, decisions of the Sandiganbayan are brought before this Court under Rule 45, not Rule 65. 18However, where the issue raised is one purely of law, where public interest is involved, and in case of urgency, certiorari is allowed notwithstanding the existence and availability of the remedy of appeal. 19 Certiorari may also be availed of where an appeal would be slow, inadequate and insufficient. 20

The nature of this case is undeniably endowed with public interest and involves a matter of public policy. 21 One of the foremost concerns of the Aquino Government in February 1986 (after the Marcoses fled the country) was the recovery of unexplained or ill-gotten wealth reputedly amassed by former President and Mrs. Ferdinand Marcos, their relatives, friends and business associates. Thus, the Provisional Constitution (Proclamation No. 3) mandated the President to "give priority to measures to achieve the mandate of the people to: . . . (d) recover ill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of the people through orders of sequestration or freezing of assets or accounts . . . ." 22 Not too long ago, in Republic vs. Lobregat, the Court described this undertaking as "surely . . . an enterprise 'of great pith and moment'; it was attended by 'great expectations'; it was initiated not only out of considerations of simple justice but also out of sheer necessity — the national coffers were empty, or nearly so." Hence, the Presidential Commission on Good Government was created by Executive Order No. 1 to assist the President in the recovery of unexplained wealth whether located in the Philippines or abroad. Executive Order No. 14 further conferred on the Sandiganbayan exclusive and original jurisdiction over all cases of ill-gotten wealth, and provided that "technical rules of procedure and evidence shall not be strictly applied to . . . (said) civil cases." 23

We further opined in the same case that:

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Political normalization of the country — which fortunately came not too long after the EDSA Revolution of 1986 — did not abrogate, or diminish the strength of the lofty state policy for recovery of ill-gotten wealth, no matter that its prosecution has thus far yielded what not a few are disposed to regard as at best only mixed results, or was attended by much abuse on the part of some of its officers or "fiscal agents"; indeed, that circumstance should vigorously argue for its more sustained and effective pursuit and implementation.

And equally, if not more, important, strong paramount public policy is not to be set at naught by technical rules of procedure or by narrow constructions of constitutional provisions that frustrate their clear intent or unreasonably restrict their scope. . . . 24

First Issue: Requisite Judicial ActionFiled Within Period Prescribed

This issue is not novel. We have sufficiently and extensively discussed and resolved this in Republic vs. Lobregatwhich was a consolidation of twenty petitions before this court presenting a common issue summed this wise:

Does inclusion in the complaints filed by the PCGG before the Sandiganbayan of specific allegations of corporations being "dummies" or under the control of one or another of the defendants named therein and used as instruments for acquisition, or as being depositaries or products, of ill-gotten wealth; or the annexing to said complaints of a list of said firms, but without actually impleading them as defendants, satisfy the constitutional requirement that in order to maintain a seizure effected in accordance with Executive Order No. 1, s. 1986, the corresponding "judicial action or proceeding" should be filed within the six-month period prescribed in Section 26, Article XVIII, of the (1987) Constitution? 25

As in this case, the corporations, in which defendants in the original complaints allegedly owned and controlled substantial interest, were not impleaded as parties-defendants but merely mentioned or listed, and specifically described in the complaints as instruments in the illegal acquisition of wealth, or as depositaries of illegal wealth, or as constituting the fruits thereof. In fact, one of the respondent-corporations (Marcelo Fiberglass Corporation, the assets of which were also sequestered) in that case was of exactly the same status as herein respondent-corporations, having been likewise listed in Civil Case No. 0021 as one of the companies controlled by therein defendant Edward Marcelo. 26

We ruled then that impleading the corporations in which the complaints sought to recover defendants' shares of stock — allegedly purchased with misappropriated public funds, in breach of fiduciary duty, or otherwise under illicit or anomalous conditions — "clearly appear(ed) to be unnecessary. If warranted by the evidence, judgments may be handed down against the corresponding defendants divesting them of ownership of their (shares of) stock, the acquisition thereof being illegal and consequently burdened with a constructive trust, and imposing on them the obligation of surrendering them to the Government." 27

We explained thus:

And as to corporations organized with ill-gotten wealth, but are not themselves guilty of misappropriation, fraud or other illicit conduct — in other words, the companies themselves are the object or thing involved in the action, the res thereof — there is no need to implead them either. Indeed, their impleading is not proper on the strength alone of their being formed with

ill-gotten funds, absent any other particular wrongdoing on their part. The judgment may simply be directed against the shares of stock shown to have been issued in consideration of ill-gotten wealth.

. . . Distinguished, in terms of juridical personality and legal culpability from their erring members or stockholders, said corporations are not themselves guilty of the sins of the latter, of the embezzlement, asportation, etc., that gave rise to the Government's cause of action for recovery; their creation or organization was merely the result of their members' (or stockholders') manipulations and maneuvers to conceal the illegal origins of the assets or monies invested therein. In this light,they are simply the res in the actions for the recovery of illegally acquired wealth, and there is, in principle, no cause of action against them and no ground to implead them as defendants in said actions.

xxx xxx xxx

Even in those cases where it might reasonably be argued that the failure of the Government to implead the sequestered corporations as defendants is indeed a procedural aberration, as where said firms were allegedly used, and actively cooperated with the defendants, as instruments of conduits for conversion of public funds or property or illicit or fraudulent obtention of favored Government contracts, etc., slight reflection would nevertheless lead to the conclusion that the defect is not fatal, but one correctible under applicable adjective rules — e.g., Section 10, Rule 5 of the Rules of Court [specifying the remedy of amendment during trial to authorize or to conform to the evidence]; Section 1, Rule 20 [governing amendments before trial], in relation to the rule respecting the omission of so-called necessary or indispensable parties, set out in Section 11, Rule 3 of the Rules of Court. It is relevant in this context to advert to the old, familiar doctrines that the omission to implead such parties "is a mere technical defect which can be cured at any stage of the proceedings even after judgment"; and that, particularly in the case of indispensable parties, since their presence and participation is essential to the very life of the action, for without them no judgment may be rendered, amendments of the complaint in order to implead them should be freely allowed, even on appeal, in fact even after rendition of judgment by this Court, where it appears that the complaint otherwise indicates their identity and character as such indispensable parties.

Again, even conceding the adjective imperfection of the omission to implead the sequestered corporations as indispensable or necessary parties, it bears repeating that their sequestrations would not thereby be rendered functus officio, since, as already pointed out, judicial actions or proceedings have in truth been filed concerning or regarding said sequestration in literal and faithful compliance with Section 26, Article XVIII of the Constitution. 28

The instant petition falls squarely within the case cited. Respondent corporations were among the properties listed in the original complaint (Civil Case No. 0021) as having been illegally accumulated by the defendants "in flagrant breach of public trust and of their fiduciary obligations as public officers, with gross abuse of power and authority and in brazen violation of the Constitution and laws of the Philippines." They were subsequently impleaded as parties-defendants in the same case by way of an amended complaint duly granted by public respondent. 29Hence, we reiterate our rule

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cited above that, with these premises, there was faithful compliance with Section 26, Article XVIII of the Constitution.

The seeming contradictions of the Court's rulings in Republic vs. Lobregat and in the Republic vs. Interco andRepublic vs. Olivares cases have already been clarified in the recent case of Republic vs. Sandiganbayan, Sipalay Trading Corporation and Allied Banking Corporation 30 in this manner:

These fresh pronouncements, 31 however, did not reverse, abandon or supplant "INTERCO". What the Court did was to explain the two apparently colliding dispositions by making this "hairline", but critical, distinction:

XVI. The "Interco" and "PJI" Rulings

This Court is not unmindful of the fact that its Resolution of July 26, 1991 on the petitioner's motion for reconsideration in G.R. No. 92755 (PCGG vs. Interco) appears to sustain the proposition that actual impleading in the recovery action of a corporation under sequestration for being a repository of illegally-acquired wealth, is necessary and requisite for such proposed or pending seizure to come under the protective umbrella of the Constitution. But Interco is to be differentiated from the cases now under review in that in the former, as already elsewhere herein made clear, there was a lack of proof, even of the prima facie kind, that Eduardo Cojuangco, Jr. owned any stock in Interco, the evidence on record being in fact that said corporation had been organized as a family corporation of the Luys.

So, too, this Court's judgment in the so-called "PJI Case" (Republic of the Philippines [PCGG] v. Sandiganbayan and Rosario Olivares) may not be regarded as on all fours with the cases under consideration. The PJI Case involved the shares of stock in the name of eight (8) natural persons which had never been sequestered at all. What happened was that the PCGG simply arrogated unto itself the right to vote those unsequestered shares on the bare claim that the eight (8) registered owners thereof were "dummies" of Benjamin Romualdez, the real owners of the shares; and all that the PCGG had done as predicate for that act of appropriation of the stock, was to include all the shares of PJI in a list (Annex A) appended to its complaint in Sandiganbayan Case No. 0035, describing them as among the properties illegally acquired by Romualdez. Unfortunately, as in Interco, the PCGG failed to substantiate by

competent evidence its theory of clandestine ownership of Romualdez; and since moreover, there had been no sequestration of the alleged dummies' shares of stock, it was undoubtedly correct for the Sandiganbayan to grant the latter's motion for them to be recognized and declared as the true owners of the stock in question, which judgment this Court subsequently pronounced to be free from grave abuse of discretion.

We need only to recall at this juncture that, as in "INTERCO", evidence of the PCGG is nil to even come up with a prima facie case against SIPALAY (and ALLIED). This similitude is the one decisive factor that draws the instant case away from the "Final Dispositions" made by the Court in the 1995 "Republic vs. Sandiganbayan" case — thus making "INTERCO", as supported by the "Aetna" and "Seno" cases, the controlling precedent. The principle of Stare Decisis, indeed, is most compelling, for "when the court has once laid down a principle of law as applicable to a certain state of facts, it will adhere to that principle and apply it to all future cases where the facts are substantially the same." 32

Second Issue: Validity of Sequestration OrderSigned by Only One Commissioner

Section 3 of the PCGG Rules and Regulations promulgated on April 11, 1986, provides:

Sec. 3. Who may issue. A writ of sequestration or a freeze or hold order may be issued by the Commission upon the authority of at least two Commissioners, based on the affirmation or complaint of an interested party or motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted.

The questioned sequestration order was, however, issued on March 19, 1986, prior to the promulgation of the PCGG Rules and Regulations. As a consequence, we cannot reasonably expect the Commission to abide by said rules which were nonexistent at the time the subject writ was issued by then Commissioner Mary Concepcion Bautista. Basic is the rule that no statute, decree, ordinance, rule or regulation (and even policies) shall be given retrospective effect unless explicitly stated so. 33 We find no provision in said Rules which expressly gives them retroactive effect, or implies the abrogation of previous writs issued nor in accordance with the same Rules. Rather, what said Rules provide is that they "shall be effective immediately," which, in legal parlance, is understood as "upon promulgation." Only penal laws are given retroactive effect insofar as they favor the accused. 34

We distinguish this case from Republic vs. Sandiganbayan, Romualdez and Dio Island Resort 35 where the sequestration order against Dio Island Resort, dated April 14, 1986, was prepared, issued and signed not by two commissioners of the PCGG, but by the head of its task force in Region VIII. In holding that said order was not valid since it was not issued in accordance with PCGG Rules and Regulations, we explained:

(Sec. 3 of the PCGG Rules and Regulations), couched in clear and simple language, leaves no room for interpretation. On the basis thereof, it is indubitable that under no circumstances can a sequestration or freeze order be validly issued by one not a Commissioner of the PCGG.

58

xxx xxx xxx

Even assuming arguendo that Atty. Ramirez had been given prior authority by the PCGG to place Dio Island Resort under sequestration, nevertheless, the sequestration order he issued is still void since PCGG may not delegate its authority to sequester to its representatives and subordinates, and any such delegation is invalid and ineffective.

We further said:

In the instant case, there was clearly no prior determination made by the PCGG of a prima facie basis for the sequestration of Dio Island Resort, Inc. . . .

xxx xxx xxx

The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is, unavoidably, a fatal defect which rendered the sequestration of respondent corporation and its properties void ab initio. Being void ab initio, it is deemed non-existent, as though it had never been issued, and therefore is not subject to ratification by the PCGG.

What were obviously lacking in the above case were the basic requisites for the validity of a sequestration order which we laid down in BASECO vs. PCGG, 36 thus:

Section (3) of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue upon the authority of at least two commissioners, based on the affirmation or complaint of an interested party, or motu proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted. 37

In the case at bar, there is no question as to the presence of prima facie evidence justifying the issuance of the sequestration order against respondent corporations. But the said order cannot be nullified for lack of the other requisite (authority of at least two commissioners) since, as explained earlier, such requisite was nonexistent at the time the order was issued.

In all cases involving alleged ill-gotten wealth brought by or against the Presidential Commission on Good Government, it is the policy of this Court to set aside technicalities and formalities that serve merely to delay or impede their judicious resolution. This Court prefers to have such cases resolved on the merits before the Sandiganbayan. Substantial justice to all parties, not mere legalisms or perfection of form, should now be relentlessly pursued. Eleven years have passed since the government started its search for and reversion of such alleged ill-gotten wealth. The definitive resolution of such cases on the merits is thus long overdue. If there is adequate proof of illegal acquisition, accumulation, misappropriation, fraud or illicit conduct, let it be brought out now. Let the titles over these properties be finally determined and quieted down with all reasonable speed, free of delaying technicalities and annoying procedural sidetracks.

WHEREFORE, premises considered, the petition is hereby GRANTED. The assailed Resolutions of the Sandiganbayan (Third Division) are SET ASIDE. The temporary restraining order is hereby made PERMANENT. The Court further DIRECTS the Sandiganbayan to resolve, with all deliberate dispatch, pursuant to the mandate of the Constitution for a speedy disposition of cases, the instant and all similar cases pending before it involving recovery of ill-gotten wealth through the conduct of continuous trial.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-21005        December 20, 1924

In the matter of the involuntary insolvency of Umberto de Poli. THE AMERICAN FOREIGN BANKING CORPORATION, claimant-appellee, vs.J. R. HERRIDGE, assignee of the insolvent estate of U. de Poli, BOWRING and CO., C. T. BOWRING and CO., LTD., and T. R. YANGCO, creditors-appellants.

Crossfield and O'Brien for the appellant assignee. J. A. Wolfson for the appellants Bowring and Co. and C. T. Bowring and Co., Ltd. Camus and Delgado for the appellant Yangco. Ross, Lawrence and Selph for appellee.

 OSTRAND, J.:

This is an appeal from the following decision of the Court of First Instance of Manila, the Honorable George R. Harvey presiding:

On or about April 28, 1920, the debtor, U. de Poli, a licensed public warehouseman in the City of Manila, issued warehouse receipt No. A-48, commonly known as a "quedan," for 560 bales of tobacco, which tobacco was particularly described therein as "Cagayan tabacco en rama" with specified marks thereon. Said U. de Poli certified over his signature on the face of said quedan as follows: I certify that I am the sole owner of the merchandise herein described." (Exhibit A of American Foreign Banking Corporation.) This quedan was endorsed in bank by U. de Poli, who delivered it to the American Foreign Banking Corporation as security upon his overdraft, then amounting to about P40,000.

The claimant bank, by its motion of April 23, 1921, asked that the assignee be ordered to deliver to said bank the 560 bales of leaf tobacco called for in said quedan upon surrender of the original of the warehouse receipt.

In answer to said motion the assignee denied that the 560 bales of Cagayan tobacco listed in said Exhibit A are now in his possession as assignee of said insolvent estate, and denied that said Exhibit A constitutes a negotiable warehouse receipt under the law, for the reason that it does not comply with the provisions of sections 2, 4 or 5 of the Warehouse Receipt Act; and that, even assuming that said 560 bales of leaf tobacco were now in his possession, he denies that the claimant bank is the owner thereof, or has any lien thereon, or any rights therein, by virtue of said receipt, Exhibit A; and by his amended answer alleges that said Exhibit A was not delivered by the insolvent, U. de Poli, to the claimant for the purpose of transferring the ownership of the property described therein to it, but only as collateral security for a preexisting indebtedness by way of overdraft, for which purpose it is under the law invalid and wholly ineffective as against the general creditors of the said insolvent estate. Substantially the same answer was made by Wise & Co. as general creditors."

There has been no question raised about the authenticity of the quedan. U. de Poli testified that he issued it to said bank as security for his said overdraft; that the tobacco was in the bodega on Calle Acarraga when he gave the quedan to the bank; that the tobacco had to be stripped and booked, and, for this reason there might have been a slight difference between the quantity given in

59

the quedan and the quantity at present in existence in the warehouse; that he knows that the tobacco was in the warehouse at the time he became insolvent, because he had given an order to fill an order for stripped tobacco, and that the tobacco was taken from the pile which he had given in guaranty to the American Foreign Banking Corporation; that Vicente Molina was in charge of the warehouse, and that he (De Poli) acted upon the data furnished to him by Mr. Molina.

The evidence shows that there were only 530 bales of this tobacco. The quedan (Exhibit A) calls for "Cagayan tobacco," but it was stipulated in this case that the 530 bales of tobacco claimed by the American Foreign Banking Corporation are Isabela tobacco. Mr. De Poli explained this discrepancy in discrepancy in description by saying that he "had the description of grade only and made the quedan without giving importance if it was Cagayan or Isabela tobacco; that he asked only for grade, and did not ask whether it was Cagayan or Isabela tobacco, because he had to deliver the security no matter whether it was Isabela or Cagayan tobacco. The objection and motion of the opposition counsel that this explanation be stricken out are hereby overruled.

The quedan in question was issued by J. Magpantay, who was "encargado" of all the U. de Poli warehouse, but he did not have control of the warehouses, but he did not have control of the warehouses, according to Mr. de Poli. Molina did not see the quedan when it was issued, but said that he knew of the tobacco which Mr. De Poli transferred to the claimant bank, because Mr. De Poli told him about it; that it was tobacco from Isabela for the year 1919, was stored in the warehouse on Calle Azcarraga, and that there was no other tobacco in the warehouse except the 1919 Isabela tobacco.

The evidence further shows that in December, 1920, Mr. Kaintzler, a sub accountant of the claimant bank, went to the U. de Poli warehouse on Calle Azcarraga to have the tobacco covered by this quedan, Exhibit A, pointed out to him; that the then assignee (Mr. Bayne) and one of his accountants showed him (Kaintzler) the 530 bales of tobacco with the tag A. F. B. C. on them, and these bales were pointed out to him by Mr. Bayne as the tobacco which belonged to the American Foreign Banking Corporation.

The quedan (Exhibit A) is in the same form as quedan No. A-155, which, in the case of Felisa Roman vs. Asia Banking Corporation, was declared by the Supreme Court of the Philippine Islands to be a negotiable warehouse receipt conveying title to the said bank superior to that of the vendor's lien of Felisa Roman (R. G. No. 17825). 1

The evidence shows that said quedan (Exhibit A) was taken by the American Foreign Banking Corporation for value, believing it to be a negotiable warehouse receipt, and without reasonable cause to believe that the debtor U. de Poli (who was operating a public warehouse at the time) was insolvent.

In view of the decision of the Supreme Court in the Felisa Roman case, above-mentioned, the only question raised by the attorneys for the consignee and for the common creditors which will be considered by the court is that as to the sufficiency of the description of the tobacco in said warehouse receipt. This lot of tobacco was the only tobacco in the warehouse. The debtor said that it was the tobacco which he transferred to the claimant bank. The tobacco was pointed out by the then assignee to the claimants representative as the tobacco covered by said quedan, Exhibit A. Hence, there does not appear to be any doubt about the identity of the tobacco.

The only question left for consideration is whether the use of the word "Cagayan" instead of "Isabela" in describing the tobacco in the quedan rendered the quedan null and void as a negotiable

warehouse receipt for the tobacco intended to be covered by it. The insolvent, U. de Poli, testified positively that this quedan referred to the tobacco in the Azcarraga warehouse, and he explained the discrepancy in the description. The then assignee (Mr. Bayne) was evidently convinced that this lot of tobacco belonged to the claimant bank, because he pointed it out to one of the bank's employees, who noted the tags thereon bearing the initials of the claimant bank.lawphi1.net

The court is of the opinion that the intention of the parties to the transaction must prevail against such a technical objection as to the sufficiency of the description of the tobacco. It might be different if there had been Cagayan tobacco in the warehouse at the time of the issuance of the quedan, Exhibit A, or if there were any doubt whatever as to the identity of the tobacco intended to be covered by the quedan. The assignee stands in the shoes of the insolvent, and while it is his duty to protect the general creditors, he is not in the position of a judgment creditor with an unsatisfied execution.

In view of the foregoing considerations, the court is of the opinion that the quedan, Exhibit A, is a negotiable warehouse receipt which was duly issued and delivered by the debtor U. de Poli to the American Foreign Banking Corporation, and that it divested U. de Poli of his title to said tobacco and transferred the position and the title thereof to the American Foreign Banking Corporation.

It is therefore ordered and adjudged that the consignee deliver the said five hundred and thirty (530) bales of tobacco to the American Foreign banking Corporation, upon payment by said bank of any liens or charges thereon, or, in the event of said tobacco having been sold, the proceeds thereof, less the storage and insurance charges paid after the declaration of insolvency; and thereafter due report will be made to this court of such delivery to the claimant bank in order that the proceeds be deducted from the balance to said claimant bank from the insolvent debtor.

We find no reversible error in the decision quoted and do not think it necessary to add anything to the discussion therein contained.

The judgment appealed from is therefore affirmed, with the costs against the appellants. So ordered.

Digest

FACTS:

The insolvent Umberto de Poli was for several years engaged on an extensive scale in the exportation of Manila hemp, maguey and other products of the country. He was also a licensed public warehouseman, though most of the goods stored in his warehouses appear to have been merchandise purchased by him for exportation and deposited thereby he himself. In order to finance his commercial operations De Poli established credits with some of the leading banking institutions doing business in Manila at that time, among them the Hongkong & Shanghai Banking Corporation, the Bank of the Philippine Islands, the Asia Banking Corporation, the Chartered Bank of India, Australia and China, and the American Foreign Banking Corporation. De Poli opened a current account credit with the bank against which he drew his checks in payment of the products bought by him for exportation. Upon the purchase, the products were stored in one of his warehouses and warehouse receipts issued therefor which were endorsed by him to the bank as security for the payment of his credit in the account current. When the goods stored by the warehouse receipts were sold and shipped, the warehouse receipt was exchanged for shipping papers, a draft was drawn in favor of the bank and against the foreign purchaser, with bill of landing attached, and the entire proceeds of the export sale were received by the

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bank and credited to the current account of De Poli. De Poli was declared insolvent by the Court of First Instance of Manila with liabilities to the amount of several million pesos over and above his assets. An assignee was elected by the creditors and the election was confirmed by thecourt Among the property taken over the assignee was the merchandise stored in the various warehouses of the insolvent. This merchandise consisted principally of hemp, maguey and tobacco. The various banks holding warehouse receipts issued by De Poli claim ownership of this merchandise under their respective receipts, whereas the other creditors of the insolvent maintain that the warehouse receipts are notnegotiable, that their endorsement to the present holders conveyed no title to the property, that they cannot be regarded as pledges of the merchandise inasmuch as they are not public documents and the possession of the merchandise was not delivered to the claimants and that the claims of the holders of the receipts have no preference over those of the ordinary unsecured creditors

ISSSUE:

Whether or not the warehouse receipts issued are negotiable?

HELD:

Yes, a warehouseman who deposited merchandise in his own warehouse, issued a warehouse receipts therefore and thereafter negotiated the receipts by endorsement. The receipt re

cites that the goods were deposited “por orden”of the depositor, the warehouseman, but contained no statement that the goods were to be delivered to the bearer of the receipts or to a specified person. It is in the form of a warehouse receipts and was not mark “nonnegotiable”. Therefore the receipts was negotiable warehouse receipts and the words “por orden” must be construed to mean “to the order”. 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-11776             August 30, 1958

RAMON GONZALES, plaintiff-appellee, vs.GO TIONG and LUZON SURETY CO., INC., defendants-appellants.

Rustico V. Nazareno for appellee.David, Abel and Ysip for appellant Go Tiong.Tolentino, Garcia and D. R. Cruz for appellant Luzon Surety Co., Inc.

MONTEMAYOR, J.:

Defendants Go Tiong and Luzon Surety Co. are appealing from the decision of the Court of First Instance of Manila, Judge Magno S. Gatmaitan presiding, the dispositive part of which reads as follows:

In view whereof, judgment is rendered condemning defendant Go Tiong and Luzon Surety Co., jointly and severally, to pay plaintiff the sum of P4,920 with legal interest from the date of the filing of the complaint until fully paid; judgment is also rendered against Go Tiong to pay the sum of P3,680 unto plaintiff, also with legal interest from the date of the filing of the complaint until fully paid. Go Tiong is also condemned to pay the sum of P1,000 as attorney's fees, plus costs.

The appeal was first taken to the Court of Appeals, the latter indorsing the case to us later under the provisions of Section 17 (6) of Republic Act No. 296, on the ground that the issues raised were purely questions of law.

Go Tiong owned a rice mill and warehouse, located at Mabini, Urdaneta, Pangasinan. On February 4, 1953, he obtained a license to engage in the business of a bonded warehouseman (Exhibit N). To secure the performance of his obligations as such bonded warehouseman, the Luzon Surety Co. executed Guaranty Bond No. 294 in the sum of P18,334 (Exhibit O), conditioned particularly on the fulfillment by Go Tiong of his duty or obligation to deliver to the depositors in his storage warehouse, the palay received by him for storage, at any time demand is made, or to pay the market value thereof, in case he was unable to return the same. The bond was executed on January 26, 1953. Go Tiong insured the warehouse and the palay deposited therein with the Alliance Surety and Insurance Company.

But prior to the issuance of the license to Go Tiong to operate as bonded warehouseman, he had on several occasions received palay for deposit from plaintiff Gonzales, totaling 368 sacks, for which he issued receipts, Exhibits A, B, C, and D. After he was licensed as bonded warehouseman, Go Tiong again received various deliveries of palay from plaintiff, totaling 492 sacks, for which he issued the corresponding receipts, all the grand total of 860 sacks, valued at P8,600 at the rate of P10 per sack.

On or about March 15, 1953, plaintiff demanded from Go Tiong the value of his deposits in the amount of P8,600, but he was told to return after two days, which he did, but Go Tiong again told him to come back. A few days later, the warehouse burned to the ground. Before the fire, Go Tiong had been accepting deliveries of palay from other depositors and at the time of the fire, there were 5,847 sacks of palay in the warehouse, in excess of the 5,000 sacks authorized under his license. The receipts issued by Go Tiong to the plaintiff were ordinary receipts, not the "warehouse receipts" defined by the Warehouse Receipts Act (Act No. 2137).

After the burning of the warehouse, the depositors of palay, including plaintiff, filed their claims with the Bureau of Commerce, and it would appear that with the proceeds of the insurance policy, the Bureau of Commerce paid off some of the claim. Plaintiff's counsel later withdrew his claim with the Bureau of Commerce, according to Go Tiong, because his claim was denied by the Bureau, but according to the decision of the trial court, because nothing came from plaintiff's efforts to have his claim paid. Thereafter, Gonzales filed the present action against Go Tiong and the Luzon Surety for the sum of P8,600, the value of his palay, with legal interest, damages in the sum of P5,000 and P1,500 as attorney's fees. Gonzales later renewed his claim with the Bureau of Commerce (Exhibit S).

While the case was pending in court, Gonzales and Go Tiong entered into a contract of amicable settlement to the effect that upon the settlement of all accounts due to him by Go Tiong, he, Gonzales, would have all actions pending against Go Tiong dismissed. Inasmuch as Go Tiong failed to settle the accounts, Gonzales prosecuted his court action..

For purposes of reference, we reproduce the assignment of errors of Go Tiong, as well as the assignment of errors of the Luzon Surety, all reading thus:

I. The trial court erred in finding that plaintiff-appellee's claim is covered by the Bonded Warehouse Law, Act 3893, as amended, and not by the Civil Code.

II. The trial court erred in not exempting defendant-appellant Go Tiong for the loss of the palay deposited, pursuant to the provisions of the New Civil Code.".

x x x           x x x           x x x

I. The trial court erred in not declaring that the amicable settlement by and between plaintiff-appellee and defendant Go

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Tiong constituted a material alteration of the surety bond of appellant Luzon Surety which extinguished and discharged its liability.

II. The trial court erred in bolding that the receipts for the palay received by Go Tiong, though not in the form of "quedans" or warehouse receipts are chargeable against the surety bond filed under the provisions of the General Bonded Warehouse Act (Act No. 3893 as amended by Republic Act No. 247) as a result of a loss.

III. The trial court erred in not holding that the plaintiff had renounced and abandoned his rights under the Bonded Warehouse Act by the withdrawal of his claim from the Bureau of Commerce and the execution of the "amicable settlement".

IV. The trial court erred in not holding that the palay delivered to Go Tiong constitutes gratuitous deposit which was extinguished upon the loss and destruction of the subject matter.

V. The trial court erred in not declaring that the transaction between defendant Go Tiong and plaintiff was more of a sale rather than a deposit.

VI. The trial court erred in declaring that the Luzon Surety Co., Inc., had not complied with its undertaking despite the liquidation of all the claims by the Bureau of Commerce.

VII. The lower court erred in adjudging the herein surety liable under the terms of the Bond.

We shall discuss the assigned errors at the same time, considering the close relation between them, although we do not propose to discuss and rule upon all of them. Both appellants urge that plaintiff's claim is governed by the Civil Code and not by the Bonded Warehouse Act (Act No. 3893, as amended by Republic Act No. 247), for the reason that, as already stated, what Go Tiong issued to plaintiff were ordinary receipts, not the warehouse receipts contemplated by the Warehouse Receipts Law, and because the deposits of palay of plaintiff were gratuitous.

Act No. 3893 as amended is a special law regulating the business of receiving commodities for storage and defining the rights and obligations of a bonded warehouseman and those transacting business with him. Consequently, any deposit made with him as a bonded warehouseman must necessarily be governed by the provisions of Act No. 3893. The kind or nature of the receipts issued by him for the deposits is not very material much less decisive. Though it is desirable that receipts issued by a bonded warehouseman should conform to the provisions of the Warehouse Receipts Law, said provisions in our opinion are not mandatory and indispensable in the sense that if they fell short of the requirements of the Warehouse Receipts Act, then the commodities delivered for storage become ordinary deposits and will not be governed by the provisions of the Bonded Warehouse Act. Under Section 1 of the Warehouse Receipts Act, one would gather the impression that the issuance of a warehouse receipt in the form provided by it is merely permissive and directory and not obligatory:

SECTION 1. Persons who may issue receipts. — Warehouse receipts may be issued by any warehouseman.,

and the Bonded Warebouse Act as amended permits the warehouseman to issue any receipt, thus:

. . . . "receipt" as any receipt issued by a warehouseman for commodity delivered to him.

As the trial court well observed, as far as Go Tiong was concerned, the fact that the receipts issued by him were not "quedans" is no valid ground for defense because he was the principal obligor. Furthermore, as found by the

trial court, Go Tiong had repeatedly promised plaintiff to issue to him "quedans" and had assured him that he should not worry; and that Go Tiong was in the habit of issuing ordinary receipts (not "quedans") to his depositors.

As to the contention that the deposits made by the plaintiff were free because he paid no fees therefor, it would appear that Go Tiong induced plaintiff to deposit his palay in the warehouse free of charge in order to promote his business and to attract other depositors, it being understood that because of this accommodation, plaintiff would convince other palay owners to deposit with Go Tiong.

Appellants contend that the burning of the warehouse was a fortuitous event and not due to any fault of Go Tiong and that consequently, he should not be held liable, appellants supporting the contention with the ruling in the case of La Sociedad Dalisay vs. De los Reyes, 55 Phil. 452, reading as follows:

Inasmuch as the fire, according to the judgment appealed from, was neither intentional nor due to the negligence of the appellant company or its officials; and it appearing from the evidence that the then manager attempted to save the palay, the appellant company should not be held responsible for damages resulting from said fire. . . . .

The trial court correctly disposed of this same contention, thus:

The defense that the palay was destroyed by fire neither does the Court consider to be good for while the contract was in the nature of a deposit and the loss of the thing would exempt the obligor in a contract of deposit to return the goods, this exemption from the responsibility for the damages must be conditioned in his proof that the loss was by force majeure, and without his fault. The Court does not see from the evidence that the proof is clear on the legal exemption. On the contrary, the fact that he exceeded the limit of the authorized deposit must have increased the risk and would militate against his defense of non-liability. For this reason, the Court does not follow La Sociedad vs. De Los Santos, 55 Phil. 42 quoted by Go Tiong. (p. 3, Decision).

Considering the fact, as already stated, that prior to the burning of the warehouse, plaintiff demanded the payment of the value of his palay from Go Tiong on two occasions but was put off without any valid reason, under the circumstances, the better rule which we accept is the following:

. . . . This rule proceeds upon the theory that the facts surrounding the care of the property by a bailee are peculiarly within his knowledge and power to prove, and that the enforcement of any other rule would impose great difficulties upon the bailors. ... It is illogical and unreasonable to hold that the presumption of negligence in case of this kind is rebutted by the bailee by simply proving that the property bailed was destroyed by an ordinary fire which broke out on the bailee's own premises, without regard to the care exercised by the latter to prevent the fire, or to save the property after the commencement of the fire. All the authorities seem to agree that the rule that there shall be a presumption of negligence in bailment cases like the present one, where there is default in delivery or accounting, for the goods is just a necessary one. . . . (9 A.L.R. 566; see also Hanes vs. Shapiro, 84 S.E. 33; J. Russel Mfg. Co. vs. New Haven, S.B. Co., 50 N.Y. 211; Beck vs. Wilkins-Ricks Co., 102 S.E. 313, Fleishman vs. Southern R. Co., 56 S.E. 974).

Besides, as observed by the trial court, the defendant violated the terms of his license by accepting for deposit palay in excess of the limit authorized by his license, which fact must have increased the risk.

The Luzon Surety claims that the amicable settlement by and between Gonzales and Go Tiong constituted a material alteration of its bond, thereby extinguishing and discharging its liability. It is evident, however, that while

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there was an attempt to settle the case amicably, the settlement was never consummated because Go Tiong failed to settle the accounts of Gonzales to the latter's satisfaction. Consequently, said non-consummated compromise settlement does not discharge the surety:

A compromise or settlement between the creditor or obligee and the principal, by which the latter is discharged from liability, discharges the surety, . . . . But an unconsummated . . . agreement to compromise, falling short of an effective settlement, will not discharge the surety. (50 C. J. 185)

In relation to the failure of Go Tiong to issue the warehouse receipts contemplated by the Warehouse Receipts Act, which failure, according to appellants, precluded plaintiff from suing on the bond, reference may be made to Section 2 of Act No. 3893, defining receipt as any receipt issued by a warehouseman for commodity delivered to him, showing that the law does not require as indispensable that a warehouse receipt be issued. Furthermore, Section 7 of said law provides that as long as the depositor is injured by a breach of any obligation of the warehouseman, which obligation is secured by a bond, said depositor may sue on said bond. In other words, the surety cannot avoid liability from the mere failure of the warehouseman to issue the prescribed receipt. In the case of Andreson vs. Krueger, 212 N.W. 198, 199, it was held:

The surety company concedes that the bond which it gave contains the statutory conditions. The statute . . . requires that the bond — shall be conditioned upon the faithful performance of the public local grain warehouseman of all the provisions of law relating to the storage of grain by such warehouseman.

The surety company thereby made itself responsible for the performance by the warehouseman of all the duties and obligations imposed upon him by the statute; and, if he failed to perform any such duty to the loss or detriment of those who delivered grain for storage, the surety company became liable therefor. Where the warehouseman receives grain for storage and refuses to return or pay it, the fact that he failed to issue the receipt, when the statute required him to issue on receiving it, is not available to the surety as a defense against an action on the bond. The obligation of the surety covers the duty of the warehouseman to issue the prescribed receipt, as well as the other duties imposed upon him by the statute.

We deem it unnecessary to discuss and rule upon the other questions raised in the appeal.

In view of the foregoing, the appealed decision is hereby affirmed, with costs.

Digest

GT operated a bonded warehouse and accepted deliveries of palay among

which were several sacks belonging to RG.  The issues which GT issued were

ordinary receipts, not the warehouse receipts defined by the Warehouse

Receipts Act.

One day, the warehouse burned, together with its contents of palay, which

included RG’s sacks.  RG sued on GT’s bond with Luzon Surety to recover his

loss.  GT and Luzon Surety opposed this, saying among others that:  (1) RG’s

claim was covered by the Civil Code and not the Bonded Warehouse Law

since the receipts were ordinary receipts and not the warehouse receipts

prescribed by the Warehouse Receipts Act;  (2) The deposits of palay by RG

were gratuitous, and therefore the destruction of the goods by fire

extinguished GT’s obligation.  During the trial, it was found that GT had been

accepting deposits in excess of the limit permitted under his license.

Ruling:

GT and Luzon Surety are liable to RG for the destruction of the goods under

the Warehouse Receipts Act.  Any deposit made with a bonded

warehouseman is necessarily governed by the General Bonded Warehouse

Act.  The kind or nature of the receipts issued for the deposits is not very

material, much less decisive.  The issuance of warehouse receipts in the

provided by Sec. 1 of the Warehouse Receipts Act is merely permissive and

directory, and not obligatory.  [Note:  Under the General Bonded Warehouse

Act, the term “receipt” meansany receipt issued by a warehouseman for

commodity delivered to him.  (Sec. 2)]

The defense that the palay was destroyed by fire and thus loss of the thing

exempts the obligor in a contract of deposit from depositing the goods is not

availing here.  The fact that GT exceeded the limit of his authorized deposit

militates against his defense of non-liability.

The surety cannot avoid liability from the mere failure of GT to issue the

prescribed warehouse receipt.  Such defense is not available in an action on

the bond.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-17825             June 26, 1922

In the matter of the Involuntary insolvency of U. DE POLI. FELISA ROMAN, claimant-appellee, vs.ASIA BANKING CORPORATION, claimant-appellant.

Wolfson, Wolfson and Schwarzkopf and Gibbs, McDonough & Johnson for appellant.Antonio V. Herrero for appellee.

OSTRAND, J.:

This is an appeal from an order entered by the Court of First Instance of Manila in civil No. 19240, the insolvency of Umberto de Poli, and declaring the lien claimed by the appellee Felisa Roman upon a lot of leaf tobacco, consisting of 576 bales, and found in the possession of said insolvent, superior to that claimed by the appellant, the Asia Banking Corporation.

The order appealed from is based upon the following stipulation of facts:

It is hereby stipulated and agreed by and between Felisa Roman and Asia Banking Corporation, and on their behalf by their undersigned attorneys, that their respective rights, in relation to the 576 bultos of tobacco mentioned in the order of this court dated April 25, 1921, be, and hereby are, submitted to the court for decision upon the following:

I. Felisa Roman claims the 576 bultos of tobacco under and by virtue of the instrument, a copy of which is hereto attached and made a part hereof and marked Exhibit A.

II. That on November 25, 1920, said Felisa Roman notified the said Asia Banking Corporation of her contention, a copy of which notification is hereto attached and made a part hereof and marked Exhibit B.

III. That on November 29, 1920, said Asia Banking Corporation replied as per copy hereto attached and marked Exhibit C.

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IV. That at the time the above entitled insolvency proceedings were filed the 576 bultos of tobacco were in possession of U. de Poli and now are in possession of the assignee.

V. That on November 18, 1920, U. de Poli, for value received, issued a quedan, covering aforesaid 576bultos of tobacco, to the Asia Banking Corporation as per copy of quedan attached and marked Exhibit D.

VI. That aforesaid 576 bultos of tobacco are part and parcel of the 2,777 bultos purchased by U. de Poli from Felisa Roman.

VII. The parties further stipulate and agree that any further evidence that either of the parties desire to submit shall be taken into consideration together with this stipulation.

Manila, P. I., April 28, 1921.

(Sgd.) ANTONIO V. HERREROAttorney for Felisa Roman

(Sgd.) WOLFSON, WOLFSON & SCHWARZKOPFAttorney for Asia Banking Corp.

Exhibit A referred to in the foregoing stipulation reads:

1.º Que la primera parte es dueña de unos dos mil quinientos a tres mil quintales de tacabo de distintas clases, producidos en los municipios de San Isidro, Kabiaw y Gapan adquiridos por compra con dinero perteneciente a sus bienes parafernales, de los cuales es ella administradora.

2.º Que ha convenido la venta de dichos dos mil quinientos a tres mil quintales de tabaco mencionada con la Segunda Parte, cuya compraventa se regira por las condiciones siguientes:

(a) La Primera Parte remitira a la Segunda debidamente enfardado el tabaco de que ella es propietaria enbultos no menores de cincuenta kilos, siendo de cuenta de dicha Primera Parte todos los gastos que origine dicha mercancja hasta la estacion de ferrocarril de Tutuban, en cuyo lugar se hara cargo la Segunda y desde cuyo instante seran de cuenta de esta los riesgos de la mercancia.

(b) El precio en que la Primera Parte vende a la Segunda el tabaco mencionada es el de veintiseis pesos (P26), moneda filipina, por quintal, pagaderos en la forma que despues se establece.

(c) La Segunda Parte sera la consignataria del tabaco en esta Ciudad de Manila quien se hara cargo de el cuando reciba la factura de embarque y la guia de Rentas Internas, trasladandolo a su bodega quedando en la misma en calidad de deposito hasta la fecha en que dicha Segunda Parte pague el precio del mismo, siendo de cuenta de dicha Segunda Parte el pago de almacenaje y seguro.

(d) LLegada la ultima expedicion del tabaco, se procedera a pesar el mismo con intervencion de la Primera Parte o de un agente de ella, y conocido el numero total de quintales remitidos, se hara liquidacion del precio a cuenta del cual se pagaran quince mil pesos (P15,000), y el resto se dividira en cuatro pagares vencederos cada uno de ellos treinta dias despues del anterior pago; esto es, el primer pagare vencera a los treinta dias de la fecha en que se hayan pagado los quince mil pesos, el segundo a igual tiempo del anterior pago, y asi sucesivamente; conviniendose que el capital debido como precio del tabaco devengara un interes del diez por ciento anual.

Los plazos concedidos al comprador para el pago del precio quedan sujetos a la condicion resolutoria de que si antes del vencimiento de cualquier plazo, el comprador vendiese parte del tabaco en proporcion al importe de cualquiera de los pagares que restasen por vencer, o caso de que vendiese, pues se conviene para este caso que desde el momento en que la Segunda Parte venda el tabaco, el deposito del mismo, como garantia del pago del precio, queda cancelado y simultaneamente es exigible el importe de la parte por pagar.

Leido este documento por los otorgantes y encontrandolo conforme con lo por ellos convenido, lo firman la Primera Parte en el lugar de su residencia, San Isidro de Nueva Ecija, y la Segunda en esta Ciudad de Manila, en las fechas que respectivamente al pie de este documento aparecen.

(Fdos.) FELISA ROMAN VDA. DE MORENOU. DE POLI

Firmado en presencia de:

(Fdos.) ANTONIO V. HERREROT. BARRETTO

("Acknowledged before Notary")

Exhibit D is a warehouse receipt issued by the warehouse of U. de Poli for 576 bales of tobacco. The first paragraph of the receipt reads as follows:

Quedan depositados en estos almacenes por orden del Sr. U. de Poli la cantidad de quinientos setenta y seis fardos de tabaco en rama segun marcas detalladas al margen, y con arreglo a las condiciones siguientes:

In the left margin of the face of the receipts, U. de Poli certifies that he is the sole owner of the merchandise therein described. The receipt is endorced in blank "Umberto de Poli;" it is not marked "non-negotiable" or "not negotiable."

Exhibit B and C referred to in the stipulation are not material to the issues and do not appear in the printed record.

Though Exhibit A in its paragraph (c) states that the tobacco should remain in the warehouse of U. de Poli as a deposit until the price was paid, it appears clearly from the language of the exhibit as a whole that it evidences a contract of sale and the recitals in order of the Court of First Instance, dated January 18, 1921, which form part of the printed record, show that De Poli received from Felisa Roman, under this contract, 2,777 bales of tobacco of the total value of P78,815.69, of which he paid P15,000 in cash and executed four notes of P15,953.92 each for the balance. The sale having been thus consummated, the only lien upon the tobacco which Felisa Roman can claim is a vendor's lien.

The order appealed from is based upon the theory that the tobacco was transferred to the Asia Banking Corporation as security for a loan and that as the transfer neither fulfilled the requirements of the Civil Code for a pledge nor constituted a chattel mortgage under Act No. 1508, the vendor's lien of Felisa Roman should be accorded preference over it.

It is quite evident that the court below failed to take into consideration the provisions of section 49 of Act No. 2137 which reads:

Where a negotiable receipts has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of

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the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.

The term "purchaser" as used in the section quoted, includes mortgagee and pledgee. (See section 58 (a) of the same Act.)

In view of the foregoing provisions, there can be no doubt whatever that if the warehouse receipt in question is negotiable, the vendor's lien of Felisa Roman cannot prevail against the rights of the Asia Banking Corporation as the indorse of the receipt. The only question of importance to be determined in this case is, therefore, whether the receipt before us is negotiable.

The matter is not entirely free from doubt. The receipt is not perfect: It recites that the merchandise is deposited in the warehouse "por orden" instead of "a la orden" or "sujeto a la orden" of the depositor and it contain no other direct statement showing whether the goods received are to be delivered to the bearer, to a specified person, or to a specified person or his order.

We think, however, that it must be considered a negotiable receipt. A warehouse receipt, like any other document, must be interpreted according to its evident intent (Civil Code, arts. 1281 et seq.) and it is quite obvious that the deposit evidenced by the receipt in this case was intended to be made subject to the order of the depositor and therefore negotiable. That the words "por orden" are used instead of "a la orden" is very evidently merely a clerical or grammatical error. If any intelligent meaning is to be attacked to the phrase "Quedan depositados en estos almacenes por orden del Sr. U. de Poli" it must be held to mean "Quedan depositados en estos almacenes a la orden del Sr. U. de Poli." The phrase must be construed to mean that U. de Poli was the person authorized to endorse and deliver the receipts; any other interpretation would mean that no one had such power and the clause, as well as the entire receipts, would be rendered nugatory.

Moreover, the endorsement in blank of the receipt in controversy together with its delivery by U. de Poli to the appellant bank took place on the very of the issuance of the warehouse receipt, thereby immediately demonstrating the intention of U. de Poli and of the appellant bank, by the employment of the phrase "por orden del Sr. U. de Poli" to make the receipt negotiable and subject to the very transfer which he then and there made by such endorsement in blank and delivery of the receipt to the blank.

As hereinbefore stated, the receipt was not marked "non-negotiable." Under modern statutes the negotiability of warehouse receipts has been enlarged, the statutes having the effect of making such receipts negotiable unless marked "non-negotiable." (27 R. C. L., 967 and cases cited.)

Section 7 of the Uniform Warehouse Receipts Act, says:

A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it 'non-negotiable,' or 'not negotiable.' In case of the warehouseman's failure so to do, a holder of the receipt who purchased it for value supposing it to be negotiable may, at his option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the receipt been negotiable.

This section shall not apply, however, to letters, memoranda, or written acknowledgments of an informal character.

This section appears to give any warehouse receipt not marked "non-negotiable" or "not negotiable" practically the same effect as a receipt which, by its terms, is negotiable provided the holder of such unmarked receipt acquired it for value supposing it to be negotiable, circumstances which admittedly exist in the present case.

We therefore hold that the warehouse receipts in controversy was negotiable and that the rights of the endorsee thereof, the appellant, are superior to the vendor's lien of the appellee and should be given preference over the latter.

The order appealed from is therefore reversed without costs. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-25748 March 10, 1975

CONSOLIDATED TERMINALS, INC., plaintiff-appellant, vs.ARTEX DEVELOPMENT CO., INC., defendant-appellee.

Pelaez, Jalandoni and Jamir for plaintiff-appellant.

Norberto J. Quisumbing and Humberto V. Quisumbing for defendant-appellee.

 AQUINO, J.:ñé+.£ªwph!1

Consolidated Terminals, Inc. (CTI) appealed from the order of Judge Jesus Y. Perez of the Court of First Instance of Manila, dismissing its amended complaint for damages against Artex Development Co., Inc. (Artex for short). The dismissal was predicated on lack of cause of action.

The following ultimate facts, which were hypothetically admitted in the motion to dismiss, were alleged in the amended complaint:

CTI was the operator of a customs bonded warehouse located at Port Area, Manila. It received on deposit one hundred ninety-three (193) bales of high density compressed raw cotton valued at P99,609.76. It was understood that CTI would keep the cotton in behalf of Luzon Brokerage Corporation until the consignee thereof, Paramount Textile Mills, Inc., had opened the corresponding letter of credit in favor of shipper, Adolph Hanslik Cotton of Corpus Christi, Texas.

Allegedly by virtue of a forged permit to deliver imported goods, purportedly issued by the Bureau of Customs, Artex was able to obtain delivery of the bales of cotton on November 5 and 6, 1964 after paying CTI P15,000 as storage and handling charges. At the time the merchandise was released to Artex, the letter of credit had not yet been opened and the customs duties and taxes due on the shipment had not been paid. (That delivery permit, Annex A of the complaint, was not included by CTI in its record on appeal).

CTI, in its original complaint, sought to recover possession of the cotton by means of a writ of replevin. The writ could not be executed. CTI then filed an amended complaint by transforming its original complaint into an action for the recovery from Artex of P99,609.76 as compensatory damages, P10,000 as nominal and exemplary damages and P20,000 as attorney's fees.

It should be clarified that CTI in its affidavit for manual delivery of personal property (Annex B of its complaint not included in its record on appeal) and in paragraph 7 of its original complaint alleged that Artex acquired the cotton from Paramount Textile Mills, Inc., the consignee. Artex alleged in its motion to dismiss that it was not shown in the delivery permit that Artex was the entity that presented that document to the CTI. Artex further averred that it returned the cotton to Paramount Textile Mills, Inc. when the contract of sale between them was rescinded because the cotton did not conform to the stipulated specifications as to quality (14-15, Record on Appeal). No copy of the rescissory agreement was attached to Artex's motion to dismiss.

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In sustaining Artex's motion to dismiss, which CTI did not oppose in writing, Judge Perez said:têñ.£îhqwâ£

Since the plaintiff (CTI) is only a warehouseman and according to the amended complaint, plaintiff was already paid the warehousing and handling charges of the 193 bales of high density compressed raw cotton mentioned in the complaint, the plaintiff can no longer recover for its services as warehouseman.

The fact that the delivery of the goods was obtained by the defendant without opening the corresponding letter of credit cannot be the basis of a cause of action of the plaintiff because such failure of the defendant to open the letter of credit gives rise to a cause of action in favor of the shipper of the goods and not in favor of the plaintiff.

With respect to the allegation of the amended complaint that the goods were taken by the defendant without paying the customs duties and other revenues (sic) assessed thereon, this does not give rise to a cause of action in favor of the plaintiff for the party aggrieved is the government.

Likewise, the alleged presentation of a forged permit to deliver imported goods by the defendant did not give rise to a cause of action in favor of the plaintiff but in favor of the Bureau of Customs and of the consignee. (18-19, Record on Appeal).

Judge Perez was guided more by logic and common sense than by any specific rule of law or jurisprudence.

CTI in this appeal contends that, as warehouseman, it was entitled to the possession (should be repossession) of the bales of cotton; that Artex acted wrongfully in depriving CTI of the possession of the merchandise because Artex presented a falsified delivery permit, and that Artex should pay damages to CTI.

The only statutory rule cited by CTI is section 10 of the Warehouse Receipts Law which provides that "where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of them, the warehouseman shall be liable as for conversion to all having a right of property or possession in the goods ...".

We hold that CTI's appeal has not merit. Its amended complaint does not clearly show that, as warehouseman, it has a cause of action for damages against Artex. The real parties interested in the bales of cotton were Luzon Brokerage Corporation as depositor, Paramount Textile Mills, Inc. as consignee, Adolph Hanslik Cotton as shipper and the Commissioners of Customs and Internal Revenue with respect to the duties and taxes. These parties have not sued CTI for damages or for recovery of the bales of cotton or the corresponding taxes and duties.

The case might have been different if it was alleged in the amended complaint that the depositor, consignee and shipper had required CTI to pay damages, or that the Commissioners of Customs and Internal Revenue had held CTI liable for the duties and taxes. In such a case, CTI might logically and sensibly go after Artex for having wrongfully obtained custody of the merchandise.

But that eventuality has not arisen in this case. So, CTI's basic action to recover the value of the merchandise seems to be untenable. It was not the owner of the cotton. How could it be entitled to claim the value of the shipment?

In other words, on the basis of the allegations of the amended complaint, the lower court could not render a valid judgment in accordance with the prayer thereof. It could not render such valid judgment because the amended complaint did not unequivocally allege what right of CTI was violated by Artex, or, to use the familiar language of adjective law, what delict or wrong was committed by Artex against CTI which would justify the latter in recovering the value of bales of cotton even if it was not the owner thereof. (See Ma-ao Sugar Central Co., Inc. vs. Barrios, 79 Phil. 666; 1 Moran's Comments on the Rules of Court, 1970 Ed., pp. 259, 495).

WHEREFORE, the order of dismissal is affirmed with costs against the plaintiff-appellant.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-23033           January 5, 1967

LUA KIAN, plaintiff and appellee, vs.MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants and appellants.

D. F. Macaranas and S. V. Pampolina Jr. for defendants and appellants.San Juan, Laig and Associates for plaintiff and appellee.

BENGZON, J. P., J.:

The present suit was filed by Lua Kian against the Manila Railroad Co. and Manila Port Service for the recovery of the invoice value of imported evaporated "Carnation" milk alleged to have been undelivered. The following stipulation of facts was made:

1. They admit each other's legal personality, and that during the time material to this action, defendant Manila Port Service as a subsidiary of defendant Manila Railroad Company operated the arrastre service at the Port of Manila under and pursuant to the Management Contract entered into by and between the Bureau of Customs and defendant Manila Port Service on February 29, 1956;

2. On December 31, 1959, plaintiff Lua Kian imported 2,000 cases of Carnation Milk from the Carnation Company of San Francisco, California, and shipped on Board SS "GOLDEN BEAR" per Bill of Lading No. 17;

3. Out of the aforesaid shipment of 2,000 cases of Carnation Milk per Bill of Lading No. 17, only 1,829 cases marked `LUA KIAN 1458' were discharged from the vessel SS `GOLDEN BEAR' and received by defendant Manila Port Service per pertinent tally sheets issued by the said carrying vessel, on January 24, 1960;

4. Discharged from the same vessel on the same date unto the custody of defendant Manila Port Service were 3,171 cases of Carnation Milk marked "CEBU UNITED 4860-PH-MANILA" consigned to Cebu United Enterprises, per Bill of Lading No. 18, and on this shipment, Cebu United Enterprises has a pending claim for short-delivery against defendant Manila Port Service;

5. Defendant Manila Port Service delivered to the plaintiff thru its broker, Ildefonso Tionloc, Inc. 1,913 cases of Carnation Milk

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marked "LUA KIAN 1458" per pertinent gate passes and broker's delivery receipts;

6. A provisional claim was filed by the consignee's broker for and in behalf of the plaintiff on January 19, 1960, with defendant Manila Port Service;

7. The invoice value of the 87 cases of Carnation Milk claimed by the plaintiff to have been short-delivered by defendant Manila Port Service is P1,183.11 while the invoice value of the 87 cases of Carnation Milk claimed by the defendant Manila Port Service to have been over-delivered by it to plaintiff is P1,130.65;

8. The 1,913 cases of Carnation mentioned in paragraph 5 hereof were taken by the broker at Pier 13, Shed 3, sometime in February, 1960, where at the time, there were stored therein, aside from the shipment involved herein, 1000 cases of Carnation Milk bearing the same marks and also consigned to plaintiff Lua Kian but had been discharged from SS `STEEL ADVOCATE' and covered by Bill of Lading No. 11;

9. Of the shipment of 1000 cases of Carnation Milk which also came from the Carnation Company, San Francisco, California, U.S.A. and bearing the same marks as the shipment herein but had been discharged from S/S "STEEL ADVOCATE" and covered by Bill of Lading No. 11, Lua Kian as consignee thereof filed a claim for short-delivery against defendant Manila Port Service, and said defendant Manila Port Service paid Lua Kian plaintiff herein, P750.00 in settlement of its claim;

10. They reserve the right to submit documentary evidence;

11. They submit the matter of attorney's fees and costs to the sound discretion of the Court.

On these facts and documentary evidence subsequently presented, the Court of First Instance of Manila ruled that 1,829 cases marked Lua Kian (171 cases less than the 2,000 cases indicated in the bill of lading and 3,171 cases marked "Cebu United" (171 cases over the 3,000 cases in the bill of lading were discharged to the Manila Port Service. Considering that Lua Kian and Cebu United Enterprises were the only consignees of the shipment of 5,000 cases of "Carnation" milk, it found that of the 3,171 cases marked "Cebu United", 171 should have been delivered to Lua Kian. Inasmuch as the defendant Manila Port Service actually delivered 1,913 cases to plaintiff,1which is only 87 cases short of 2,000 cases as per bill of lading the former was ordered to pay Lua Kian the sum of P1,183.11 representing such shortage of 87 cases, with legal interest from the date of the suit, plus P500 as attorney's fees.

Defendants appealed to Us and contend that they should not be made to answer for the undelivered cases of milk, insisting that Manila Port Service was bound to deliver only 1,829 cases to Lua Kian and that it had there before in fact over-delivered to the latter.

The bill of lading in favor of Cebu United Enterprises indicated that only 3,000 cases were due to said consignee, although 3,171 cases were marked in its favor. Accordingly, the excess 171 cases marked "Cebu United" placed the defendant arrastre operator in a dilemma, for should it deliver them to Lua Kian the goods could be claimed by the consignee Cebu United Enterprises whose markings they bore, and should it deliver according to markings, to Cebu United Enterprises, it might be sued by the consignee, Lua Kian whose bill of lading indicated that it should receive 171 cases more. The dilemma itself, however, offered the solution. The legal relationship between an arrastre operator and the consignee is akin to that of a depositor and warehouseman.2 As custodian of the goods discharged from the vessel, it was defendant arrastre operator's duty, like that of any ordinary depositary, to take good care of the goods and to turn them over to the party entitled to their possession.3 Under this particular set of circumstances, said defendant should have withheld delivery because of the discrepancy between the bill of

lading and the markings and conducted its own investigation, not unlike that under Section 18 of the Warehouse Receipts Law, or called upon the parties, to interplead, such as in a case under Section 17 of the same law, in order to determine the rightful owner of the goods.

It is true that Section 12 of the Management Contract exempts the arrastre operator from responsibility for misdelivery or non-delivery due to improper or insufficient marking. We cannot however excuse the aforestated defendant from liability in this case before Us now because the bill of lading showed that only 3,000 cases were consigned to Cebu United Enterprises. The fact that the excess of 171 cases were marked for Cebu United Enterprises and that the consignment to Lua Kian was 171 cases less than the 2,000 in the bill of lading, should have been sufficient reason for the defendant Manila Port Service to withhold the goods pending determination of their rightful ownership.

We therefore find the defendants liable, without prejudice to their taking whatever proper legal steps they may consider worthwhile to recover the excess delivered to Cebu United Enterprises.

With respect to the attorney's fees awarded below, this Court notices that the same is about 50 per cent of the litigated amount of P1,183.11. We therefore deem it reasonable to decrease the attorney's fees to P300.00.

Wherefore, with the aforesaid reservation, and with the modification that the attorney's fee is reduced to P300.00, the judgment appealed from is affirmed, with costs against appellants. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

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

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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.

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