1 | C r e d i t Tr a n s a c t i o n s

Beastly Notes

b. Escalation and de-escalation clauses To secure payment of the loan the parties executed a real estate
mortgage contract which provided:
PNB v. CA and Spouses Basco, G.R. No. 109563, July 9, 1996
258 SCRA 549
(k) INCREASE OF INTEREST RATE:
FACTS:
The rate of interest charged on the obligation secured by this mortgage
as well as the interest on the amount which may have been advanced by
On June 4, 1979, private respondent spouses Maria Amor and Marciano
the MORTGAGEE, in accordance with the provision hereof, shall be
Bascos obtained a loan from the Philippine National Bank in the amount
subject during the life of this contract to such an increase within the rate
of P15,000.00 evidenced by a promissory note and secured by a real
allowed by law, as the Board of Directors of the MORTGAGEE may
estate mortgage.
prescribe for its debtors.

The promissory note contained the following stipulation:

On Dec 12, 1980, PNB extended the period of payment of the loan
to June 5, 1981, thus converting the loan from a short-term to a medium-
For value received, [private respondents] jointly and severally promise to term loan, i.e., a loan which matured over 2 to 5 years.
pay to the ORDER of the PHILIPPINE NATIONAL BANK, at its office in
San Jose City, Philippines, the sum of P15,000.00 ONLY , Phil Currency,
- PNB also increased the rate of interest per annum, first to 14%,
together with interest thereon at the rate of 12 % per annum until
effective Dec 1, 1979;
paid, which interest rate the Bank may at any time without notice, raise
within the limits allowed by law, and I/we also agree to pay jointly and
severally ____% per annum penalty charge, by way of liquidated - then to 22% effective Feb 21, 1983;
damages should this note be unpaid or is not renewed on due dated.
- to 22.5% effective June 20, 1983;
Payment of this note shall be as follows:
- to 23% from November 2, 1983;
*THREE HUNDRED SIXTY FIVE DAYS* AFTER DATE
- to 25% effective March 2, 1984;
On the reverse side of the note the following condition was
stamped: - and finally to 28% from April 10, 1984.

All short-term loans to be granted starting Jan 1, 1978 shall be made
subject to the condition that any and/or all extensions hereof that will
leave any portion of the amount still unpaid after 730 days shall
automatically convert the outstanding balance into a medium or long-
term obligation as the case may be and give the Bank the right to charge
the interest rates prescribed under its policies from the date the account
was originally granted.
Because private respondents defaulted in paying their obligation, the
Provincial Sheriff of Nueva Ecija scheduled the extrajudicial foreclosure
of the mortgage on June 15, 1984 to pay private respondents'
indebtedness which, according to PNB, had increased from P15,000.00
to P35,125.84, plus 28% annual interest.
Private respondents brought suit against PNB, its Branch Manager Jetro
Godoy, and the Provincial Sheriff of Nueva Ecija Numeriano Y. Galang
2 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
(1) for a declaration of nullity of C.B. Monetary Board Resolution
No. 2126 dated Nov 29, 1979 (embodied in C.B. Circular No. 705
dated Dec 1, 1979), which increased the ceiling on the interest rate
of secured and unsecured loans to 16% per annum and 14% per
annum, respectively, on the ground that it was contrary to the Usury
Law, good morals, public policy, customs and traditions, social
justice, due process and the equal protection clause of the
Constitution; and
(2) for a declaration that the interest rate increases on their loan
were contrary to Art. 1959 of the Civil Code which provides that
interest due and unpaid shall not earn interest. Pending final
determination of the case, private respondents asked that the
auction sale be enjoined.
PNB filed an answer with compulsory counterclaim. It alleged that
private respondents had no cause of action because 1-a of the Usury
Law, as amended by P.D. No. 1684, did not limit the number of times the
interest could be increased and that private respondents were estopped
from questioning the increases because they failed to object to the
same. PNB asked that the complaint be dismissed and that private
respondents be ordered to pay P35,125.84, plus interest from April 10,
1984, until the obligation was fully paid, attorney's fees and moral
damages in such amount as may be determined by the court.
On June 13, 1984 private respondents deposited with the clerk of
court P8,000.00 and on Jan 15, 1985 P2,000.00, in partial payment of
their loan.
RTC: On June 15, 1990 ruled the following:
1. There having no evidence against the defendants Jetro
Godoy, and the Provincial Sheriff of Nueva Ecija,
Numeriano Galang, the case against them is dismissed;
2. The increase in interest rates based on the escalation
clauses in the Promissory Note and the Real Estate
Mortgage, par. K, being contrary to Sec. 3, P.D. No. 116 are
declared null and void, that the defendant PNB is hereby
directed to desist from enforcing the increased rate of
interest more than (12%) per cent on plaintiffs' loan;
3. The compulsory counterclaim of the defendants is also
dismissed;
4. On the other hand, the plaintiffs can settle their unpaid obligation
with the defendant PNB at the interest rate of TWELVE (12%)
per cent per annum computed from the inception of the loan
until the same is fully paid; advances made by the PNB for
insurance premiums and penalties added; and the 10,000.00
paid to and defendant bank to be credited as payment by the
plaintiffs;
5. Plaintiffs' claim for damages is, likewise, dismissed; and
6. The parties shall each bear out [sic] the expenses incurred by
them.
RTC invalidated the stipulations in the promissory note and the real
estate mortgage, which authorized PNB to increase the interest rate, on
the ground that there was no corresponding stipulation that the interest
rate would be reduced in the event the law reduced the applicable
maximum rate as provided under P.D. No. 1684; that P.D. No. 116, which
sets a ceiling of 12% interest on secured loans, is a "law," which should
prevail over Circular No. 705, used by PNB to increase the interest; that
collection of the increased interest sanctions unjust enrichment contrary
to Art. 22 of the Civil Code; and that the promissory note and real estate
mortgage were contracts of adhesion which should be interpreted in
favor of private respondents.
PNB appealed.
3 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
CA: affirmed the trial court's decision. It held that the escalation clause
in the promissory note could not be given effect because of the
absence of a provision for a de-escalation in the event a reduction
of interest was ordered by law.
In addition it held that pursuant to the escalation clause any
increase in interest must be within "the limits allowed by law" but
C.B. circulars, on the basis of which PNB increased the interest,
could not be considered "laws."
PNB moved for a reconsideration. As its motion was denied, it filed
this petition.
PNB's argument is that the CA erred in applying 2 of P.D. No. 1684,
which makes the validity of an escalation clause turn on the presence of
a de-escalation clause, to the promissory note and the real estate
mortgage in this case. It contends that the 2 had been executed on June
4, 1979, before the effectivity of P.D. No. 1684 on March 17, 1980.
ISSUE: Should any increase in the rate of interest made pursuant to
an escalation clause be the result of an agreement between the
parties.
RULING: YES.
To begin with, PNB's argument rests on a misapprehension of the import
of the appellate court's ruling. The CA nullified the interest rate increases
not because the promissory note did not comply with P.D. No. 1684 by
providing for a de-escalation, but because the absence of such provision
made the clause so one-sided as to make it unreasonable.
That ruling is correct. It is in line with the SCs decision in Banco Filipino
Savings & Mortgage Bank v. Navarro that although P.D. 1684 is not to
be retroactively applied to loans granted before its effectivity, there must
nevertheless be a de-escalation clause to mitigate the one-sideness of
the escalation clause. Indeed because of concern for the unequal status
of borrowers vis-a-vis the banks, cases after Banco Filipino have
fashioned the rule that any increase in the rate of interest made pursuant
to an escalation clause must be the result of agreement between the
parties.
Thus in Philippine national Bank v. CA, 2 promissory notes authorized
PNB to increase the stipulated interest per annum within the limits
allowed by law at any time depending on whatever policy [PNB] may
adopt in the future; Provided, that the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." The real
estate mortgage likewise provided:
The rate of interest charged on the obligation secured by this mortgage
as well as the interest on the amount which may have been advanced by
the MORTGAGEE, in accordance with the provisions hereof, shall be
subject during the life of this contract to such an increase within the rate
allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.
Pursuant to these clauses, PNB successively increased the interest from
18% to 32%, then to 41% and then to 48%.
The Supreme Court declared the increases unilaterally imposed by PNB
to be in violation of the principle of mutuality as embodied in Art. 1308 of
the Civil Code, which provides that "[t]he contract must bind both
contracting parties; its validity or compliance cannot be left to the will of
one of them." As the Court explained:
4 | C r e d i t Tr a n s a c t i o n s
Beastly Notes

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 leave
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.
A similar ruling was made in Philippine National Bank v. CA. The credit
agreement in that case provided:
in their agreement, and would negate the element of mutuality in
contracts.
Only recently we invalidated another round of interest increases decreed
by PNB pursuant to a similar agreement it had with other borrowers:
[W]hile 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.
In this case no attempt was made by PNB to secure the conformity of
private respondents to the successive increases in the interest
rate. Private respondents' assent to the increases can not be implied
from their lack of response to the letters sent by PNB, informing them of
the increases. For as stated in one case, no one receiving a proposal to
change a contract is obliged to answer the proposal.
WHEREFORE, the decision of the CA is AFFIRMED.
SO ORDERED.

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 accommodation shall
Alameda v. CA, 256 SCRA 292
be correspondingly decreased in the event that the applicable maximum
interest is reduced by law or by the Monetary Board . . . .
FACTS:
PNB granted to the spouses Ponciano and Eufemia Almeda several
As in the first case, PNB successively increased the stipulated interest
loan/credit accommodations totaling P18 M in a period of six years at an
so that what was originally 12% per annum became, after only 2 years,
interest rate of 21% per annum.
42%. In declaring the increases invalid, we held:

To secure the loan, the spouses Almeda executed a Real Estate

We cannot countenance petitioner bank's posturing that the escalation
Mortgage Contract covering a 3,500 square meter parcel of land,
clause at bench gives it unbridled right to unilaterally upwardly adjust the
together with the building erected thereon (the Marvin Plaza).
interest on private respondents' loan. That would completely take away
from private respondents the right to assent to an important modification
On the contract, it was stipulated that the Bank reserves the right to
increase the interest rate within the limits allowed by law at any time
5 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
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.
Petitioners made partial payments on the loan totaling. P7,735,004.66.
On March 31, 1984, PNB raised the interest rate to 28%. It was
thereupon increased from an initial 21% to a high of 68% between
March of 1984 to September, 1986.
Petitioner protested the increase in interest rates. Before the loan was to
mature in March, 1988, the spouses filed a petition for injunction and
TRO with the RTC. The RTC issued a writ of preliminary injunction and
supplemental preliminary writ of injunction
Upon the posting of a counterbond by the PNB, the trial court dissolved
the supplemental writ of preliminary injunction. PNB 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.
Petitioners formally consigned the amount of P40,142,518.00 with the
Regional Trial Court
Case History:
RTC issued a writ of preliminary injunction enjoining the foreclosure
sale of Marvin Plaza.
CA - set aside the assailed orders and upheld PNBs right to foreclose
the mortgaged property
ISSUES
1. WON PNB was authorized to raise its interest rates from 21% to as
high as 68% under the credit agreement
2. WON PNB is granted the authority to foreclose the Marvin Plaza
under the mandatory foreclosure provisions of PD385
RULING:
1. 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.
2. In facilitating collection of debts through the automatic
foreclosure provisions of PD 385, the govt is, however, not
exempted from observing basic principles of law, and ordinary
fairness and decency under the due process clause of the
Constitution.
Reasoning
1. the binding effect of any agreement between parties to a
contract is premised on two settled principles: that any
obligation arising from contract has the force of law between the
parties; and that there must be mutuality between the parties
based on their essential equality.
- PNB unilaterally altered the terms of its contract with petitioners
by increasing the interest rates on the loan without prior assent
of the latter
- the manner of agreement is itself explicitly stipulated by the Civil
Code in Art.1956 no interest shall be due unless it has been
expressly stipulated in writing--- what has been stipulated in
writing is that petitioners were bound merely to pay 21%
interest, subject to possible escalation or de-escalation when
the circumstances warrant it, it is within the limits allowed by
law, and upon agreement
- in PNB v. CA, PNB was disauthorized from unilaterally raising
the interest rate partly because the increase violated the
principle of mutuality of contracts expressed in Art.1308 of the
6 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
CC the contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them
- increases were arbitrary
- escalation clauses in credit agreements are perfectly valid and
do not contravene public policy. However, they are still subject
to laws and provisions governing agreements between parties,
which agreements implicitly incorporate provisions of existing
law
- the credit agreement requires that the increase be within the
limits allowed by lawrefers to legislative enactments not
admin circulars (PNB relied on CB Circular No. 905) as shown
in the credit agreement where there is a distinction made
between law or the Monetary Board Circulars
- Banco Filipino Savings and Mortgage Bank v. Navarro:
distinction between a law and an admin regulation is recognized
in the Monetary Board guidelines; guidelines thus presuppose
that a Central Bank regulation is not within the term any law
- petitioners never agreed in writing to pay the increased interest
rates demanded by PNB
2. PD 385 was issued principally to guarantee that government
financial institutions would not be denied substantial cash
inflows necessary to finance the governments development
projects by large borrowers who resort to litigation to prevent or
delay the governments collection of their debts or loans
- the dispute regarding the interest rate increases was never
settled so the exact amount of petitioners obligations could not
be determined
- the foreclosure provisions could be validly invoked by PNB 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
- PNB cannot claim that there was no honest-to-goodness
attempt on the part of the spouses to settle their obligations
Disposition The unilateral and progressive increases imposed by PNB
were null and void. The decision and resolution of the CA is REVERSED
AND SET ASIDE. The case is remanded to RTC for further proceedings.
(2) ISSUE:
Was PNB authorized to raise its interest rates to as high as 68%,
pursuant to the credit agreement's escalation clause, and in relation to
Central Bank Circular No. 905?
(2) RATIO:
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. 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.
PNB 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.
7 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
C.B. Circular No. 905 did not authorize the bank, or any lending
institution for that matter, to progressively increase interest
rates. 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.
The credit agreement specifically requires that the increase be
"within the limits allowed by law". 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.
THE CONSOLIDATED BANK AND TRUST
CORPORATION
(SOLIDBANK), petitioner, vs. THE COURT OF
APPEALS,
CONTINENTAL CEMENT CORPORATION, GREGORY
T. LIM and SPOUSE, respondents.
GR No. 114286, 19 April 2001
356 SCRA 671
FACTS:
Continental Cement Corp obtained from Consolidated Bank letter of
credit used to purchased 500,000 liters of bunker fuel oil. Respondent
Corporation made a marginal deposit to petitioner.
A trust receipt was executed by respondent corporation, with respondent
Gregory Lim as signatory. Claiming that respondents failed to turn over
the goods or proceeds, petitioner filed a complaint for sum of money
before the RTC of Manila.
In their answer, respondents aver that the transaction was a simple loan
and not a trust receipt one, and that the amount claimed by petitioner did
not take into account payments already made by them. The court
dismissed the complaint, CA affirmed the same.
ISSUE:
Whether or not the marginal deposit should not be deducted outright
from the amount of the letter of credit.
RULING:
No. petitioner argues that the marginal deposit should be considered
only after computing the principal plus accrued interest and other
charges. It could be onerous to compute interest and other charges on
the face value of the letter of credit which a bank issued, without first
crediting or setting off the marginal deposit which the borrower paid to it-
compensation is proper and should take effect by operation of law
because the requisited in Art. 1279 are present and should extinguish
both debts to the concurrent amount. Unjust enrichment.
Original Version
On July 13, 1982, respondents Continental Cement Corporation
(hereinafter, respondent Corporation) and Gregory T. Lim (hereinafter,
respondent Lim) obtained from petitioner Consolidated Bank and Trust
Corporation Letter of Credit No. DOM-23277 in the amount of
P1,068,150.00 On the same date, respondent Corporation paid a
marginal deposit of P320,445.00 to petitioner. The letter of credit was
used to purchase around 500,000 liters of bunker fuel oil from Petrophil
Corporation, which the latter delivered directly to respondent Corporation
in its Bulacan plant. In relation to the same transaction, a trust receipt for
the amount of P1,001,520.93 was executed by respondent Corporation,
with respondent Lim as signatory.
Claiming that respondents failed to turn over the goods covered by the
trust receipt or the proceeds thereof, petitioner filed a complaint for sum
of money with application for preliminary attachment before the Regional
Trial Court of Manila. In answer to the complaint, respondents averred
that the transaction between them was a simple loan and not a trust
receipt transaction, and that the amount claimed by petitioner did not
8 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
take into account payments already made by them. Respondent Lim
also denied any personal liability in the subject transactions. In a
Supplemental Answer, respondents prayed for reimbursement of alleged
overpayment to petitioner of the amount of P490,228.90.
At the pre-trial conference, the parties agreed on the following issues:
1) Whether or not the transaction involved is a loan transaction or a trust
receipt transaction;
2) Whether or not the interest rates charged against the defendants by
the plaintiff are proper under the letter of credit, trust receipt and under
existing rules or regulations of the Central Bank;
3) Whether or not the plaintiff properly applied the previous payment of
P300,456.27 by the defendant corporation on July 13, 1982 as payment
for the latters account; and
4) Whether or not the defendants are personally liable under the
transaction sued for in this case.
TRIAL COURT: On Sept 17, 1990, it dismissed the Complaint and
ordering petitioner to pay respondents the following amounts under their
counterclaim: P490,228.90 representing overpayment of respondent
Corporation, with interest thereon at the legal rate from July 26, 1988
until fully paid; P10,000.00 as attorneys fees; and costs.
Both parties appealed to the CA,
CA: partially modified the Decision by deleting the award of attorneys
fees in favor of respondents and, instead, ordering respondent
Corporation to pay petitioner P37,469.22 as and for attorneys fees and
litigation expenses.
ISSUES:
1. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
ACTED INCORRECTLY OR COMMITTED REVERSIBLE ERROR
IN HOLDING THAT THERE WAS OVERPAYMENT BY PRIVATE
RESPONDENTS TO THE PETITIONER IN THE AMOUNT OF
P490,228.90 DESPITE THE ABSENCE OF ANY COMPUTATION
MADE IN THE DECISION AND THE ERRONEOUS APPLICATION
OF PAYMENTS WHICH IS IN VIOLATION OF THE NEW CIVIL
CODE.
2. WHETHER OR NOT THE MANNER OF COMPUTATION OF THE
MARGINAL DEPOSIT BY THE RESPONDENT APPELLATE
COURT IS IN ACCORDANCE WITH BANKING PRACTICE.
3. WHETHER OR NOT THE AGREEMENT AMONG THE PARTIES AS
TO THE FLOATING OF INTEREST RATE IS VALID UNDER
APPLICABLE JURISPRUDENCE AND THE RULES AND
REGULATIONS OF THE CENTRAL BANK.
4. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN NOT CONSIDERING THE
TRANSACTION AT BAR AS A TRUST RECEIPT TRANSACTION
ON THE BASIS OF THE JUDICIAL ADMISSIONS OF THE
PRIVATE RESPONDENTS AND FOR WHICH RESPONDENTS
ARE LIABLE THEREFOR.
5. WHETHER OR NOT THE RESPONDENT APPELLATE COURT
GRIEVOUSLY ERRED IN NOT HOLDING PRIVATE RESPONDENT
SPOUSES LIABLE UNDER THE TRUST RECEIPT TRANSACTION.
RULING: The petition must be denied.
On the first issue respecting the fact of overpayment found by both the
lower court and respondent CA, we stress the time-honored rule that
findings of fact by the CA especially if they affirm factual findings of the
trial court will not be disturbed by this Court, unless these findings are
not supported by evidence.
Petitioner decries the lack of computation by the lower court as basis for
its ruling that there was an overpayment made. While such a
computation may not have appeared in the Decision itself, we note that
the trial courts finding of overpayment is supported by evidence
presented before it. At any rate, we painstakingly reviewed and
computed the payments together with the interest and penalty charges
due thereon and found that the amount of overpayment made by
respondent Bank to petitioner, i.e., P563,070.13, was more than what
was ordered reimbursed by the lower court. However, since respondents
9 | C r e d i t Tr a n s a c t i o n s
Beastly Notes
did not file an appeal in this case, the amount ordered reimbursed by the
lower court should stand.
Moreover, petitioners contention that the marginal deposit made by
respondent Corporation should not be deducted outright from the
amount of the letter of credit is untenable.
Petitioner argues that the marginal deposit should be considered only
after computing the principal plus accrued interests and other
charges. However, to sustain petitioner on this score would be to
countenance a clear case of unjust enrichment, for while a marginal
deposit earns no interest in favor of the debtor-depositor, the bank is not
only able to use the same for its own purposes, interest-free, but is also
able to earn interest on the money loaned to respondent Corporation.
Indeed, it would be onerous to compute interest and other charges on
the face value of the letter of credit which the petitioner issued, without
first crediting or setting off the marginal deposit which the respondent
Corporation paid to it.
Compensation is proper and should take effect by operation of law
because the requisites in Article 1279 of the Civil Code are present and
should extinguish both debts to the concurrent amount.
Hence, the interests and other charges on the subject letter of credit
should be computed only on the balance of P681,075.93, which was the
portion actually loaned by the bank to respondent Corporation.
Neither do we find error when the lower court and the CA set aside as
invalid the floating rate of interest exhorted by petitioner to be
applicable. The pertinent provision in the trust receipt agreement of the
parties fixing the interest rate states:
I, WE jointly and severally agree to any increase or decrease in the
interest rate which may occur after July 1, 1981, when the Central Bank
floated the interest rate, and to pay additionally the penalty of 1% per
month until the amount/s or installment/s due and unpaid under the trust
receipt on the reverse side hereof is/are fully paid.
We agree with respondent CA that the foregoing stipulation is invalid,
there being no reference rate set either by it or by the Central Bank,
leaving the determination thereof at the sole will and control of petitioner.
While it may be acceptable, for practical reasons given the fluctuating
economic conditions, for banks to stipulate that interest rates on a loan
not be fixed and instead be made dependent upon prevailing market
conditions, there should always be a reference rate upon which to peg
such variable interest rates. An example of such a valid variable interest
rate was found in Polotan, Sr. v. Court of Appeals. In that case, the
contractual provision stating 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 +
-+
was considered valid. The aforequoted provision was upheld
notwithstanding that it may partake of the nature of an escalation clause,
because at the same time it provides for the decrease in the interest rate
in case the prevailing market rates dictate its reduction. In other words,
unlike the stipulation subject of the instant case, the interest rate
involved in the Polotan case is designed to be based on the prevailing
market rate. On the other hand, a stipulation ostensibly signifying an
agreement to any increase or decrease in the interest rate, without
more, cannot be accepted by this Court as valid for it leaves solely to the
creditor the determination of what interest rate to charge against an
outstanding loan.
Petitioner has also failed to convince us that its transaction with
respondent Corporation is really a trust receipt transaction instead of
merely a simple loan, as found by the lower court and the Court of
Appeals.
The recent case of Colinares v. Court of Appeals appears to be
foursquare with the facts obtaining in the case at bar. There, we found
that inasmuch as the debtor received the goods subject of the trust
receipt before the trust receipt itself was entered into, the transaction in
question was a simple loan and not a trust receipt agreement. Prior to
the date of execution of the trust receipt, ownership over the goods was
already transferred to the debtor. This situation is inconsistent with what
normally obtains in a pure trust receipt transaction, wherein the goods
belong in ownership to the bank and are only released to the importer in
trust after the loan is granted.
In the case at bar, as in Colinares, the delivery to respondent
Corporation of the goods subject of the trust receipt occurred long before
10 | C r e d i t T r a n s a c t i o n s
Beastly Notes
the trust receipt itself was executed. More specifically, delivery of the
bunker fuel oil to respondent Corporations Bulacan plant commenced on
July 7, 1982 and was completed by July 19, 1982. Further, the oil was
used up by respondent Corporation in its normal operations by August,
1982. On the other hand, the subject trust receipt was only executed
nearly two months after full delivery of the oil was made to respondent
Corporation, or on September 2, 1982.
The danger in characterizing a simple loan as a trust receipt transaction
was explained in Colinares, to wit:
The Trust Receipts Law does not seek to enforce payment of the loan,
rather it punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of
whether the latter is the owner. Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of confidence in the
handling of money to the prejudice of PBC. Petitioners continually
endeavored to meet their obligations, as shown by several receipts
issued by PBC acknowledging payment of the loan.
The Information charges Petitioners with intent to defraud and
misappropriating the money for their personal use. The mala
prohibita nature of the alleged offense notwithstanding, intent as a state
of mind was not proved to be present in Petitioners situation. Petitioners
employed no artifice in dealing with PBC and never did they evade
payment of their obligation nor attempt to abscond. Instead, Petitioners
sought favorable terms precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are not importers acquiring
the goods for re-sale, contrary to the express provision embodied in the
trust receipt. They are contractors who obtained the fungible goods for
their construction project. At no time did title over the construction
materials pass to the bank, but directly to the Petitioners from CM
Builders Centre. This impresses upon the trust receipt in question
vagueness and ambiguity, which should not be the basis for criminal
prosecution in the event of violation of its provisions.
The practice of banks of making borrowers sign trust receipts to facilitate
collection of loans and place them under the threats of criminal
prosecution should they be unable to pay it may be unjust and
inequitable, if not reprehensible. Such agreements are contracts of
adhesion which borrowers have no option but to sign lest their loan be
disapproved. The resort to this scheme leaves poor and hapless
borrowers at the mercy of banks, and is prone to misinterpretation, as
had happened in this case. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as manifested by
its Affidavit of Desistance.
Similarly, respondent Corporation cannot be said to have been
dishonest in its dealings with petitioner. Neither has it been shown that it
has evaded payment of its obligations. Indeed, it continually endeavored
to meet the same, as shown by the various receipts issued by petitioner
acknowledging payment on the loan. Certainly, the payment of the sum
of P1,832,158.38 on a loan with a principal amount of only P681,075.93
negates any badge of dishonesty, abuse of confidence or mishandling of
funds on the part of respondent Corporation, which are the gravamen of
a trust receipt violation. Furthermore, respondent Corporation is not an
importer which acquired the bunker fuel oil for re-sale; it needed the oil
for its own operations. More importantly, at no time did title over the oil
pass to petitioner, but directly to respondent Corporation to which the oil
was directly delivered long before the trust receipt was executed. The
fact that ownership of the oil belonged to respondent Corporation,
through its President, Gregory Lim, was acknowledged by petitioners
own account officer on the witness stand, to wit:
Q - After the bank opened a letter of credit in favor of Petrophil Corp.
for the account of the defendants thereby paying the value of
the bunker fuel oil what transpired next after that?
A - Upon purchase of the bunker fuel oil and upon the requests of the
defendant possession of the bunker fuel oil were transferred to
them.
Q - You mentioned them to whom are you referring to?
A - To the Continental Cement Corp. upon the execution of the trust
receipt acknowledging the ownership of the bunker fuel oil this
should be acceptable for whatever disposition he may make.
Q - You mentioned about acknowledging ownership of the bunker
fuel oil to whom by whom?
A - By the Continental Cement Corp.
Q - So by your statement who really owns the bunker fuel oil?
11 | C r e d i t T r a n s a c t i o n s
Beastly Notes
ATTY. RACHON:
Objection already answered.
COURT:
Give time to the other counsel to object.
ATTY. RACHON:
He has testified that ownership was acknowledged in favor of
Continental Cement Corp. so that question has already been
answered.
ATTY. BAAGA:
That is why I made a follow up question asking ownership of the bunker
fuel oil.
COURT:
Proceed.
ATTY. BAAGA:
Q - Who owns the bunker fuel oil after purchase from Petrophil Corp.?
A - Gregory Lim.
By all indications, then, it is apparent that there was really no trust
receipt transaction that took place. Evidently, respondent Corporation
was required to sign the trust receipt simply to facilitate collection by
petitioner of the loan it had extended to the former.
Finally, we are not convinced that respondent Gregory T. Lim and his
spouse should be personally liable under the subject trust
receipt. Petitioners argument that respondent Corporation and
respondent Lim and his spouse are one and the same cannot be
sustained. The transactions sued upon were clearly entered into by
respondent Lim in his capacity as Executive Vice President of
respondent Corporation. We stress the hornbook law that corporate
personality is a shield against personal liability of its officers. Thus, we
agree that respondents Gregory T. Lim and his spouse cannot be made
personally liable since respondent Lim entered into and signed
the contract clearly in his official capacity as Executive Vice
President. The personality of the corporation is separate and distinct
from the persons composing it.
WHEREFORE, in view of all the foregoing, the instant Petition for
Review is DENIED. The Decision of the Court of Appeals dated July 26,
1993 in CA-G.R. CV No. 29950 is AFFIRMED.
SO ORDERED.
NEW SAMPAGUITA BUILDERS G.R. No. 148753
CONSTRUCTION, INC. (NSBCI) and Spouses EDUARDO R.
DEE Present: and ARCELITA M. DEE, Petitioners v.
PHILIPPINE NATIONAL BANK, Respondent.
July 30, 2004
PANGANIBAN, J.:
Courts have the authority to strike down or to modify provisions in
promissory notes that grant the lenders unrestrained power to increase
interest rates, penalties and other charges at the latters sole discretion
and without giving prior notice to and securing the consent of the
borrowers. This unilateral
* On leave.
authority is anathema to the mutuality of contracts and enable lenders to
take undue advantage of borrowers. Although the Usury Law has been
effectively repealed, courts may still reduce iniquitous or unconscionable
rates charged for the use of money. Furthermore, excessive interests,
penalties and other charges not revealed in disclosure statements issued by
banks, even if stipulated in the promissory notes, cannot be given effect
under the Truth in Lending Act.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
seeking to nullify the June 20, 2001 Decision [2] of the Court of
Appeals[3] (CA) in CA-GR CV No. 55231. The decretal portion of the
assailed Decision reads as follows:
WHEREFORE, the decision of the Regional Trial Court of
Dagupan City, Branch 40 dated December 28, 1995
12 | C r e d i t T r a n s a c t i o n s
Beastly Notes
is REVERSED and SET ASIDE. The foreclosure proceedings of
the mortgaged properties of defendants-appellees [4] and the
February 26, 1992 auction sale are declared legal and valid and
said defendants-appellees are ordered to pay plaintiff-
appellant PNB,[5] jointly and severally[,] the amount of deficiency
that will be computed by the trial court based on the original
penalty of 6% per annum as explicitly stated in the loan
documents and to pay attorneys fees in an amount equivalent to
x x x 1% of the total amount due and the costs of suit and
expenses of litigation.
Facts
The facts are narrated by the CA as follows:
On Feb 11, 1989, Board Resolution No. 05, Series of 1989 was
approved by [Petitioner] NSBCI [1)] authorizing the company to
x x x apply for or secure a commercial loan with the PNB in an
aggregate amount of P8.0M, under such terms agreed by the
Bank and the NSBCI, using or mortgaging the real estate
properties registered in the name of its President and Chairman
of the Board [Petitioner] Eduardo R. Dee as collateral; [and] 2)
authorizing [petitioner-spouses] to secure the loan and to sign
any [and all] documents which may be required by
[Respondent] PNB[,] and that [petitioner-spouses] shall act as
sureties or co-obligors who shall be jointly and severally liable
with [Petitioner] NSBCI for the payment of any [and all]
obligations.
On August 15, 1989, Resolution No. 77 was approved by
granting the request of [Respondent] PNB thru its Board NSBCI
for an P8 Million loan broken down into a revolving credit line
of P7.7M and an unadvised line of P0.3M for additional
operating and working capital[7] to mobilize its various
construction projects, namely:
1) MWSS Watermain;
2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm development
project;
6) Banawe Hotel Phase II;
7) Clark Air Base -- Barracks and Buildings; and
8) Others: EDSA Lighting, Roxas Blvd. Painting NEA
Sapang Palay and Angeles City.
The loan of [Petitioner] NSBCI was secured by a first mortgage
on the following: a) three (3) parcels of residential land located
at Mangaldan, Pangasinan with total land area of 1,214 square
meters[,] including improvements thereon and registered under
TCT Nos. 128449, 126071, and 126072 of the Registry of
Deeds of Pangasinan; b) six (6) parcels of residential land
situated at San Fabian, Pangasinan with total area of 1,767
square meters[,] including improvements thereon and covered
by TCT Nos. 144006, 144005, 120458, 120890, 144161[,] and
121127 of the Registry of Deeds of Pangasinan; and c) a
residential lot and improvements thereon located at Mangaldan,
Pangasinan with an area of 4,437 square meters and covered
by TCT No. 140378 of the Registry of Deeds of Pangasinan.
The loan was further secured by the joint and several signatures
of [Petitioners] Eduardo Dee and Arcelita Marquez Dee, who
signed as accommodation-mortgagors since all the collaterals
were owned by them and registered in their names.
Moreover [Petitioner] NSBCI executed the following documents,
viz: a) promissory note dated June 29, 1989 in the amount
of P5,000,000.00 with due date on October 27, 1989; [b)]
promissory note dated September 1, 1989 in the amount
of P2,700,000.00 with due date on December 30, 1989; and c)
promissory note dated September 6, 1989 in the amount
of P300,000.00 with maturity date on January 4, 1990.
In addition, [petitioner] corporation also signed the Credit
Agreement dated August 31, 1989 relating to the revolving
credit line of P7.7 Million x x x and the Credit Agreement dated
September 5, 1989 to support the unadvised line
of P300,000.00.
On August 31, 1989, [petitioner-spouses] executed a Joint and
Solidary Agreement (JSA) in favor of [Respondent] PNB
unconditionally and irrevocably binding themselves to be jointly
13 | C r e d i t T r a n s a c t i o n s
Beastly Notes
and severally liable with the borrower for the payment of all
sums due and payable to the Bank under the Credit Document.
Later on, [Petitioner] NSBCI failed to comply with its obligations
under the promissory notes.
On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of
[Petitioner] NSBCI sent a letter to the Branch Manager of the
PNB Dagupan Branch requesting for a 90-day extension for the
payment of interests and restructuring of its loan for another
term.
Subsequently, NSBCI tendered payment to [Respondent] PNB
[of] three (3) checks aggregating P1,000,000.00, namely 1)
check no. 316004 dated August 8, 1991 in the amount
of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in
the amount of P650,000.00; and 3) check no. 03499998 dated
August 15, 1991 in the amount of P150,000.00.[8]
In a meeting held on August 12, 1991, [Respondent] PNBs
representative[,] Mr. Rolly Cruzabra, was informed by
[Petitioner] Eduardo Dee of his intention to remit to
[Respondent] PNB post-dated checks covering interests,
penalties and part of the loan principals of his due account.
On August 22, 1991, [Respondent] banks Crispin Carcamo
wrote [Petitioner] Eduardo Dee[,] informing him that [Petitioner]
NSBCIs proposal [was] acceptable[,] provided the total payment
should be P4,128,968.29 that [would] cover the amount
of P1,019,231.33 as principal, P3,056,058.03 as interests and
penalties[,] and P53,678.93 for insurance[,] with the issuance of
post-dated checks to be dated not later than November 29,
1991.
On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB
Branch Manager reiterating his proposals for the settlement of
[Petitioner] NSBCIs past due loan account amounting
to P7,019,231.33.
[Petitioner] Eduardo Dee later tendered four (4) post-dated
Interbank checks aggregating P1,111,306.67 in favor of
[Respondent] PNB, viz:
Upon presentment[,] however, x x x check nos. 03500087 and
03500088 dated September 29 and October 29, 1991 were
dishonored by the drawee bank and returned due [to] a stop
payment order from [petitioners].
On Novr 12, 1991, PNBs Mr. Carcamo wrote [Petitioner]
Eduardo Dee informing him that unless the dishonored checks
[were] made good, said PNB branch shall recall its
recommendation to the Head Office for the restructuring of the
loan account and refer the matter to its legal counsel for legal
action.[] [Petitioners] did not heed [respondents] warning and as
a result[,] the PNB Dagupan Branch sent demand letters to
[Petitioner] NSBCI at its office address at 1611 ERDC Building,
E. Rodriguez Sr. Avenue, Quezon City, asking it to settle its past
due loan account.
[Petitioners] nevertheless failed to pay their loan obligations
within the [timeframe] given them and as a result, [Respondent]
PNB filed with the Provincial Sheriff of Pangasinan at Lingayen
a Petition for Sale under Act 3135, as amended[,] and PD No.
385 dated January 30, 1992.
The notice of extra-judicial sale of the mortgaged properties
relating to said PNBs [P]etition for [S]ale was published in the
February 8, 15 and 22, 1992 issues of the Weekly Guardian,
allegedly a newspaper of general circulation in the Province of
Pangasinan, including the cities of Dagupan and San Carlos. In
addition[,] copies of the notice were posted in three (3) public
places[,] and copies thereof furnished [Petitioner] NSBCI at
1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City,
[and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and
[Petitioner] Sps. Eduardo and Arcelita Dee at 213 Wilson St.,
San Juan, Metro Manila.
On Feb 26, 1992, the Provincial Deputy Sheriff Cresencio F.
Ferrer of Lingayen, Pangasinan foreclosed the real estate
mortgage and sold at public auction the mortgaged properties of
[petitioner-spouses,] with [Respondent] PNB being declared the
highest bidder for the amount of P10,334,000.00.
14 | C r e d i t T r a n s a c t i o n s
Beastly Notes
On March 2, 1992, copies of the Sheriffs Certificate of Sale
were sent by registered mail to [petitioner] corporations address
at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City
and [petitioner-spouses] address at 213 Wilson St., San Juan,
Metro Manila.
On April 6, 1992, the PNB Dagupan Branch Manager sent a
letter to [petitioners] at their address at 1611 [ERDC Building,]
E. Rodriguez Sr. Avenue, Quezon City[,] informing them that the
properties securing their loan account [had] been sold at public
auction, that the Sheriffs Certificate of Sale had been registered
with the Registry of Deeds of Pangasinan on March 13, 1992[,]
and that a period of one (1) year therefrom [was] granted to
them within which to redeem their properties.
[Petitioners] failed to redeem their properties within the one-year
redemption period[,] and so [Respondent] PNB executed a
[D]eed of [A]bsolute [S]ale consolidating title to the properties in
its name. TCT Nos. 189935 to 189944 were later issued to
[Petitioner] PNB by the Registry of Deeds of Pangasinan.
On August 4, 1992, [Respondent] PNB informed [Petitioner]
NSBCI that the proceeds of the sale conducted on February 26,
1992 were not sufficient to cover its total claim amounting
to P12,506,476.43[,] and thus demanded from the latter the
deficiency of P2,172,476.43 plus interest and other charges[,]
until the amount [was] fully paid.
[Petitioners] refused to pay the above deficiency claim which
compelled [Respondent] PNB to institute the instant [C]omplaint
for the collection of its deficiency claim.
Finding that the PNB debt relief package automatically [granted]
to [Petitioner] NSBCI the benefits under the program, the court
a quo ruled in favor of [petitioners] in its Decision dated
December 28, 1995, the fallo of which reads:
In view of the foregoing, the Court believes and so
holds that the [respondent] has no cause of action
against the [petitioners].
WHEREFORE, the case is hereby DISMISSED,
without costs.
On appeal, respondent assailed the trial courts Decision dismissing its
deficiency claim on the mortgage debt. It also challenged the ruling of
the lower court that Petitioner NSBCIs loan account was bloated, and
that the inadequacy of the bid price was sufficient to set aside the
auction sale.
CA:
Reversing the trial court, the CA held that Petitioner NSBCI did not avail
itself of respondents debt relief package (DRP) or take steps to comply
with the conditions for qualifying under the program. The appellate court
also ruled that entitlement to the program was not a matter of right,
because such entitlement was still subject to the approval of higher bank
authorities, based on their assessment of the borrowers repayment
capability and satisfaction of other requirements.
As to the misapplication of loan payments, the CA held that the
subsidiary ledgers of NSBCIs loan accounts with respondent reflected all
the loan proceeds as well as the partial payments that had been applied
either to the principal or to the interests, penalties and other
charges. Having been made in the ordinary and usual course of the
banking business of respondent, its entries were presumed accurate,
regular and fair under Section 5(q) of Rule 131 of the Rules of
Court. Petitioners failed to rebut this presumption.
The increases in the interest rates on NSBCIs loan were also held to be
authorized by law and the Monetary Board and -- like the increases in
penalty rates -- voluntarily and freely agreed upon by the parties in the
Credit Agreements they executed. Thus, these increases were binding
upon petitioners.
However, after considering that two to three of Petitioner NSBCIs
projects covered by the loan were affected by the economic slowdown in
the areas near the military bases in the cities of Angeles and Olongapo,
the appellate court annulled and deleted the adjustment in penalty from
6 percent to 36 percent per annum. Not only did respondent fail to
demonstrate the existence of market forces and economic conditions
that would justify such increases; it could also have treated petitioners
request for restructuring as a request for availment of the
15 | C r e d i t T r a n s a c t i o n s
Beastly Notes
DRP. Consequently, the original penalty rate of 6 percent per annum was
used to compute the deficiency claim.
The auction sale could not be set aside on the basis of the inadequacy
of the auction price, because in sales made at public auction, the owner
is given the right to redeem the mortgaged properties; the lower the bid
price, the easier it is to effect redemption or to sell such right. The bid
price of P10,334,000.00 vis--vis respondents claim of P12,506,476.43
was found to be neither shocking nor unconscionable.
The attorneys fees were also reduced by the appellate court from 10
percent to 1 percent of the total indebtedness. First, there was no
extreme difficulty in an extrajudicial foreclosure of a real estate
mortgage, as this proceeding was merely administrative in nature and
did not involve a court litigation contesting the proceedings prior to the
auction sale. Second, the attorneys fees were exclusive of all stipulated
costs and fees. Third, such fees were in the nature of liquidated
damages that did not inure to respondents salaried counsel.
Respondent was also declared to have the unquestioned right to
foreclose the Real Estate Mortgage. It was allowed to recover any
deficiency in the mortgage account not realized in the foreclosure sale,
since petitioner-spouses had agreed to be solidarily liable for all sums
due and payable to respondent.
Finally, the appellate court concluded that the extrajudicial foreclosure
proceedings and auction sale were valid for the following reasons: (1)
personal notice to the mortgagors, although unnecessary, was actually
made; (2) the notice of extrajudicial sale was duly published and posted;
(3) the extrajudicial sale was conducted through the deputy sheriff,
under the direction of the clerk of court who was concurrently the ex-
oficio provincial sheriff and acting as agent of respondent; (4) the sale
was conducted within the province where the mortgaged properties were
located; and (5) such sale was not shown to have been attended by
fraud.
Hence this Petition.
Issues
Petitioners submit the following issues for our consideration:
I. Whether or not the Honorable Court of Appeals correctly
ruled that petitioners did not avail of PNBs debt relief package
and were not entitled thereto as a matter of right.
II. Whether or not petitioners have adduced sufficient and
convincing evidence to overthrow the presumption of regularity
and correctness of the PNB entries in the subsidiary ledgers of
the loan accounts of petitioners.
III. Whether or not the Honorable Court of Appeals seriously
erred in not holding that the Respondent PNB bloated the loan
account of petitioner corporation by imposing interests,
penalties and attorneys fees without legal, valid and equitable
justification.
IV. Whether or not the auction price at which the mortgaged
properties was sold was disproportionate to their actual fair
mortgage value.
V. Whether or not Respondent PNB is not entitled to recover the
deficiency in the mortgage account not realized in the
foreclosure sale, considering that:
A. Petitioners are merely guarantors of the
mortgage debt of petitioner corporation which
has a separate personality from the [petitioner-
spouses].
B. The joint and solidary agreement
executed by [petitioner- spouses] are contracts
of adhesion not binding on them;
C. The NSBCI Board Resolution is not valid
and binding on [petitioner-spouses] because
they were compelled to execute the said
Resolution[;] otherwise[,] Respondent PNB
would not grant petitioner corporation the loan;
D. The Respondent PNB had already in its
possession the properties of the [petitioner-
spouses] which served as a collateral to the
loan obligation of petitioner corporation[,] and
16 | C r e d i t T r a n s a c t i o n s
Beastly Notes
to still allow Respondent PNB to recover the
deficiency claim amounting to a very
substantial amount of P2.1 million would
constitute unjust enrichment on the part of
Respondent PNB.
VI. Whether or not the extrajudicial foreclosure proceedings and
auction sale, including all subsequent proceedings[,] are null
and void for non-compliance with jurisdictional and other
mandatory requirements; whether or not the petition for
extrajudicial foreclosure of mortgage was filed prematurely; and
whether or not the finding of fraud by the trial court is amply
supported by the evidence on record.
The foregoing may be summed up into two main issues: first, whether
the loan accounts are bloated; and second, whether the extrajudicial
foreclosure and subsequent claim for deficiency are valid and proper.
The Courts Ruling
The Petition is partly meritorious.
First Main Issue:
Bloated Loan Accounts
At the outset, it must be stressed that only questions of law [12] may be
raised in a petition for review on certiorari under Rule 45 of the Rules of
Court. As a rule, questions of fact cannot be the subject of this mode of
appeal,[13] for [t]he Supreme Court is not a trier of facts. [14] As exceptions
to this rule, however, factual findings of the CA may be reviewed on
appeal[15] when, inter alia, the factual inferences are manifestly mistaken;
[16]
the judgment is based on a misapprehension of facts; [17] or the CA
manifestly overlooked certain relevant and undisputed facts that, if
properly considered, would justify a different legal conclusion. [18] In the
present case, these exceptions exist in various instances, thus
prompting us to take cognizance of factual issues and to decide upon
them in the interest of justice and in the exercise of our sound discretion.
[19]
Indeed, Petitioner NSBCIs loan accounts with respondent appear to be
bloated with some iniquitous imposition of interests, penalties, other
charges and attorneys fees. To demonstrate this point, the Court shall
take up one by one the promissory notes, the credit agreements and the
disclosure statements.
Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory Notes specified
the interest rate to be charged: 19.5 percent in the first, and 21.5 percent
in the second and again in the third. However, a uniform clause therein
permitted respondent to increase the rate within the limits allowed by law
at any time depending on whatever policy it may adopt in the future x x
x,[20] without even giving prior notice to petitioners. The Court holds that
petitioners accessory duty to pay interest[21] did not give respondent
unrestrained freedom to charge any rate other than that which was
agreed upon. No interest shall be due, unless expressly stipulated in
writing.[22] It would be the zenith of farcicality to specify and agree upon
rates that could be subsequently upgraded at whim by only one party to
the agreement.
The unilateral determination and imposition of increased rates is violative
of the principle of mutuality of contracts ordained in Article 1308 of the
Civil Code. One-sided impositions do not have the force of law between
the parties, because such impositions are not based on the parties
essential equality.
Although escalation clauses are valid in maintaining fiscal stability and
retaining the value of money on long-term contracts, giving respondent
an unbridled right to adjust the interest independently and upwardly
would completely take away from petitioners the right to assent to an
important modification in their agreement[28] and would also negate the
element of mutuality in their contracts. The clause cited earlier made the
fulfillment of the contracts dependent exclusively upon the uncontrolled
will of respondent and was therefore void. Besides, the pro forma
promissory notes have the character of a contract dadhsion, where the
parties do not bargain on equal footing, the weaker partys [the debtors]
participation being reduced to the alternative to take it or leave it.
While the Usury Law ceiling on interest rates was lifted by [Central Bank]
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. [34] In fact, we
have declared nearly ten years ago that neither this Circular nor PD
17 | C r e d i t T r a n s a c t i o n s
Beastly Notes
1684, which further amended the Usury Law, authorized either party to
unilaterally raise the interest rate without the others consent.
Moreover, a similar case eight years ago pointed out to the same
respondent (PNB) that borrowing signified a capital transfusion from
lending institutions to businesses and industries and was done for the
purpose of stimulating their growth; yet respondents continued unilateral
and lopsided policy of increasing interest rates without the prior
assent of the borrower not only defeats this purpose, but also deviates
from this pronouncement. Although such increases are not usurious,
since the Usury Law is now legally inexistent -- the interest ranging from
26 percent to 35 percent in the statements of account -- must be
equitably reduced for being iniquitous, unconscionable and
exorbitant. Rates found to be iniquitous or unconscionable are void, as if
it there were no express contract thereon. Above all, it is undoubtedly
against public policy to charge excessively for the use of money.
It cannot be argued that assent to the increases can be implied either
from the June 18, 1991 request of petitioners for loan restructuring or
from their lack of response to the statements of account sent by
respondent. Such request does not indicate any agreement to an
interest increase; there can be no implied waiver of a right when there is
no clear, unequivocal and decisive act showing such purpose. Besides,
the statements were not letters of information sent to secure their
conformity; and even if we were to presume these as an offer, there was
no acceptance. No one receiving a proposal to modify a loan contract,
especially interest -- a vital component -- is obliged to answer the
proposal.
Furthermore, respondent did not follow the stipulation in the Promissory
Notes providing for the automatic conversion of the portion that
remained unpaid after 730 days -- or two years from date of original
release -- into a medium-term loan, subject to the applicable interest rate
to be applied from the dates of original release.
In the first, second and third Promissory Notes, the amount that
remained unpaid as of Oct 27, 1989, Dec 1989 and Jan 4, 1990 -- their
respective due dates -- should have been automatically converted by
respondent into medium-term loans on June 30, 1991, Sept 2, 1991, and
Sept 7, 1991, respectively. And on this unpaid amount should have been
imposed the same interest rate charged by respondent on other
medium-term loans; and the rate applied from June 29, 1989,
September 1, 1989 and September 6, 1989 -- their respective original
release -- until paid. But these steps were not taken. Aside from sending
demand letters, respondent did not at all exercise its option to enforce
collection as of these Notes due dates. Neither did it renew or extend the
account.
In these three Promissory Notes, evidently, no complaint for collection
was filed with the courts. It was not until Jan 30, 1992 that a Petition for
Sale of the mortgaged properties was filed -- with the provincial sheriff,
instead. Moreover, respondent did not supply the interest rate to be
charged on medium-term loans granted by automatic
conversion. Because of this deficiency, we shall use the legal rate of 12
percent per annum on loans and forbearance of money, as provided for
by CB Circular 416.
Credit Agreements. Aside from the promissory notes, another main
document involved in the principal obligation is the set of credit
agreements executed and their annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered
and admitted in evidence, and even referred to in the first Promissory
Note -- cannot be given weight.
First, it was not signed by respondent through its branch manager.
Apparently it was surreptitiously acknowledged before respondents
counsel, who unflinchingly declared that it had been signed by the
parties on every page, although respondents signature does not appear
thereon.
Second, it was objected to by petitioners, contrary to the trial courts
findings. However, it was not the Agreement, but the revolving credit
line[56] of P5,000,000, that expired one year from the Agreements date of
implementation.
Third, there was no attached annex that contained the General
Conditions. Even the Acknowledgment did not allude to its
existence. Thus, no terms or conditions could be added to the
Agreement other than those already stated therein.
Since the first Credit Agreement cannot be given weight, the interest rate
on the first availment pegged at 3 percent over and above respondents
prime rate[60] on the date of such availment[61] has no bearing at all on the
18 | C r e d i t T r a n s a c t i o n s
Beastly Notes
loan. After the first Notes due date, the rate of 19 percent agreed upon
should continue to be applied on the availment, until its automatic
conversion to a medium-term loan.
The second Credit Agreement[62] dated August 31, 1989, provided for
interest -- respondents prime rate, plus the applicable spread [63] in effect
as of the date of each availment, [64] on a revolving credit line
of P7,700,000 -- but did not state any provision on its increase or
decrease. Consequently, petitioners could not be made to bear interest
more than such prime rate plus spread. The Court gives weight to this
second Credit Agreement for the following reasons.
First, this document submitted by respondent was admitted by
petitioners. Again, contrary to their assertion, it was not the Agreement --
but the credit line -- that expired one year from the Agreements date of
implementation. Thus, the terms and conditions continued to apply, even
if draw downs could no longer be made.
Second, there was no 7-page annex offered in evidence that contained
the General Conditions, notwithstanding the Acknowledgment of its
existence by respondents counsel. Thus, no terms or conditions could
be appended to the Agreement other than those specified therein.
Third, the 12-page General Conditions offered and admitted in evidence
had no probative value. There was no reference to it in the
Acknowledgment of the Agreement; neither was respondents signature
on any of the pages thereof. Thus, the General Conditions stipulations
on interest adjustment, whether on a fixed or a floating scheme, had no
effect whatsoever on the Agreement. Contrary to the trial courts findings,
the General Condition were correctly objected to by petitioners. The rate
of 21.5 percent agreed upon in the second Note thus continued to apply
to the second availment, until its automatic conversion into a medium-
term loan.
The third Credit Agreement dated Sept 5, 1989, provided for the same
rate of interest as that in the second Agreement. This rate was to be
applied to availments of an unadvised line of P300,000. Since there was
no mention in the third Agreement, either, of any stipulation on increases
or decreases in interest, there would be no basis for imposing amounts
higher than the prime rate plus spread. Again, the 21.5 percent rate
agreed upon would continue to apply to the third availment indicated in
the third Note, until such amount was automatically converted into a
medium-term loan.
The Court also finds that, first, although this document was admitted by
petitioners, it was the credit line that expired one year from the
implementation of the Agreement. The terms and conditions therein
continued to apply, even if availments could no longer be drawn after
expiry.
Second, there was again no 7-page annex offered that contained the
General Conditions, regardless of the Acknowledgment by the same
respondents counsel affirming its existence. Thus, the terms and
conditions in this Agreement relating to interest cannot be expanded
beyond that which was already laid down by the parties.
Disclosure Statements. In the present case, the Disclosure
Statements furnished by respondent set forth the same interest rates as
those respectively indicated in the Promissory Notes. Although no
method of computation was provided showing how such rates were
arrived at, we will nevertheless take up the Statements seriatim in
order to determine the applicable rates clearly.
As to the first Disclosure Statement on Loan/Credit Transaction dated
June 13, 1989, we hold that the 19.5 percent effective interest rate per
annum would indeed apply to the first availment or drawdown evidenced
by the first Promissory Note. Not only was this Statement issued prior to
the consummation of such availment or drawdown, but the rate shown
therein can also be considered equivalent to 3 percent over and above
respondents prime rate in effect. Besides, respondent mentioned no
other rate that it considered to be the prime rate chargeable to
petitioners. Even if we disregarded the related Credit Agreement, we
assume that this private transaction between the parties was fair and
regular,[84] and that the ordinary course of business was followed. [85]
As to the second Disclosure Statement on Loan/Credit
Transaction dated Sept 2, 1989, we hold that the 21.5 percent effective
interest rate per annum would definitely apply to the second availment or
drawdown evidenced by the second Promissory Note. Incidentally, this
Statement was issued only after the consummation of its related
availment or drawdown, yet such rate can be deemed equivalent to the
prime rate plus spread, as stipulated in the corresponding Credit
Agreement. Again, we presume that this private transaction was fair and
19 | C r e d i t T r a n s a c t i o n s
Beastly Notes
regular, and that the ordinary course of business was followed. That the
related Promissory Note was pre-signed would also bolster petitioners
claim although, under cross-examination Efren Pozon -- Assistant
Department Manager of PNB, Dagupan Branch -- testified that the
Disclosure Statements were the basis for preparing the Notes.
As to the third Disclosure Statement on Loan/Credit Transaction dated
Sept 6, 1989, we hold that the same 21.5 percent effective interest rate
per annum[91] would apply to the third availment or drawdown evidenced
by the third Promissory Note. This Statement was made available to
petitioner-spouses, only after the related Credit Agreement had been
executed, but simultaneously with the consummation of the Statements
related availment or drawdown. Nonetheless, the rate herein should still
be regarded as equivalent to the prime rate plus spread, under the
similar presumption that this private transaction was fair and regular and
that the ordinary course of business was followed.
In sum, the three disclosure statements, as well as the two credit
agreements considered by this Court, did not provide for any increase in
the specified interest rates. Thus, none would now be permitted. When
cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB,
Dagupan Branch, even testified that the bases for computing such rates
were those sent by the head office from time to time, and not those
indicated in the notes or disclosure statements.
In addition to the preceding discussion, it is then useless to labor the
point that the increase in rates violates the impairment clause of the
Constitution, because the sole purpose of this provision is to safeguard
the integrity of valid contractual agreements against unwarranted
interference by the State in the form of laws. Private individuals
intrusions on interest rates is governed by statutory enactments like the
Civil Code.
Penalty, or Increases
Thereof, Unjustified
No penalty charges or increases thereof appear either in the Disclosure
Statements[96] or in any of the clauses in the second and the third Credit
Agreements[97] earlier discussed. While a standard penalty charge of 6
percent per annum has been imposed on the amounts stated in all three
Promissory Notes still remaining unpaid or unrenewed when they fell
due,[98] there is no stipulation therein that would justify any increase in
that charges. The effect, therefore, when the borrower is not clearly
informed of the Disclosure Statements -- prior to the consummation of
the availment or drawdown -- is that the lender will have no right to
collect upon such charge[99] or increases thereof, even if stipulated in the
Notes. The time is now ripe to give teeth to the often ignored forty-one-
year old Truth in Lending Act[100] and thus transform it from a snivelling
paper tiger to a growling financial watchdog of hapless borrowers.
Besides, we have earlier said that the Notes are contracts of adhesion;
although not invalid per se, any apparent ambiguity in the loan contracts
-- taken as a whole -- shall be strictly construed against respondent who
caused it.[101] Worse, in the statements of account, the penalty rate has
again been unilaterally increased by respondent to 36 percent without
petitioners consent. As a result of its move, such liquidated damages
intended as a penalty shall be equitably reduced by the Court to
zilch[102] for being iniquitous or unconscionable. [103]
Although the first Disclosure Statement was furnished Petitioner NSBCI
prior to the execution of the transaction, it is not a contract that can be
modified by the related Promissory Note, but a mere statement in writing
that reflects the true and effective cost of loans from
respondent. Novation can never be presumed, [104]and the animus
novandi must appear by express agreement of the parties, or by their
acts that are too clear and unequivocal to be mistaken. [105] To allow
novation will surely flout the policy of the State to protect its citizens from
a lack of awareness of the true cost of credit. [106]
With greater reason should such penalty charges be indicated in the
second and third Disclosure Statements, yet none can be found
therein. While the charges are issued after the respective availment or
drawdown, the disclosure statements are given simultaneously
therewith. Obviously, novation still does not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent are not
warranted. No particular values or rates of service charge are indicated
in the Promissory Notes or Credit Agreements, and no total value or
even the breakdown figures of such non-finance charge are specified in
the Disclosure Statements. Moreover, the provision in the Mortgage that
requires the payment of insurance and other charges is neither made
part of nor reflected in such Notes, Agreements, or Statements. [107]
20 | C r e d i t T r a n s a c t i o n s
Beastly Notes
Attorneys Fees Equitably Reduced
We affirm the equitable reduction in attorneys fees. [108] These are not an
integral part of the cost of borrowing, but arise only when collecting upon
the Notes becomes necessary. The purpose of these fees is not to give
respondent a larger compensation for the loan than the law already
allows, but to protect it against any future loss or damage by being
compelled to retain counsel in-house or not -- to institute judicial
proceedings for the collection of its credit. [109] Courts have has the
power[110] to determine their reasonableness[111] based on quantum
meruit[112] and to reduce[113] the amount thereof if excessive.[114]
In addition, the disqualification argument in the Affidavit of Publication
raised by petitioners no longer holds water, inasmuch as Act 496 [115] has
repealed the Spanish Notarial Law.[116] In the same vein, their
engagement of their counsel in another capacity concurrent with the
practice of law is not prohibited, so long as the roles being assumed by
such counsel is made clear to the client. [117] The only reason for this
clarification requirement is that certain ethical considerations operative in
one profession may not be so in the other.[118]
Debt Relief Package
Not Availed Of
We also affirm the CAs disquisition on the debt relief package (DRP).
Respondents Circular is not an outright grant of assistance or extension
of payment,[119] but a mere offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been
seriously and directly affected by the economic slowdown in the
peripheral areas of the then US military bases. Its allegations, devoid of
any verification, cannot lead to a supportable conclusion. In fact, for
short-term loans, there is still a need to conduct a thorough review of the
borrowers repayment possibilities.[120]
[121]
Neither has Petitioner NSBCI shown enough margin of equity, based
on the latest loan value of hard collaterals, [122] to be eligible for the
package. Additional accommodations on an unsecured basis may be
granted only when regular payment amortizations have been
established, or when the merits of the credit application would so justify.
[123]
The branch managers recommendation to restructure or extend a total
outstanding loan not exceeding P8,000,000 is not final, but subject to the
approval of respondents Branches Department Credit Committee,
chaired by its executive vice-president. [124] Aside from being further
conditioned on other pertinent policies of respondent, [125] such approval
nevertheless needs to be reported to its Board of Directors for
confirmation.[126] In fact, under the General Banking Law of 2000,
[127]
banks shall grant loans and other credit accommodations only in
amounts and for periods of time essential to the effective completion of
operations to be financed, consistent with safe and sound banking
practices.[128] The Monetary Board -- then and now -- still prescribes, by
regulation, the conditions and limitations under which banks may grant
extensions or renewals of their loans and other credit accommodations.
[129]
Entries in Subsidiary Ledgers
Regular and Correct
Contrary to petitioners assertions, the subsidiary ledgers of respondent
properly reflected all entries pertaining to Petitioner NSBCIs loan
accounts. In accordance with the Generally Accepted Accounting
Principles (GAAP) for the Banking Industry,[130] all interests accrued or
earned on such loans, except those that were restructured and non-
accruing,[131] have been periodically taken into income. [132] Without a
doubt, the subsidiary ledgers in a manual accounting system are mere
private documents[133] that support and are controlled by the general
ledger.[134] Such ledgers are neither foolproof nor standard in format, but
are periodically subject to audit. Besides, we go by the presumption that
the recording of private transactions has been fair and regular, and that
the ordinary course of business has been followed.
Second Main Issue:
Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
Respondent aptly exercised its option to foreclose the mortgage, [135] after
petitioners had failed to pay all the Notes in full when they fell due.
[136]
The extrajudicial sale and subsequent proceedings are therefore
valid, but the alleged deficiency claim cannot be recovered.
Auction Price Adequate
In the accessory contract[137] of real mortgage,[138] in which immovable
property or real rights thereto are used as security [139] for the fulfillment of
21 | C r e d i t T r a n s a c t i o n s
Beastly Notes
the principal loan obligation,[140] the bid price may be lower than the
propertys fair market value.[141] In fact, the loan value itself is only 70
percent of the appraised value. [142] As correctly emphasized by the
appellate court, a low bid price will make it easier[143] for the owner to
effect redemption[144] by subsequently reacquiring the property or by
selling the right to redeem and thus recover alleged losses. Besides, the
public auction sale has been regularly and fairly conducted, [145] there has
been ample authority to effect the sale, [146] and the Certificates of Title
can be relied upon. No personal notice[147] is even required,[148] because
an extrajudicial foreclosure is an action in rem, requiring only notice by
publication and posting, in order to bind parties interested in the
foreclosed property.[149]
As no redemption[150] was exercised within one year after the date of
registration of the Certificate of Sale with the Registry of Deeds,
[151]
respondent -- being the highest bidder -- has the right to a writ of
possession, the final process that will consummate the extrajudicial
foreclosure. On the other hand, petitioner-spouses, who are mortgagors
herein, shall lose all their rights to the property.[152]
No Deficiency Claim Receivable
After the foreclosure and sale of the mortgaged property, the Real Estate
Mortgage is extinguished. Although the mortgagors, being third persons,
are not liable for any deficiency in the absence of a contrary stipulation,
[153]
the action for recovery of such amount -- being clearly sureties to the
principal obligation -- may still be directed against them. [154] However,
respondent may impose only the stipulated interest rates of 19.5 percent
and 21.5 percent on the respective availments -- subject to the 12
percent legal rate revision upon automatic conversion into medium-term
loans - plus 1 percent attorneys fees, without additional charges on
penalty, insurance or any increases thereof.
Accordingly, the excessive interest rates in the Statements of Account
sent to petitioners are reduced to 19.5 percent and 21.5 percent, as
stipulated in the Promissory Notes; upon loan conversion, these rates
are further reduced to the legal rate of 12 percent. Payments made by
petitioners are pro-rated, the charges on penalty and insurance
eliminated, and the resulting total unpaid principal and interest
of P6,582,077.70 as of the date of public auction is then subjected to 1
percent attorneys fees. The total outstanding obligation is compared to
the bid price. On the basis of these rates and the comparison made, the
deficiency claim receivable amounting to P2,172,476.43 in fact
vanishes. Instead, there is an overpayment by more than P3 million, as
shown in the following Schedules:
In the preparation of the above-mentioned schedules, these basic legal
principles were followed:
First, the payments were applied to debts that were already due.
[155]
Thus, when the first payment was made and applied on January 5,
1990, all Promissory Notes were already due.
Second, payments of the principal were not made until the interests had
been covered.[156] For instance, the first payment on January 15, 1990
had initially been applied to all interests due on the notes, before
deductions were made from their respective principal amounts. The
resulting decrease in interest balances served as the bases for
subsequent pro-ratings.
Third, payments were proportionately applied to all interests that were
due and of the same nature and burden. [157] This legal principle was the
rationale for the pro-rated computations shown on Schedule 4.
Fourth, since there was no stipulation on capitalization, no interests due
and unpaid were added to the principal; hence, such interests did not
earn any additional interest. [158] The simple -- not compounded -- method
of interest calculation[159] was used on all Notes until the date of public
auction.
In fine, under solutio indebiti[160] or payment by mistake,[161] there is no
deficiency receivable in favor of PNB, but rather an excess claim or
surplus[162] payable by respondent; this excess should immediately be
returned to petitioner-spouses or their assigns -- not to mention the
buildings and improvements[163] on and the fruits of the property -- to the
end that no one may be unjustly enriched or benefited at the expense of
another.[164] Such surplus is in the amount of P3,686,101.52, computed
as follows:
Joint and Solidary Agreement. Contrary to the contention of the
petitioner-spouses, their Joint and Solidary Agreement (JSA) [165] was
indubitably a surety, not a guaranty.[166] They consented to be jointly and
severally liable with Petitioner NSBCI -- the borrower -- not only for the
payment of all sums due and payable in favor of respondent, but also for
the faithful and prompt performance of all the terms and conditions
22 | C r e d i t T r a n s a c t i o n s
Beastly Notes
thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI
certified as early as February 23, 1989, that the spouses should act as
such surety.[168] But, their solidary liability should be carefully studied, not
sweepingly assumed to cover all availments instantly.
First, the JSA was executed on Aug 31, 1989. As correctly adverted to
by petitioners,[169] it covered only the Promissory Notes of P2,700,000
and P300,000 made after that date. The terms of a contract of
suretyship undeniably determine the suretys liability[170] and cannot
extend beyond what is stipulated therein.[171]Yet, the total amount
petitioner-spouses agreed to be held liable for was P7,700,000; by the
time the JSA was executed, the first Promissory Note was still unpaid
and was thus brought within the JSAs ambit.[172]
Second, while the JSA included all costs, charges and expenses that
respondent might incur or sustain in connection with the credit
documents,[173] only the interest was imposed under the pertinent Credit
Agreements. Moreover, the relevant Promissory Notes had to be
resorted to for proper valuation of the interests charged.
Third, although the JSA, as a contract of adhesion, should be
taken contra proferentum against the party who may have caused any
ambiguity therein, no such ambiguity was found. Petitioner-spouses,
who agreed to be accommodation mortgagors, [174] can no longer be held
individually liable for the entire onerous obligation [175] because, as it
turned out, it was respondent that still owed them.
To summarize, to give full force to the Truth in Lending Act, only the
interest rates of 19.5 percent and 21.5 percent stipulated in the
Promissory Notes may be imposed by respondent on the respective
availments. After 730 days, the portions remaining unpaid are
automatically converted into medium-term loans at the legal rate of 12
percent. In all instances, the simple method of interest computation is
followed. Payments made by petitioners are applied and pro-rated
according to basic legal principles. Charges on penalty and insurance
are eliminated, and 1 percent attorneys fees imposed upon the total
unpaid balance of the principal and interest as of the date of public
auction. The P2 million deficiency claim therefore vanishes, and a refund
of P3,686,101.52 arises.
WHEREFORE, this Petition is hereby PARTLY GRANTED. The
Decision of the Court of Appeals is AFFIRMED, with
the MODIFICATION that PNB is ORDERED to refund the sum
of P3,686,101.52 representing the overcollection computed above, plus
interest thereon at the legal rate of six percent (6%) per annum from the
filing of the Complaint until the finality of this Decision. After this Decision
becomes final and executory, the applicable rate shall be twelve percent
(12%) per annum until its satisfaction. No costs. SO ORDERED.
EQUITABLE PCI BANK V. NG SHEUNG NGOR (2007)
FACTS: Respondent Ng Sheung Ngor, Ken Appliance Division, Inc and
Benjamin E. Go filed an action for annulment and/or reformation of
documents and contracts against petitioner Equitable PCI Bank
(Equitable) and its employees, Aimee Yu and Bejan Lionel Apas.
1. Respondents claimed that Equitable induced them to avail of its
peso and dollar credit facilities by offering low interest rates so they
accepted the propodal and signed the banks printed promissory
notes on various dates beginning 1996. But they were unaware that
the documents contain identical escalation clause granting Equitable
authority to increase interest rates without their consent
2. Equitable asserted that respondents knowingly accepted all the
terms and conditions contained in the promissory notes, also they
continuously availed of and benefited from Equitables credit
facilities for five years.
3. The trial court upheld the validity of the promissory notes however it
invalidated the escalation clause for it violated the principle of
mutuality of contracts. It also took judicial notice of the steep
depreciation of the peso during the intervening period and declared
the existence of extraordinary deflation
4. RTC ordered the use of the 1996 dollar exchange rate in computing
respondents dollar denominated loans and awarded moral and
exemplary damages.
5. Equitable filed an MR, while respondents prayed for the issuance of
a writ of execution.
6. RTC issued an omnibus order denying MR and ordered the
issuance of the motion of a writ of execution in favor of respondents.
23 | C r e d i t T r a n s a c t i o n s
Beastly Notes
7. Three real properties of Equitable were levied upon and were sold in
a public auction. Respondents were the highest bidder and
certificates of sale were issued.
8. Equitable filed a petition for certiorari with an application for an
injunction in the CA to enjoin the implementation and execution of
the omnibus order. CA granted Equitables application for injunction
was granted.
9. Despite the injunction, Equitables properties previously levied were
sold in a public auction to respondent. Equitable moved to annul the
auction sale. CA dismissed the petition for certiorari, hence this
petition.
ISSUE: What is the relationship between the bank and its depositor?
HELD: The relationship between the bank and its depositor is that of
creditor and debtor. For this reason, a bank has the right to set off the
deposit in its hands for the payment of a depositors indebtedness.
Respondent indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted fraudulently or in bad faith
or in wanton disregard of its contractual obligations despite the absence
of proof. The undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay their loans.
There was therefore absolutely no basis for the award of moral damages
to them.
Original Version
CORONA, J.:
This petition for review on certiorari [1] seeks to set aside the decision [2] of
the Court of Appeals (CA) in CA-G.R. SP No. 83112 and its
resolution[3] denying reconsideration.
On Oct 7, 2001, respondents Ng Sheung Ngor,[4] Ken Appliance Division,
Inc. and Benjamin E. Go filed an action for annulment and/or reformation
of documents and contracts[5] against petitioner Equitable PCI Bank
(Equitable) and its employees, Aimee Yu and Bejan Lionel Apas, in the
RTC, Branch 16 of Cebu City.[6] They claimed that Equitable induced
them to avail of its peso and dollar credit facilities by offering low interest
rates[7] so they accepted Equitable's proposal and signed the bank's pre-
printed promissory notes on various dates beginning 1996. They,
however, were unaware that the documents contained identical
escalation clauses granting Equitable authority to increase interest rates
without their consent.[8]
Equitable, in its answer, asserted that respondents knowingly accepted
all the terms and conditions contained in the promissory notes. [9] In fact,
they continuously availed of and benefited from Equitable's credit
facilities for five years.[10]
After trial, the RTC upheld the validity of the promissory notes. It found
that, in 2001 alone, Equitable restructured respondents' loans amounting
to US$228,200 and P1,000,000.[11] The trial court, however, invalidated
the escalation clause contained therein because it violated the principle
of mutuality of contracts.[12] Nevertheless, it took judicial notice of the
steep depreciation of the peso during the intervening period [13] and
declared the existence of extraordinary deflation. [14] Consequently, the
RTC ordered the use of the 1996 dollar exchange rate in computing
respondents' dollar-denominated loans.[15] Lastly, because the business
reputation of respondents was (allegedly) severely damaged when
Equitable froze their accounts,[16] the trial court awarded moral and
exemplary damages to them.[17]
The dispositive portion of the February 5, 2004 RTC
decision[18] provided:
WHEREFORE, premises considered, judgment is hereby
rendered:
A) Ordering [Equitable] to reinstate and return the amount of
[respondents'] deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12
[m]illion [p]esos as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10
[m]illion [p]esos as exemplary damages;
24 | C r e d i t T r a n s a c t i o n s
Beastly Notes
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to
pay [respondents], jointly and severally, the sum of [t]wo
[m]illion [p]esos as moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas],
jointly and severally, to pay [respondents'] attorney's fees in the
sum of P300,000; litigation expenses in the sum of P50,000 and
the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to
pay [Equitable] the unpaid principal obligation for the peso loan
as well as the unpaid obligation for the dollar denominated loan;
G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to
pay [Equitable] interest as follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for
the payment of the dollar obligation is the conversion
rate of P26.50 per dollar availed of at the time of
incurring of the obligation in accordance with Article
1250 of the Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment
of the aforestated unpaid principal loan obligations and interest.
SO ORDERED.[19]
Equitable and respondents filed their respective notices of appeal. [20]
In the March 1, 2004 order of the RTC, both notices were denied due
course because Equitable and respondents failed to submit proof that
they paid their respective appeal fees.[21]
WHEREFORE, premises considered, the appeal
interposed by defendants from the Decision in the
above-entitled case is DENIED due course. As of
February 27, 2004, the Decision dated February 5,
2004, is considered final and executory in so far
as [Equitable, Aimee Yu and Bejan Lionel Apas] are
concerned.[22] (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of
the RTC[23] on the ground that it did in fact pay the appeal
fees. Respondents, on the other hand, prayed for the issuance of a writ
of execution.[24]
On March 24, 2004, the RTC issued an omnibus order denying
Equitable's motion for reconsideration for lack of merit [25] and ordered the
issuance of a writ of execution in favor of respondents. [26]According to
the RTC, because respondents did not move for the reconsideration of
the previous order (denying due course to the parties notices of appeal),
[27]
the February 5, 2004 decision became final and executory as to both
parties and a writ of execution against Equitable was in order.[28]
A writ of execution was thereafter issued [29] and three real properties of
Equitable were levied upon.[30]
On March 26, 2004, Equitable filed a petition for relief in the RTC from
the March 1, 2004 order.[31] It, however, withdrew that petition on March
30, 2004[32] and instead filed a petition for certiorari with an application
for an injunction in the CA to enjoin the implementation and execution of
the March 24, 2004 omnibus order.[33]
On June 16, 2004, the CA granted Equitable's application for injunction.
A writ of preliminary injunction was correspondingly issued. [34]
Notwithstanding the writ of injunction, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004.
Respondents were the highest bidders and certificates of sale were
issued to them.[35]
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction
sale and to cite the sheriffs who conducted the sale in contempt for
proceeding with the auction despite the injunction order of the CA. [36]
On October 28, 2005, the CA dismissed the petition for certiorari. [37] It
found Equitable guilty of forum shopping because the bank filed its
petition for certiorari in the CA several hours before withdrawing its
petition for relief in the RTC. [38] Moreover, Equitable failed to disclose,
both in the statement of material dates and certificate of non-forum
25 | C r e d i t T r a n s a c t i o n s
Beastly Notes
shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC.[39]
Equitable moved for reconsideration [40] but it was denied.[41] Thus, this
petition.
Equitable asserts that it was not guilty of forum shopping because the
petition for relief was withdrawn on the same day the petition for
certiorari was filed.[42] It likewise avers that its petition for certiorari was
meritorious because the RTC committed grave abuse of discretion in
issuing the March 24, 2004 omnibus order which was based on an
erroneous assumption. The March 1, 2004 order denying its notice of
appeal for non payment of appeal fees was erroneous because it had in
fact paid the required fees.[43] Thus, the RTC, by issuing its March 24,
2004 omnibus order, effectively prevented Equitable from appealing the
patently wrong February 5, 2004 decision.[44]
This petition is meritorious.
EQUITABLE WAS NOT GUILTY OF FORUM
Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those
actions raise identical issues, subject matter and causes of action. [45]The
test is whether, in two or more pending cases, there is identity of parties,
rights or causes of actions and reliefs.[46]
Equitable's petition for relief in the RTC and its petition for certiorari in
the CA did not have identical causes of action. The petition for relief from
the denial of its notice of appeal was based on the RTCs judgment or
final order preventing it from taking an appeal by fraud, accident,
mistake or excusable negligence.[47] On the other hand, its petition for
certiorari in the CA, a special civil action, sought to correct the grave
abuse of discretion amounting to lack of jurisdiction committed by the
RTC.[48]
In a petition for relief, the judgment or final order is rendered by a court
with competent jurisdiction. In a petition for certiorari, the order is
rendered by a court without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum
shopping when it moved to withdraw its petition for relief in the RTC on
the same day (in fact just four hours and forty minutes after) it filed the
petition for certiorari in the CA. Even if Equitable failed to disclose that it
had a pending petition for relief in the RTC, it rectified what was
doubtlessly a careless oversight by withdrawing the petition for relief just
a few hours after it filed its petition for certiorari in the CA a clear
indication that it had no intention of maintaining the two actions at the
same time.
THE TRIAL COURT
COMMITTED GRAVE
ABUSE OF DISCRETION
IN ISSUING ITS MARCH 1,
2004 AND MARCH 24, 2004
ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal,
board or officer exercising judicial or quasi-judicial
function has acted without or in excess of its or his
jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction,
and there is no appeal, nor any plain, speedy or
adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in
the proper court, alleging the facts with certainty and
praying that judgment be rendered annulling or
modifying the proceedings of such tribunal, board or
officer, and granting such incidental reliefs as law and
justice may require.
The petition shall be accompanied by a certified true
copy of the judgment, order or resolution subject
thereof, copies of all pleadings and documents relevant
and pertinent thereto, and a sworn certificate of non-
forum shopping as provided in the third paragraph of
Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These
are:
26 | C r e d i t T r a n s a c t i o n s
Beastly Notes
1. that the tribunal, board or officer exercising
judicial or quasi-judicial functions acted without or in
excess of his or its jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction;
and
2. that there is no appeal or any plain, speedy and
adequate remedy in the ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to
prosper, petitioner must show that the public respondent patently and
grossly abused his discretion and that abuse amounted to an evasion of
positive duty or a virtual refusal to perform a duty enjoined by law or to
act at all in contemplation of law, as where the power was exercised in
an arbitrary and despotic manner by reason of passion or hostility.[49]
The March 1, 2004 order denied due course to the notices of appeal of
both Equitable and respondents. However, it declared that the February
5, 2004 decision was final and executory only with respect to
Equitable.[50] As expected, the March 24, 2004 omnibus order denied
Equitable's motion for reconsideration and granted respondents' motion
for the issuance of a writ of execution.[51]
The March 1, 2004 and March 24, 2004 orders of the RTC were
obviously intended to prevent Equitable, et al. from appealing the
February 5, 2004 decision. Not only that. The execution of the decision
was undertaken with indecent haste, effectively obviating or defeating
Equitable's right to avail of possible legal remedies. No matter how we
look at it, the RTC committed grave abuse of discretion in rendering
those orders.
With regard to whether Equitable had a plain, speedy and adequate
remedy in the ordinary course of law, we hold that there was none. The
RTC denied due course to its notice of appeal in the March 1, 2004
order. It affirmed that denial in the March 24, 2004 omnibus order.
Hence, there was no way Equitable could have possibly appealed the
February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004
order, that petition was not a plain, speedy and adequate remedy in the
ordinary course of law.[53] A petition for relief under Rule 38 is an
equitable remedy allowed only in exceptional circumstances or where
there is no other available or adequate remedy.[54]
Thus, we grant Equitable's petition for certiorari and consequently give
due course to its appeal.
EQUITABLE RAISED PURE QUESTIONS OF LAW IN ITS PETITION
FOR REVIEW
The jurisdiction of this Court in Rule 45 petitions is limited to questions of
law.[55] There is a question of law when the doubt or controversy
concerns the correct application of law or jurisprudence to a certain set
of facts; or when the issue does not call for the probative value of the
evidence presented, the truth or falsehood of facts being admitted. [56]
Equitable does not assail the factual findings of the trial court. Its
arguments essentially focus on the nullity of the RTCs February 5, 2004
decision. Equitable points out that that decision was patently
erroneous, specially the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence.[57]
THE PROMISSORY NOTES WERE VALID
The RTC upheld the validity of the promissory notes despite
respondents assertion that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions
are drafted by one party.[58] The participation of the other party is limited
to affixing his signature or his adhesion to the contract. [59]For this reason,
contracts of adhesion are strictly construed against the party who drafted
it.[60]
It is erroneous, however, to conclude that contracts of adhesion are
invalid per se. They are, on the contrary, as binding as ordinary
contracts. A party is in reality free to accept or reject it. A contract of
adhesion becomes void only when the dominant party takes advantage
of the weakness of the other party, completely depriving the latter of the
opportunity to bargain on equal footing.[61]
That was not the case here. As the trial court noted, if the terms and
conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with another
27 | C r e d i t T r a n s a c t i o n s
Beastly Notes
bank at the first available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding
dollar- and peso-denominated loans with Equitable, it, however, failed to
ascertain the total amount due (principal, interest and penalties, if any)
as of July 9, 2001. The trial court did not explain how it arrived at the
amounts of US$228,200 and P1,000,000.[62] In Metro Manila Transit
Corporation v. D.M. Consunji,[63] we reiterated that this Court is not a trier
of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case.[64] Hence, we ordered the
partial remand of the case for the sole purpose of determining the
amount of actual damages.[65]
ESCALATION CLAUSE
VIOLATED THE
PRINCIPLE OF
MUTUALITY OF
CONTRACTS
Escalation clauses are not void per se. However, one which grants the
creditor an unbridled right to adjust the interest independently and
upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement is void. Clauses of that nature
violate the principle of mutuality of contracts. [66] Article 1308[67] of the Civil
Code holds that a contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them.[68]
For this reason, we have consistently held that a valid escalation clause
provides:
1. that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by law
or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if
the applicable maximum rate of interest is reduced by
law or by the Monetary Board (de-escalation clause). [69]
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for
subsequent extensions shall be at such rate as shall be
determined by the bank.[70]
Equitable dictated the interest rates if the term (or period for repayment)
of the loan was extended. Respondents had no choice but to accept
them. This was a violation of Article 1308 of the Civil Code. Furthermore,
the assailed escalation clause did not contain the necessary provisions
for validity, that is, it neither provided that the rate of interest would be
increased only if allowed by law or the Monetary Board, nor allowed de-
escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v.
Philippine National Bank[71] we held that, because the escalation clause
was annulled, the principal amount of the loan was subject to the original
or stipulated rate of interest. Upon maturity, the amount due was subject
to legal interest at the rate of 12% per annum.[72]
Consequently, respondents should pay Equitable the interest rates of
12.66% p.a. for their dollar-denominated loans and 20% p.a. for their
peso-denominated loans from January 10, 2001 to July 9, 2001.
Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
THERE WAS NO EXTRAORDINARY DEFLATION
Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation in
the value of currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation of the parties at
the time of the obligation. Extraordinary deflation, on the other hand,
involves an inverse situation.[73]
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or
deflation of the currency stipulated should intervene,
the value of the currency at the time of the
establishment of the obligation shall be the basis of
28 | C r e d i t T r a n s a c t i o n s
Beastly Notes
payment, unless there is an agreement to the
contrary.
For extraordinary inflation (or deflation) to affect an obligation, the
following requisites must be proven:
1. that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);[74]
2. that the obligation was contractual in nature;[75] and
3. that the parties expressly agreed to consider the effects
of the extraordinary inflation or deflation.[76]
Despite the devaluation of the peso, the BSP never declared a situation
of extraordinary inflation. Moreover, although the obligation in this
instance arose out of a contract, the parties did not agree to recognize
the effects of extraordinary inflation (or deflation). [77] The RTC never
mentioned that there was a such stipulation either in the promissory note
or loan agreement. Therefore, respondents should pay their dollar-
denominated loans at the exchange rate fixed by the BSP on the date of
maturity.[78]
THE AWARD OF MORAL AND EXEMPLARY DAMAGES LACKED
BASIS
Moral damages are in the category of an award designed to compensate
the claimant for actual injury suffered, not to impose a penalty to the
wrongdoer.[79] To be entitled to moral damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or
physical, mental or psychological suffering sustained by the
claimant;
2. That the defendant committed a wrongful act or
omission;
3. That the wrongful act or omission was the proximate
cause of the damages the claimant sustained;
4. The case is predicated on any of the instances
expressed or envisioned by Article 2219[80] and 2220[81]. [82]
In culpa contractual or breach of contract, moral damages are
recoverable only if the defendant acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations. [83] The breach must be
wanton, reckless, malicious or in bad faith, and oppressive or abusive. [84]
The RTC found that respondents did not pay Equitable the interest due
on February 9, 2001 (or any month thereafter prior to the maturity of the
loan)[85] or the amount due (principal plus interest) due on July 9, 2001.
[86]
Consequently, Equitable applied respondents' deposits to their loans
upon maturity.
The relationship between a bank and its depositor is that of creditor and
debtor.[87] For this reason, a bank has the right to set-off the deposits in
its hands for the payment of a depositor's indebtedness. [88]
Respondents indeed defaulted on their obligation. For this reason,
Equitable had the option to exercise its legal right to set-off or
compensation. However, the RTC mistakenly (or, as it now appears,
deliberately) concluded that Equitable acted fraudulently or in bad faith
or in wanton disregard of its contractual obligations despite the absence
of proof.
The undeniable fact was that, whatever damage respondents sustained
was purely the consequence of their failure to pay their loans. There
was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since
respondents were not entitled to moral damages, neither should they be
awarded exemplary damages.[89] And if respondents were not entitled to
moral and exemplary damages, neither could they be awarded
attorney's fees and litigation expenses.[90]
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the
Court of Appeals in CA-G.R. SP No. 83112 are
hereby REVERSED and SET ASIDE.
29 | C r e d i t T r a n s a c t i o n s
Beastly Notes
The March 24, 2004 omnibus order of the Regional Trial Court, Branch
16, Cebu City in Civil Case No. CEB-26983 is hereby ANNULLED for
being rendered with grave abuse of discretion amounting to lack or
excess of jurisdiction. All proceedings undertaken pursuant thereto are
likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu
City in Civil Case No. CEB-26983 is hereby SET ASIDE. The appeal of
petitioners Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas is
therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of
Cebu City in Civil Case No. CEB-26983 is accordingly SET ASIDE. New
judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business
under the name and style of Ken Marketing, Ken Appliance Division, Inc.
and Benjamin E. Go to pay petitioner Equitable PCI Bank the principal
amount of their dollar- and peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business
under the name and style of Ken Marketing, Ken Appliance Division, Inc.
and Benjamin E. Go to pay petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-
denominated loans from January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated
loans from January 10, 2001 to July 9, 2001;[91]
c) pursuant to our ruling in Eastern Shipping Lines v.
Court of Appeals,[92] the total amount due on July 9, 2001 shall
earn legal interest at 12% p.a. from the time petitioner Equitable
PCI Bank demanded payment, whether judicially or extra-
judicially; and
d) after this Decision becomes final and executory, the
applicable rate shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City
shall compute the exact amounts due on the respective dollar-
denominated and peso-denominated loans, as of July 9, 2001, of
respondents Ng Sheung Ngor, doing business under the name and style
of Ken Marketing, Ken Appliance Division and Benjamin E. Go.
SO ORDERED.
c. The usury law and its present status (1957)
SECURITY BANK AND TRUST COMPANY v RTC-MAKATI
G.R. No. 113926 October 23, 1996
SYLLABUS
1. CIVIL LAW; LOANS; INTEREST; USURIOUS, NOT A CASE OF;
APPLICABILITY OF CENTRAL BANK CIRCULAR 905 IN CASE AT
BENCH.- From the examination of the records, it appears that
indeed the agreed rate of interest as stipulated on the three (3)
promissory notes is 23% per annum. The applicable provision of
law is Central Bank Circular No. 905 which took effect of December
22, 1982, particularly Sections 1 and 2. x x x CB Circular 905 was
issued by the Central Bank's Monetary Board pursuant to P.D. 1684
empowering them to prescribe the maximum rates of interest for
loans and certain forbearances.
x x x All the promissory notes were signed in 1983 and, therefore, were
already covered by CB Circular No. 905. Contrary to the claim of
respondent court, this circular did not repeal nor in anyway amend
the Usury Law but simply suspended the latter's effectivity.
2. STATUTORY CONSTRUCTION; RULE APPLICABLE WHEN THE
LAW IS CLEAR AND UNAMBIGUOUS.- Basic is the rule of
statutory construction that when the law is clear and unambiguous,
the court is left with no alternative but to apply the same according
to its clear language.
30 | C r e d i t T r a n s a c t i o n s
Beastly Notes
3. CIVIL LAW; LOANS; INTEREST RATE WHEN VALIDLY STIPULATED
MAY NOT BE CHANGED; CASE AT BENCH.- The rate of interest
was agreed upon by the parties freely. Significantly, respondent did
not question that rate.It is not for respondent court a quo to change
the stipulations in the contract where it is not illegal. Furthermore,
Article 1306 of the New Civil Code provides that contracting parties
may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. We find no
valid reason for the respondent court a quo to impose a 12% rate of
interest on the principal balance owing to petitioner by respondent
in the presence of a valid stipulation.
4. ID.; ID.; ID.; 12% INTEREST RATE IS IMPOSED WHEN THERE IS
NO STIPULATED INTEREST DUE.- In a loan or forbearance of
money, the interest due should be that stipulated in writing, and in
the absence thereof, the rate shall be 12% per annum. Hence, only
in the absence of a stipulation can the court impose the 12% rate of
interest.
DIGEST
FACTS:
In 1983, Eusebio acquired 3 separate loans from Security Bank
amounting to P265k. The agreed interest rate was 23% per annum. The
promissory note was freely and voluntarily signed by both parties. Leia
Ventura was the co-maker. Eusebio defaulted from paying. Security
Bank sued for collection.
DECISION OF LOWER COURTS:
* RTC: Judge Gorospe of the Makati RTC ordered Eusebio to pay but he
lowered the interest rate to 12% per annum.
* directly to SC in petition for certiorari.
ISSUES & RULING:
1. Should the rate of interest on a loan or forbearance of money, goods
or credits, as stipulated in a contract, far in excess of the ceiling
prescribed under or pursuant to the Usury Law, prevail over Section 2 of
Central Bank Circular No. 905 which prescribes that the rate of interest
thereof shall continue to be 12% per annum? or whether or not the 23%
rate of interest per annum agreed upon by petitioner bank and
respondents is allowable and not against the Usury Law?
Yes, the rate per contract prevails.
From the examination of the records, it appears that indeed the agreed
rate of interest as stipulated on the three (3) promissory notes is 23%
per annum. The applicable provision of law is the Central Bank Circular
No. 905 which took effect on December 22, 1982:
Sec. 1. The rate of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, that may be
charged or collected by any person, whether natural or judicial, shall not
be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended.
Only in the absence of stipulations will the 12% rate be applied or if the
stipulated rate is grossly excessive.
Further, Eusebio never questioned the rate. He merely expressed to
negotiate the terms and conditions. The promissory notes were signed
by both parties voluntarily. Therefore, stipulations therein are binding
between them.
2. Do the Courts have the discretion to arbitrarily override stipulated
interest rates of promissory notes and stipulated interest rates of
promissory notes and thereby impose a 12% interest on the loans, in the
absence of evidence justifying the imposition of a higher rate?
NO. The rate of interest was agreed upon by the parties freely.
Significantly, respondent did not question that rate. It is not for
31 | C r e d i t T r a n s a c t i o n s
Beastly Notes
respondent court a quo to change the stipulations in the contract where
it is not illegal. Furthermore, Article 1306 of the New Civil Code provides
that contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. We
find no valid reason for the respondent court a quo to impose a 12% rate
of interest on the principal balance owing to petitioner by respondent in
the presence of a valid stipulation. In a loan or forbearance of money,
the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum. Hence, only in the absence of
a stipulation can the court impose the 12% rate of interest.
APPLICABLE PROVISION OF LAW:
Central Bank Circular No. 905 which took effect on December 22, 1982,
particularly Sections 1 and 2 which state:
Sec. 1. The rate of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, that may be
charged or collected by any person, whether natural or judicial, shall not
be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended.
Sec. 2. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall continue to be twelve
per cent (12%) per annum.
All the promissory notes were signed in 1983 and, therefore, were
already covered by CB Circular No. 905. Contrary to the claim of
respondent court, this circular did not repeal nor in anyway amend the
Usury Law but simply suspended the latter's effectivity.
ORIGINAL VERSION
Questions of law which are the first impression are sought to be
resolved in this case: Should the rate of interest on a loan or
forbearance of money, goods or credits, as stipulated in a contract, far in
excess of the ceiling prescribed under or pursuant to the Usury Law,
prevail over Section 2 of Central Bank Circular No. 905 which prescribes
that the rate of interest thereof shall continue to be 12% per annum? Do
the Courts have the discretion to arbitrarily override stipulated interest
rates of promissory notes and stipulated interest rates of promissory
notes and thereby impose a 12% interest on the loans, in the absence of
evidence justifying the impositions of a higher rate?
This is a petition for review on certiorari for the purpose of assailing the
decision of Honorable Judge Fernando V. Gorospe of the Regional Trial
Court of Makati, Branch 61, dated March 30, 1993, which found private
respondent Eusebio liable to petitioner for a sum of money. Interest was
lowered by the court a quo from 23% per annum as agreed upon by the
parties to 12% per annum.
The undisputed facts are as follows:
On April 27, 1983, private respondent Magtanggol Eusebio executed
Promissory Note No. TL/74/178/83 in favor of petitioner Security Bank
and Trust Co. (SBTC) in the total amount of One Hundred Thousand
Pesos (P100,000.00) payable in six monthly installments with a
stipulated interest of 23% per annum up to the fifth installments.[1]
On July 28, 1983, respondent Eusebio again executed Promissory note
No TL/74/1296/83 in favor of petitioner SBTC. Respondent bound
himself to pay the sum of One Hundred Thousand Pesos (P100.000.00)
in six (6) monthly installments plus 23% interest per annum. [2]
Finally, another Promissory Note No. TL74/1491/83 was executed
on August 31, 1983 in the amount of Sixty Five Thousand Pesos
(P65,000.00). Respondent agreed to pay this note in six (6) monthly
installments plus interest at the rate of 23% per annum.[3]
On all the abovementioned notes, private respondents Leila Ventura had
signed as co-maker.[4]
Upon maturity which fell on the different dates below, the principal
balance remaining on the notes stood at:
1) PN No. TL/74/748/83 P16,665.00 as of September 1983.
2) PN No. TL/74/1296/83 P83,333.00 as of August 1983
32 | C r e d i t T r a n s a c t i o n s
Beastly Notes
3) PN No. TL/74/1991/83 P65,000.00 as of August 1983.
Upon the failure and refusal of respondent Eusebio to pay the
aforestated balance payable, a collectible case was filed in court by
petitioner SBTC.[5] On March 30, 1993, the court a quo rendered a
judgment in favor of petitioner SBTC, the dispositive portion which
reads:
WHEREFORE, premises above-considered, and plaintiffs claim having
been duly proven, judgment is hereby rendered in favor of plaintiff and
as against defendant Eusebio who is hereby ordered to:
1. Pay the sum of P16,665.00, plus interest of 12% per annum
starting 27 September 1983, until fully paid;
2. Pay the sum of P83,333.00, plus interest of 12% per annum
starting 28 August 1983, until fully paid;
3. Pay the sum of P65,000.00, plus interest of 12% per annum
starting 31 August 1983, until fully paid;
4. Pay the sum equivalent to 20% of the total amount due and payable
to plaintiff as and by way of attorneys fees; and to
5. Pay the cost of this suit.
SO ORDERED. [6]
On August 6, 1993, a motion for partial reconsideration was filed by
petitioner SBTC contending that:
(1) the interest rate agreed upon by the parties during the
signing of the promissory notes was 23% per annum;
(2) the interests awarded should be compounded quarterly
from due date as provided in three (3) promissory notes;
(3) defendant Leila Ventura should likewise be held liable to
pay the balance on the promissory notes since she has signed as
co-maker and as such, is liable jointly and severally with defendant
Eusebio without a need for demand upon her.[7]
Consequently, an Order was issued by the court a quo denying the
motion to grant the rates of interest beyond 12% per annum; and holding
defendant Leila Ventura jointly and severally liable with co-defendant
Eusebio.
Hence, this petition.
The sole issue to be settled in this petition is whether or not the 23% rate
of interest per annum agreed upon by petitioner bank and respondents
is allowable and not against the Usury Law.
We find merit in this petition.
From the examination of the records, it appears that indeed the agreed
rate of interest as stipulated on the three (3) promissory notes is 23%
per annum.[8] The applicable provision of law is the Central Bank Circular
No. 905 which took effect on December 22, 1982, particularly Sections 1
and 2 which state:[9]
Sec. 1. The rate of interest, including commissions, premiums, fees and
other charges, on a loan or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, that may be
charged or collected by any person, whether natural or judicial, shall not
be subject to any ceiling prescribed under or pursuant to the Usury Law,
as amended.
Sec. 2. The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall continue to be twelve
per cent (12%) per annum.
33 | C r e d i t T r a n s a c t i o n s
Beastly Notes
CB Circular 905 was issued by the Central Banks Monetary Board
pursuant to P.D. 1684 empowering them to prescribe the maximum rates
of interest for loans and certain forbearances, to wit:
SECTION 1. Section 1-a of Act No. 2655, as amended, is hereby
amended to read as follows:
SEC. 1-a The Monetary Board is hereby authorized to prescribed 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 changes in such rates or rates may be
effected gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted, the Monetary Board may
prescribed higher maximum rates for loans of low priority, such as
consumer loans or renewals thereof as well as such loans made by
pawnshops, finance companies and other similar credit institutions
although the rates prescribed for these institutions need not necessarily
be uniform. The Monetary Board is also authorized to prescribed
different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial
intermediaries.[10]
This court has ruled in the case of PNB v. CA [11] that:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting
parties to stipulate freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or forbearance of money, goods
or credits. In fine, they can agree to adjust, upward or downward, the
interest previously stipulated.
All the promissory notes were signed in 1983 and, therefore, were
already covered by CB Circular No. 905. Contrary to the claim of
respondent court, this circular did not repeal nor in anyway amend the
Usury Law but simply suspended the latters effectivity.
Basic is the rule of statutory construction that when the law is clear and
unambiguous, the court is left with no alternative but to apply the same
according to its clear language. As we have held in the case of Quijano
v. Development Bank of the Philippines:[12]
xxx We cannot see any room for interpretation or construction in the
clear and unambiguous language of the above-quoted provision of
law. This Court had steadfastly adhered to the doctrine that its first and
fundamental duty is the application of the law according to its express
terms, interpretation being called for only when such literal application is
impossible. No process of interpretation or construction need be
resorted to where a provision of law peremptorily calls for
application. Where a requirement or condition is made in explicit and
unambiguous terms, no discretion is left to the judiciary. It must see to it
that its mandate is obeyed.
The rate of interest was agreed upon by the parties freely. Significantly,
respondent did not question that rate. It is not for respondent court a
quo to change the stipulations in the contract where it is not illegal.
Furthermore, Article 1306 of the New Civil code provides that contracting
parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. We find no valid
reason for the respondent court a quo to impose a 12% rate of interest
on the principal balance owing to petitioner by respondent in the
presence of a valid stipulation. In a loan or forbearance of money, the
interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum. [13] Hence, only in the absence
of a stipulation can the court impose the 12% rate of interest.
The promissory notes were signed by both parties
voluntarily. Therefore, stipulations therein are binding between
them. Respondent Eusebio, likewise, did not question any of the
stipulations therein. In fact, in the Comment file by respondent Eusebio
to this court, he chose not to question the decision and instead
expressed his desire to negotiate with the petitioner bank for terms
within which to settle his obligation.[14]
34 | C r e d i t T r a n s a c t i o n s
Beastly Notes
IN VIEW OF THE FOREGOING, the decision of the respondent
court a quo, is hereby AFFIRMED with the MODIFICATION that the rate
of interest that should be imposed be 23% per annum.
SO ORDERED.
D. CREDIT ACCOMODATIONS: Other forms of Mutuum [Sec x320.1 of
the manual of Regulations for Banks; RA 8484 (Access Devices
Regulation Act of 1998); Arts 567 to 572, Code of Commerce; RA 5980,
Financing Company Act]
- see credit card definition
CIR v. American Express, International Inc GR No.
152609, June 29, 2005
Beltran v. PAIC Finance Corporation, GR Nos. 83113 &
83256, May 19, 1992
FELICIANO, J.:
The consolidated Petitions here before the Court compel us to consider
the nature and at least some of the legal effects of a "financing lease" or
"financial lease." Such an instrument must seem an exotic creation in
the eyes of many civil law jurists; for a financial lease does not fit neatly
into the tight and orderly categories of the Civil Code. But financial
leases are quite commonplace in today's commercial and financial world
and the law must take account of developments and practice in that
world.
On 15 July 1980, the Beltran spouses purchased from Service
Equipment Specialists Co. ("SESCO") one unit of Infra-Red
Performance Analyzer with Serial No. 19B2870, SUN 1115, FOR
P137,000.00. Upon delivery of the unit on the same day, the Beltrans
returned to SESCO a Performance Analyzer SUN 1011 previously
purchased from SESCO, and the payments made thereon, plus two (2)
other checks made out by the Beltrans in the name of SESCO, were
applied as downpayment on the new Performance Analyzer SUN 1115.
Further, SESCO agreed with the Beltrans that the balance of the
purchase price of the new SUN 1115 would be placed under a financing
arrangement which SESCO was to enter into with PAIC. 1
On 3 September 1980, the Beltrans issued another check in favor of
SESCO in the amount of P3,780.00. On the same date, SESCO
assigned the sales invoice it issued to the Beltran spouses to PAIC; the
documentation dated 3 September 1980 stated that the Performance
Analyzer SUN 1115 with Serial No. 19B2870 was delivered to PAIC. At
the same time, PAIC executed a contract of lease over the SUN 1115
with the spouses Beltran as lessees for a term of 36 months at a
monthly rental of P3,903.52 commencing on 2 September 1980 and
35 | C r e d i t T r a n s a c t i o n s
Beastly Notes
ending on 2 October 1983. On 19 September 1980, SESCO executed in
favor of PAIC a surety undertaking under which SESCO guaranteed
solidarily the faithful performance of all obligations of the Beltran lessees
to PAIC.
Sometime in October 1980, the SUN 1115 malfunctioned. The Beltrans
sought the assistance of SESCO which in turn promised to repair the
equipment. The repairs made on the SUN 1115 were, however, found to
be unsatisfactory by the Beltrans who thereupon decided to return the
unit and discontinued the monthly rental payments to PAIC.
When the spouses Beltran failed to pay four (4) succeeding monthly
payments, PAIC sent them a letter demanding payment of the rentals in
arrears. When the spouses Beltran failed to pay the arrearages, PAIC,
on 23 February 1981, filed a complaint for a sum of money against the
spouses. On 31 March 1981, the spouses Beltran filed an answer with
counterclaim and a third-party complaint against SESCO. SESCO
eventually filed an answer to the third-party complaint as required by the
trial court.
On 16 October 1985, the trial court rendered a decision in favor of the
spouses Beltran. The trial court held that the transaction between PAIC
and the spouses Beltran was one of lease and dismissed the complaint
of PAIC, as well as the Beltrans' counterclaim against PAIC and their
third party complaint against SESCO. The trial court held:
Under the terms of the lease, in case of fault of the lessee (defendant
Beltran), the plaintiff may declare any and all sums due and to become
due and payable and in addition the lessor shall be entitled to take
possession of the leased equipment and to recover as damages an
amount equal to the difference of the rent for the unexpired term of the
lease and aggregate rental value of the leased equipment.
Categorizing the transaction had between plaintiff and defendant Rafael
S. Beltran as one of lease, which binds the plaintiff; we are constrained
to dismiss the plaintiff's case.
Under Article 1654 of the Civil Code, the lessor is obliged to deliver the
object of the lease in such condition as to render it fit for the use
intended; to make on the same during the lease all the necessary
repairs in order to keep it suitable for the use to which it has been
devoted and to maintain the lessee in the peaceful enjoyment of the
lease during the contract.
Defendants Beltran's evidence, without contradiction is that the
performance analyzer became unfit for the use intended soon after
delivery. Plaintiff [PAIC] has not repaired such defect in order to keep the
equipment suitable for the use to which it is devoted.
Consequently, the lease must be deemed extinguished because the
thing leased was totally unfit for the purposes of the lease. 2 (Emphasis
and brackets supplied)
The Beltran spouses filed a notice of appeal dated 12 April 1986 with the
trial court in view of the failure of the trial court to rule on the liability of
SESCO on its contract of sale. The notice of appeal was, however,
denied due course by the trial court for having been filed late. The
motion for reconsideration filed by the spouses Beltran was denied on
the ground that the period for appeal is jurisdictional. A second motion
for reconsideration was filed with, but was not acted upon by, the trial
court. Instead, the trial court transmitted the records of the case to the
Court of Appeals since PAIC had filed its own appeal in a timely manner.
Upon such transmittal, the Court of Appeals assumed jurisdiction of the
appealed case.
The judgment of the trial court was affirmed by the Court of Appeals in a
decision dated 30 June 1987. In that decision, however, the Court of
Appeals held the transaction between the Beltrans and PAIC to be one
of sale rather than a lease:
We agree with the contention of the defendants-appellees. An
examination of the records shows that indeed the Contract of lease "is
but a scheme to simulate the real agreement between the parties which
36 | C r e d i t T r a n s a c t i o n s
Beastly Notes
is a financing arrangement for the defendants Beltran to pay the unpaid
price of the performance analyzer with Serial No. SUN 1115 to the
plaintiff." (p. 251, Record). The equipment in question was sold to
defendant-appellee Rafael S. Beltran on July 15, 1980 by Service
Equipment Specialist Co., Inc. (SESCO) as evidenced by Sales Invoice
No. 050 (p. 10, Folder of Exhibits), by Warranty Certificate dated July 15,
1980 (p. 11, Folder of Exhibits), and by a letter of SESCO addressed to
defendant appellee dated October 21, 1980 (p. 13, Folder of Exhibits).
Plaintiff-appellant's evidence shows some glaring inconsistencies. The
contract of lease covers the equipment in question which was already
sold and delivered to defendant-appellee. The date of the contract of
lease is July 31, 1980 but the subject of the lease was "sold" to plaintiff-
appellant only on September 3, 1980 (p. 4, Folder of Exhibits). The
original of Sales Invoice No. 050 reflect both plaintiff-appellant and
defendant-appellee Rafael S. Beltran as vendees of the equipment in
question but the contract of lease shows that defendant-appellee is the
lessee and the plaintiff-appellant is the lessor. The delivery receipts
show that the equipment in question was delivered to defendant-
appellee on July 15, 1980 (p.10, Folder of Exhibits) by SESCO, on
September 2, 1980 by plaintiff-appellant, and on September 3, 1980 by
SESCO (pp. 5-6, Folder of Exhibits). Exhibit D shows that the equipment
in question was delivered to both plaintiff-appellant and defendant-
appellee on September 3, 1980 by SESCO (p. 6, Folder of
Exhibits). These inconsistencies belie plaintiff-appellant's contention that
the contract of lease is not a "scheme to simulate real
agreement between the parties which is a financing arrangement."
Defendants-appellees [Beltrans] cannot be held liable for the breakdown
of the equipment in question pursuant to the Warranty Certificate of
SESCO dated July 15, 1980 (p. 11, Folder of Exhibits). It is admitted that
the cause of the breakdown was when one of SESCO's technicians
"accidentally damaged the PCB of the equipment" (p. 13 Folder of
Exhibits). When the equipment was not repaired despite SESCO's
assurance, defendants-appellees decided to return the equipment and
discontinued amortization payments (pp. 12-13, Folder of Exhibits). As
found by the trial court:
Defendant Beltran's evidence, without contradiction is that the
performance analyzer became unfit for the use intended soon after
delivery. Plaintiff has pot repaired such defect in order to keep the
equipment suitable for the use it is devoted. (p. 252, Record).
Defendants-appellees seek a rescission of the contract of sale pursuant
to Article 1599 of the Civil Code which provides for such a remedy when
there is a breach of warranty by the seller. Since the records show that
the equipment in question became unfit for the use it is
intended, defendants-appellees are entitled to rescission of the contract
of sale with SESCO or its (SESCO's) assigns.
xxx xxx xxx 3
Both PAIC and the Beltrans moved for reconsideration of the Court of
Appeals' decision. In a resolution dated 28 April 1988, the Court of
Appeals rejected both motions and ruled that the Beltrans, not having
perfected any appeal from the decision of the trial court, could not seek
modification of that decision.
A Petition for Review on Certiorari was then filed by the Beltran spouses
with this Court and docketed as G.R. No. 83113, assailing the Court of
Appeals' refusal to entertain their appeal. In a Resolution dated 4
January 1989, the Court dismissed the petition of the Beltran spouses
for "insufficiency in form and substance and for lack of merit." The
Beltrans moved for reconsideration, without success. A second motion
for reconsideration was filed by the Beltrans.
Meantime, PAIC also filed a Petition for Review on certiorari before this
Court, docketed as G.R. No. 83256. On 25 January 1989, the Court
issued a Resolution in G.R. No. 83256, granting the motion of the
spouses Beltran for consolidation of G.R. No. 83256 with G.R. No.
83113, in effect reconsidering the previous dismissal of the petition in
G.R. No. 83113.
PAIC, in its petition, mainly alleges that the Court of Appeals erred in
applying the provisions of the Civil Code in the construction of its
contract with the Beltran spouses. PAIC maintains that the Court of
37 | C r e d i t T r a n s a c t i o n s
Beastly Notes
Appeals should have applied instead the provisions of R.A. No. 5980
entitled "An Act Regulating the Organization and Operation of Financing
Companies," in characterizing the relationship between PAIC and the
spouses Beltran. It is argued that the contract of lease is actually
a financial lease governed by Section 3 (a) of R.A. No. 5980; that under
such scheme, PAIC under took no warranty as to the fitness, design or
condition of, or as to the quality or capacity of the equipment.
The threshold problem relates to characterization of the relationships
between the three (3) parties: PAIC, the Beltrans and SESCO.
Characterization of these relationships requires us to examine the real
nature of the commercial transactions entered into by these parties inter
se, and in doing so, we need to look through the forms of the
agreements and related documents and to examine the effective intent
of the parties as well as the economic facts and circumstances which
existed at the time of establishment of such agreements. 4
We begin by summarizing the claims asserted by each of the parties
against the others.
The Beltrans asserted against PAIC and against SESCO two (2)
principal claims. The first claim was for rescission of the lease
agreement with PAIC, which had obligated the Beltrans to make monthly
payments to PAIC, for failure of PAIC to render the SUN 1115 fit for the
purpose for which the Beltrans wanted it in the first place. The second
was a claim to recover the downpayment that the Beltrans had made to
SESCO on the purchase price of the SUN 1115.
The principal claim of PAIC was asserted against the Beltrans under the
lease agreement. That claim was for specific performance of the
Beltrans' obligations under the lease agreement, i.e., payment of the
specified monthly payments all of which had become due and payable in
view of the default on the part of the Beltrans. The aggregate of those
monthly payments in effect represented the payment which PAIC had
previously made to SESCO for the balance of the purchase price
(remaining after the Beltrans' downpayment) of the SUN 1115, plus
financing charges which included PAIC's profit. PAIC also had a cause of
action against SESCO under the suretyship agreement which SESCO
had signed guaranteeing solidarily with the Beltrans payment of the
amounts due from the Beltrans under the lease agreement. PAIC did not
originally implead SESCO as a defendant in the complaint against the
Beltrans. SESCO was originally brought in as a party-litigant through the
medium of the third-party complaint filed by the Beltrans against SESCO
before the trial court. Later, PAIC amended its complaint, this time
bringing in SESCO as a defendant; the amended complaint was
admitted and SESCO in due time filed an answer.
SESCO sought to defend itself against PAIC's claims by asserting that
PAIC's remedies were against the Beltrans under their lease contract;
that by entering into the lease with the Beltrans, PAIC had waived any
rights it had as a buyer from SESCO; that SESCO's solidary guarantee
in favor of PAIC had been extinguished or prescribed; that the Beltrans
had prevented SESCO from complying with its warranty on the SUN
1115; and that any defect of the SUN 1115 was due to the acts and
negligence of the users, i.e., the Beltrans. SESCO did not appeal from
the trial court's decision but was, of course, a party to the proceedings
before the Court of Appeals and is a party to the two (2)Petitions for
Review. In each of the Petitions for Review (G.R. Nos. 83113 and
83256) now consolidated before our Court, SESCO was served with a
copy of the Petition. Clearly, therefore, the Supreme Court has
jurisdiction over the person of SESCO.
We turn to the important circumstances constituting and attending the
transactions between SESCO, PAIC and the Beltrans:
1. Initially, SESCO sold the Performance Analyzer SUN 1115 to the
Beltran spouses as evidenced by SESCO's Sales Invoice No. 050 dated
15 July 1980. 5 Accompanying this Sales Invoices was a Certificate of
Warranty issued by SESCO in favor of the Beltrans, also dated 15 July
1980. 6 Thereupon, delivery of the Performance Analyzer was made to
the Beltrans, as indicated in the Sales Invoice and in the delivery receipt
dated 15 July 1980. 7 As downpayment fort his purchase, the Beltrans
paid SESCO the total amount of P29,672.11.
2. Next, SESCO sold to PAIC the same equipment it had earlier sold to
the Beltran spouses. The sale to PAIC is evidenced by SESCO's Sales
Invoice No. 050 dated 3 September 1980 and issued in the name
of both PAIC and the Beltrans as vendees. For this transaction, PAIC
38 | C r e d i t T r a n s a c t i o n s
Beastly Notes
paid SESCO the amount of P91,751.60. A delivery receipt covering the
SUN 1115 and dated 3 September 1980 was issued in the name
of both PAIC and the Beltrans. A close examination of the records will,
however, show that PAIC never took physical possession of the SUN
1115, since on the stated date of delivery to PAIC, the SUN 1115 was
already physically in the hands of the Beltrans.
3. Shortly after the transaction between SESCO and PAIC, a lease
contract dated 19 September 1990 was entered into between PAIC and
the Beltrans. The lease agreement provided for a fixed monthly rental
payment for a period of thirty-six (36) months. It is important to note that
under this lease contract, the lessor PAIC undertook no warranty of the
fitness, design and condition of, or of the quality or capacity of, the
leased Performance Analyzer SUN 1115. The relevant provision of the
lease agreement reads as follows:
2.1. Warranties; Negation Lessor not being the manufacturer of necessarily follows that the Beltrans, rather than PAIC, had selected and
the Equipment, nor manufacturer's agent, makes no warranty or
representation, either expressed or implied, as to the fitness, design or
condition of, or as to the quality or capacity of the material, equipment or
workmanship in the Equipment, nor any warranty that the equipment will
satisfy the requirements of any law, rule, specification or contract which
provides for specific machinery or operation, or special methods, it being
agreed that all such risks as between the Lessor and the Lessee are to
be borne by the Lessee at its sole risk and expense. No oral agreement,
guaranty, promise, condition, representation or warranty shall be
binding; all prior conversations, agreements, or representations related
hereto and/or to the Equipment are integrated herein, and no
modification hereof shall be binding unless in writing signed by Lessor.
All repairs, parts, supplies, accessories, equipment and device,
furnished or added to any Equipment under lease shall become the
property of the Lessor. The Lessee also agrees that each Equipment
under lease is of a design, capacity and size selected and approved by
the Lessee, and the Lessee is satisfied that the same is suitable for its
purposes. The Lessor shall not be liable to the Lessee for any loss,
damage or expense of any kind or nature, caused directly or indirectly,
by any Equipment under lease, or the use or maintenance thereof, or the
repairs, servicing or adjustments thereto, or by any delay or failure to
provide the same, or by any interruption of service or loss of use thereof
or for any loss of business or damage whatever and however the same
may have been caused. (Emphasis supplied)
The lease contract also provided that "the lessee shall have no option to
purchase or otherwise acquire title or ownership of any of the leased
equipment and shall have only he right to use the same under and
subject to the terms and conditions of [the] lease."
4. Pursuant to the lease agreement, another delivery receipt was issued,
this time in the name of the Beltrans by PAIC, and dated 2 September
1980. It may be noted that this delivery receipt dated 2 September 1980
was in fact dated a day earlier than the date when SESCO, per its own
documentation, delivered the equipment to PAIC.
5. Since the Beltrans were in possession of the SUN 1115 before PAIC,
per SESCO's documentation, purchased the same from SESCO, it
inspected the equipment.
6. The amount paid by PAIC to SESCO represented the discounted
value of the total amount receivable by SESCO from the Beltrans. 8 At
the time of the sale by SESCO to PAIC, the amount receivable by
SESCO from the Beltrans (i.e., the balance of the purchase price of the
equipment remaining after application of the downpayment) was
P107,327.89 (P137,000.00 - P29,672.11 = P107,327.89).
7. The rental payments stipulated in the lease contract between PAIC
and the Beltrans were so computed as to cover the amount paid by
PAIC to SESCO plus the financing charges. 9
8. Although the lease contract gave no option to the Beltrans to
purchase or to acquire the SUN 1115, the declarations of the parties in
their different pleadings 10 afford clear indication that the parties had
contemplated that the ownership of the SUN 1115 would pass to the
Beltrans after the end of the lease period. It was not, therefore,
anticipated by the parties that the SUN 1115 would be returned to the
lessor PAIC. PAIC was not in the business of leasing out machinery or
equipment and did not maintain a warehouse or workshop nor service
39 | C r e d i t T r a n s a c t i o n s
Beastly Notes
and maintenance personnel for the repair and servicing of machinery or
equipment.
It will be recalled that the trial court concluded that the contract between
PAIC and the Beltrans was a real lease or a "civil law lease" and held
that the lease was extinguished because the thing leased was or had
become totally unfit for the purposes of the lease, in accordance with the
provisions of Article 1654 of the Civil Code. It will also be recalled that
the Court of Appeals had concluded after examination of the above
circumstances that the contract of lease was "a scheme to simulate the
real agreement between the parties" which "real agreement" was a
composite of a contract of sale between the Beltrans as vendees and
SESCO (or SESCO's assigns [PAIC]) as vendor, and a "financing
arrangement."
We believe that the Court of Appeals was substantially correct in holding
that the principal transactions were two-fold: firstly, a sale of the SUN
No. 1115 from SESCO to PAIC/the Beltrans and, secondly, a financing
arrangement that would permit the ultimate users of the SUN 1115 the
Beltrans to use that equipment and pay for it by installments, spread
out over thirty-six (36) months. Their consistencies in the details of the
documentation of the transactions may be seen to be due, not so much
to "simulation" of the "real agreement of the parties" but rather to the fact
that the financing company was chosen and the financing arrangement
concluded sometime after the original sale transaction between SESCO
and the Beltrans. That original transaction was in effect remodelled or
restructured to conform with the financing arrangement, which took the
form of a financial lease. A financial lessor, like all lessors, is legal owner
of the thing leased. Accordingly, SESCO documented a sale to PAIC;
because the SUN 1115 had earlier been sold to the Beltrans, the
SESCO invoice was modified and made out to both PAIC and the
Beltrans. The possession originally held by the Beltrans in concept
of owner, was transmuted into possession by the Beltrans in concept
of lessee.
In this jurisdiction, financial leases as a species of secured financing are
of fairly recent vintage. Financial leases, while they are complex
arrangements, cannot be casually dismissed as "simulated contracts."
To the contrary, they are genuine or legitimate contracts which have
been accorded statutory and administrative recognition. Section 3 (a) of
Republic Act No. 5980, as amended by Presidential Decrees Nos. 1454
and 1793, known as the "Financing Company Act," defines financing
companies in the following manner:
Financing companies, hereinafter called companies, are corporations, or
partnerships, except those regulated by the Central Bank of the
Philippines, the Insurance Commissioner and the Cooperatives
Administration Office, which are primarily organized for the purpose of
extending credit facilities toconsumers and to industrial, commercial, or
agricultural enterprises, either by discounting or factoring commercial
papers or accounts receivables, or by buying and selling contracts,
leases, chattel mortgages, or other evidences of indebtedness, or by
leasing motor vehicles, heavy equipment and industrial machinery,
business and office machines and equipment, appliances and other
movable property. 11 (Emphasis supplied)
Section 1, paragraph 1 of the Revised Rules and Regulations
Implementing the Provisions of the Financing Company Act, as
amended, adopted jointly by the Securities and Exchange Commission
and the Monetary Board of the Central Bank of the Philippines, defines
leasing in the following terms:
1. "LEASING" shall refer to financial leasing which is a mode of
extending credit through a non-cancellable contract under which the
lessor purchases or acquires at the instance of the
lessee heavy equipment, motor vehicles, industrial machinery,
appliances, business and office machines, and other movable
property in consideration of the periodic payment by the lessee of a
fixed amount of money sufficient to amortize at least 70% of
the purchase price or acquisition cost, including any incidental
expenses and a margin of profit, over the lease period. The contract
shall extend over an obligatory period during which the lessee has the
right to hold and use the leased property and shall bear the cost of
repairs, maintenance, insurance and preservation thereof, but with no
obligation or option on the part of the lessee to purchase the leased
property at the end of the lease contract. (Emphasis supplied)
40 | C r e d i t T r a n s a c t i o n s
Beastly Notes
The tax treatment of lease agreements, as distinguished from
conditional sales contracts, is governed by Revenue Regulations No. 19-
86, promulgated by the Department of Finance on 1 January 1987.
These Revenue Regulations recognize two (2) types of leases. The first
type, denominated an "operating lease", is defined as
. . . a contract under which the asset is not wholly amortized during the
primary period of the lease, and where the lessor does not rely solely on
the rentals
during the primary period for his profits, but looks for the recovery of the
balance of his costs and for the rest of his profits from the sale or re-
lease of the returned asset at the end of the primary lease period.
(Emphasis supplied)
The second type of recognized lease is designated as a "finance lease"
and defined in the Revenue Regulations in the following manner:
. . . "Finance lease," or "Full payout lease" is a contract involving
payment over an obligatory period (also called primary or basic
period) of specified rental amount for the use of a lessor's property,
sufficient in total to amortize the capital outlay of lessor and to provide
for the lessor's borrowing costs and profits. The obligatory period refers
to the primary or basic non-cancellable period of the lease which in no
case shall be less than 730 days. The lessee, not the lessor, exercises
the choice of the asset and is normally responsible for maintenance,
insurance and such other expenses pertinent to the use, preservation
and operation of the asset. Finance leases may be extended, after the
expiration of the primary period, by non-cancellable secondary or
subsequent periods with the rentals significantly reduced. The residual
value shall in no instance be less than five per cent (5%) of the lessor's
acquisition cost of the leased asset. (Emphasis supplied)
The basic purpose of a financial leasing transaction is to enable the
prospective buyer of equipment, who is unable to pay for such
equipment in cash in one lump sum, to lease such equipment in the
meantime for his use, at a fixed rental sufficient to amortize at least 70%
of the acquisition cost (including the expenses and a margin of profit for
the financial lessor) with the expectation that at the end of the lease
period, the buyer/financial lessee will be able to pay any remaining
balance of the purchase price. 12 Generally speaking, a financing
company is not a buyer or seller of goods; it is not a trading company.
Neither is it an ordinary leasing company; it does not make its profit by
buying equipment and repeatedly leasing out such equipment to
different users thereof. But a financial lease must be preceded by a
purchase and sale contract covering the equipment which becomes the
subject matter of the financial lease. The financial lessor takes the role
of the buyer of equipment leased. And so the formal or documentary tie
between the seller and the real buyer of the equipment, i.e., the financial
lessee, is apparently severed. In economic reality, however, that
relationship remains. The sale of the equipment by the supplier thereof
to the financial lessor and the latter's legal ownership thereof are
intended to secure the repayment over time of the purchase price of the
equipment, plus financing charges, through the payment of lease
rentals; that legal title is the upfront security held by the financial lessor,
a security probably superior in some instances to a chattel mortgagee's
lien.
A financing lease may be seen to be a contract sui generis, possessing
some but not necessarily all of the elements of an ordinary or civil law
lease. Thus, legal title to the equipment leased is lodged in the financial
lessor. The financial lessee is entitled to the possession and use of the
leased equipment. At the same time, the financial lessee is obligated to
make periodic payments denominated as lease rentals, which enable
the financial lessor to recover the purchase price of the equipment which
had been paid to the supplier thereof. However, the financial lessor,
being a financing company, i.e., an extender of credit rather than an
ordinary equipment rental company, does not extend a warranty of the
fitness of the equipment for any particular use. In the instant case, the
contract of lease between PAIC and the Beltrans, in addition to
expressly disclaiming any obligation on the part of PAIC to warrant the
fitness of the SUN 1115 for any particular use, had specified that the
equipment warranty, issued by SESCO the supplier of the equipment,
"shall be passed on by [PAIC] to the lessee." In fact, as noted, SESCO
issued a Certificate of Warranty to the Beltrans. Thus, the financial
lessee was precisely in a position to enforce such warranty directly
against the supplier of the equipment and not against the financial
41 | C r e d i t T r a n s a c t i o n s
Beastly Notes
lessor. We find nothing contra legem or contrary to public policy in such
a contractual arrangement.
Considering all the circumstances listed earlier, and bearing in mind the
economic and legal nature and objectives of a financing lease, we
conclude and so hold that the financial lease between PAIC and the
Beltrans was a valid and enforceable contract as between the two (2)
contracting parties. The Beltrans are therefore bound to pay to PAIC all
the rental payments which accrued and are due and payable under that
contract.
At the same time, PAIC is entitled to require SESCO to respond under
its solidary guarantee of the obligations of the Beltrans under the lease
contract. PAIC may thus opt to recover from either the Beltrans or
SESCO alone, or from both the Beltrans and SESCO solidarily at the
same time.
Should PAIC recover fully or partially the amounts due from the Beltrans,
we believe and so hold that the Beltrans are entitled to reimbursement
from SESCO of such amounts as they shall have been compelled to pay
PAIC. In addition, the Beltrans are entitled to recover from SESCO the
downpayment they had previously made to SESCO on the SUN 1115,
and as well to require SESCO to take back that equipment. These rights
of the Beltrans flow from their rescission of the contract of sale covering
the SUN 1115 for failure of SESCO to make good on its warranty against
defects in materials and workmanship set out in its "Warranty
Certificate," and on its warranty against hidden defects which render the
thing sold "unfit for the use of which it is intended" under the general law
on sales. 13
It is clear to the Court that it is SESCO who must bear the legal
consequences of its failure to make good on the warranty it had given as
vendor of the SUN 1115. SESCO received the full value of the SUN
1115: (a) the downpayment from the Beltrans; and (b) the balance of the
purchase price from PAIC. The record shows that PAIC had not
breached any of its undertakings to the Beltrans under the financial
lease. Upon the other hand, the Beltrans, because of failure of the
equipment warranty given by SESCO, could not benefit either from the
purchase of the equipment or from the financial lease. Clearly, it would
be inequitable and unconscionable to permit SESCO to hold on to the
purchase price and to shift the burden of its own failure either to the
ultimate buyers or to the company which financed the bulk of the
purchase price.
The Court is aware that the Beltrans were unable to file a timely appeal
from the ruling of the trial court which had dismissed their claim against
SESCO. However, guided by the principle that technicality should not be
allowed to stand in the way of equitably and completely resolving the
rights and obligations of the parties, 14 , this Court now resolves to treat
the Beltrans' appeal as having been seasonably filed so as to permit
complete resolution of this trilateral controversy on the merits.
IN VIEW OF THE ALL THE FOREGOING, the Decision of the Court of
Appeals dated 30 June 1987 in C.A.-G.R. CV No. 10078 and the
decision of the Regional Trial Court of Manila dated 16 October 1985 in
Civil Case No. 138233, are hereby SET ASIDE, and a new judgment is
hereby ENTERED providing as follows:
1. The spouses Beltran and SESCO are hereby ORDERED to pay,
jointly and severally, to PAIC the rental payments accrued and remaining
unpaid under the lease agreement, with interest at six percent (6%) per
annum starting from 16 October 1985 and until full payment thereof.
2. SESCO is also hereby ORDERED to reimburse the spouses Beltran
any amount that they are actually compelled to pay to PAIC under
paragraph 1 of the dispositive portion of this Decision, with interest
thereon at six percent (6%) per annum counting from the date of
payment by the Beltran spouses and until full reimbursement thereof.
3. The spouses Beltran are hereby REQUIRED to return the Infra-Red
Performance Analyzer SUN 1115 to SESCO, at the expense of SESCO.
SESCO is in turn hereby ORDERED to accept that equipment.
4. SESCO is, finally, hereby ORDERED to return to the spouses Beltran
the downpayment of P29,672.11 made on the SUN 1115, with interest
thereon at six percent (6%) per annum counting from 16 October 1985
and until full payment thereof.
42 | C r e d i t T r a n s a c t i o n s
Beastly Notes
No pronouncement as to costs. This Decision is immediately executory.
SO ORDERED.
II DEPOSITS
G.R. No. L-7593 March 27, 1913
THE UNITED STATES, plaintiff-appellee, v. JOSE M.
IGPUARA, defendant-appellant.
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 CFI 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."
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
43 | C r e d i t T r a n s a c t i o n s
Beastly Notes
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.
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
44 | C r e d i t T r a n s a c t i o n s
Beastly Notes
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, Sept 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.
Being in accord and the merits of the case, the judgment appealed from
is affirmed, with costs.
COMPAIA AGRICOLA DE ULTRAMAR, claimant-appellee,
v.VICENTE NEPOMUCENO, assignee-appellant.
FACTS:
The registered partnerships, Mariano Velasco & Co., Mariano Velasco,
Sons, & Co., and Mariano Velasco & Co., Inc., were, on petition of the
creditors, declared insolvent by the Court of First Instance of Manila.
45 | C r e d i t T r a n s a c t i o n s
Beastly Notes
Compania Agricola de Ultramar filed a claim against one of the
insolvents Mariano Velasco & Co., claiming the sum of P10,000, with the
agreed interest thereon at the rate of 6 per cent per annum from April 5,
1918, until its full payment was a deposit with said Mariano Velasco &
Co. and asked the court to declare it a preferred claim. The court
rendered a decision declaring that the alleged deposit was a preferred
claim for the sum mentioned, with interest at 6 per cent per annum from
April 5, 1918, until paid. From this decision the assignee appealed.
The evidence presented by the claimant Compania Agricola de Ultramar
consisted of a receipt in writing, and the testimony of Jose Velasco who
was manager of Mariano Velasco & Co. at the time the note was
executed. Received from the "Compania Agricola de Ultramar" the sum
of ten thousand Philippine pesos as a deposit at the interest of six per
cent annually, for the term of three months from date.
ISSUE: Whether the claim of the appellee should be considered a
deposit and a preferred claim.
RULING: NO. The transaction involved was a loan and not a deposit.
Although in the document in question a deposit is spoken of,
nevertheless from an examination of the entire document it clearly
appears that the contract was a loan and that such was the intention of
the parties. It is unnecessary to recur to the cannons of interpretation to
arrive at this conclusion. The obligation of the depository to pay interest
at the rate of 6 per cent to the depositor suffices to cause the obligation
to be considered as a loan and makes it likewise evident that it was the
intention of the parties that the depository should have the right to make
use of the amount deposited, since it was stipulated that the amount
could be collected after notice of two months in advance. Such being the
case, the contract lost the character of a deposit and acquired that of a
loan. (Art. 1768, Civil Code.) [Gavieres vs. De Tavera]
Article 1767 of the Civil Code provides that
"The depository cannot make use of the thing deposited without the
express permission of the depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that
"When the depository has permission to make use of the thing
deposited, the contract loses the character of a deposit and becomes a
loan or bailment."
"The permission not be presumed, and its existence must be proven."
Moreover, it may be inferred that there was no renewal of the contract of
deposit which converted into a loan, because, as has already been
stated, the defendants received said amount by virtue of a real loan
contract under the name of a deposit, since the so-called bailees were
forthwith authorized to dispose of the amount deposited. This they have
done, as has been clearly shown.
The ten thousand pesos delivered by the appellee to Mariano Velasco &
Co. cannot be regarded as a technical deposit. But the appellee argues
that it is at least an "irregular deposit." This argument is, we think,
sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10
Phil., 319). There this court said:
. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p.
664), states that there are three points of difference between a loan and
an irregular deposit. The first difference which he points out consists in
the fact that in an irregular deposit the only benefit is that which accrues
to the depositor, while in a loan the essential cause for the transaction is
the necessity of the borrower.
Nor does the contract in question fulfill the third requisite indicated
by Manresa, which is, that in an irregular deposit, the depositor can
demand the return of the article at any time, while a lender is bound by
the provisions of the contract and cannot seek restitution until the time
for payment, as provided in the contract, has arisen. It is apparent from
the terms of this documents that the plaintiff could not demand his
money at any time. He was bound to give notice of his desire for its
return and then to wait for six months before he could insist upon
payment.
In the present case the transaction in question was clearly not for
the sole benefit of the Compania Agricola de Ultramar; it was evidently
for the benefit of both parties. Neither could the alleged depositor
demand payment until the expiration of the term of three months.
46 | C r e d i t T r a n s a c t i o n s
Beastly Notes
For the reasons stated, the appealed judgment is reversed, and
we hold that the transaction in question must be regarded as a loan,
without preference.
CA-Agro Industrial Devt Corp vs CA 219 SCRA 426
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 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.
Version 2
Facts:
CA Agro (through its President, Aguirre) and spouses Pugao
entered into an agreement whereby the former purchased two parcels of
land for P350, 525 with a P75, 725 down payment while the balance was
covered by three (3) postdated checks. Among the terms embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that
titles to the lots shall be transferred to the petitioner upon full payment of
the purchase price and that the owners copies of the certificates of titles
thereto 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 upon full payment of the purchase price. They then rented
Safety Deposit box of private respondent Security Bank and Trust
Company (SBTC). For this purpose, both signed a contract of lease
which contains 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.
47 | C r e d i t T r a n s a c t i o n s
Beastly Notes
14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection
therewith.
After the execution of the contract, two (2) renters key were given to
Aguirre, and Pugaos. A key guard remained with the bank. The safety
deposit box has two key holes and can be opened with the use of both
keys. Petitioner claims that the CTC were placed inside the said box.
Thereafter, a certain Mrs. Ramos offered to buy from the petitioner the
two (2) lots at a price of P225 per sqm. Mrs. Ramose demanded the
execution of a deed of sale which necessarily entailed the production of
the CTC. Aguirre and Pugaos then proceeded to the bank to open the
safety deposit box. However, when opened in the presence of banks
representative, the box yielded no certificates. Because of the delay in
reconstitution of title, Mrs. Ramos withdrew her earlier offer and as a
consequence petitioner failed to realize the expected profit of P280 ,
500. Hence, the latter filed a complaint for damages.
RTC: Dismissed the complaint
CA: Affirmed
Issue: Whether or not the contractual relation between a commercial
bank and another party in the contract of rent of a safety deposit
box is one of bailor and bailee.
Ruling:
Yes.
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
Pugaos.
American Jurisprudence:
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 bailee, the bailment being for hire and mutual benefit.
Our provisions on safety deposit boxes are governed by Section 72 (a)
of the General Banking Act, and this primary function is still found within
the parameters of a contract of deposit like 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. Thus,
depositarys liability is governed by our civil code rules on obligation and
contracts, and thus the SBTC would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay or contravention
of the tenor of the agreement.
SIA v. CA 222 SCRA 24
Contract of the use of a safety deposit box of a bank is not a
deposit but a lease under Sec 72, A of General Banking Act.
Accordingly, 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. The banks negligence aggravated the injury or damage to the
stamp collection..
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 banks premises,
seeped into the safety deposit box leased by the plaintiff and caused,
according damage to his stamps collection. Security Bank rejected the
plaintiffs 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 plaintiffs 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.
48 | C r e d i t T r a n s a c t i o n s
Beastly Notes
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 banks negligence aggravated 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.