LOANS value of the bulls.
Upon the expiration of the
A. In General
Art. 1933. By the contract of loan, one of the
parties delivers to another, either something not
consumable so that the latter may use the same for a
certain time and return it, in which case the contract
is called a commodatum; or money or other
consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid,
in which case the contract is simply called a loan
or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation
to pay interest.
In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership
passes to the borrower.
Art. 1934. An accepted promise to deliver
something by way of commodatum or simple loan
is binding upon parties, but the commodatum or
simple loan itself shall not be perfected until the
delivery of the object of the contract.
Art. 1156. An obligation is a juridical necessity to
give, to do or not to do.
Art. 1305. A contract is a meeting of minds
between two persons whereby one binds himself,
with respect to the other, to give something or to
render some service.
Art. 1306. The contracting parties may establish
such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not
contrary to law, morals, good customs, public order,
or public policy.
CASES:
REPUBLIC OF THE PHILIPPINES, plaintiff-
appellee, vs. JOSE V.BAGTAS
[G.R. No.L-17474. October 25, 1962.]
FACTS:
In 1948, the defendant borrowed three bulls
(a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of
P744.46) for breeding purposes from the defendant
through the Bureau of Animal Industry for a period
of one year. During that specific period, it will be
subjected to a breeding fee of 10% of the book
contract, the defendant asked for a renewal of one
year. However, only one of the three bulls was
approved for renewal for another year. Now, the
defendant wrote back to express his intention to buy
the three bulls and later reiterated that he will buy
them at a value with a deduction of yearly
depreciation; to which the Director of Animal
Industry didn’t approved of, and instead asked the
defendant to pay for the book value within the
deadline or return the three bulls. The defendant
failed to comply with either. So the petitioner
commenced an action against the defendant in the
Court of First Instance of Manila: for the loaned
bulls to be returned or to pay their book value in the
total sum of P3,241.45 and the unpaid breeding fee
in the sum of P499.62, both with interests. On the
other hand, the defendant wouldn’t be able to pay
for the value of the bulls and he could not return
them as well, prayed for the dismissal of the
complaint. During the pendency of the case, the
original defendant died, so his wife became party to
the case. According to the wife, the two bulls
(Sindhi and Bhagnari) were already returned to the
Bureau of Animal Industry. But the third bull,
Sahiniwal, died from gunshot wounds which were
inflicted during a Huks raid on Hacienda
FelicidadIntal, and that as such death was due to
force majeure, she was relieved from the duty of the
returning the bull or paying its value to the appellee.
TRIAL COURT RULING: The defendant is ordered
to pay the petitioner: the sum of P3,625.09 the total
value of the three bulls plus the breeding fees in the
amount of P626.17 with interest on both sums of
(at) the legal rate from the filing of this complaint
and costs.
COURT OF APPEALS RULING: Denied the
defendant’s motion.
ISSUES:
(1) Whether or not the breeding fee is considered
compensation?
(2) Whether or not the defendant is exempted from
liability due to force majeure?
HELD: NO.
The loan by the appellee to the late
defendant José V. Bagtas of the three bulls for
breeding purposes for a period of one year from 8
May 1948 to 7 May 1949, later on renewed for
another year as regards one bull, was subject to the
payment by the borrower of breeding fee of 10% of
the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that
reason, as the appellee retained ownership or title to
the bull it should suffer its loss due to force
majeure.A contract of commodatum is essentially
gratuitous. 1 If the breeding fee be considered
acompensation, then the contract would be a lease
of the bull.
NO. Under article 1671 of theCivil Code the lessee
would be subject to the responsibilities of a
possessor in bad faith, because she had continued
possession of the bull after the expiry of the
contract. Andeven if the contract be commodatum,
still the appellant is liable, because article 1942
ofthe Civil Code provides that a bailee in a contract
of commodatum —
. . . is liable for loss of the thing, even if it should be
through a fortuitous event:
(2) If he keeps it longer than the period
stipulated. . . .
(3) If the thing loaned has been delivered with
appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a
fortuitous event:
The original period of the loan was from 8 May
1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8
May 1950. But the appellant kept and used the bull
until November 1953 when during a Huk raid it was
killed by stray bullets. Furthermore, when lent and
delivered to the deceased husband of the appellant
the bulls had each an appraised book value, to wit:
the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56
and the Sahiniwal; at P744.46. It was not stipulated
that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be
exempt from liability.
CAROLYN M. GARCIA vs . RICA MARIE S.
THIO. [G.R. No. 154878. March 16, 2007.]
FACTS:
In 1995, the respondent started to receive
several crossed checks from petitioner in the
amounts of US $100,000 and P500,000,both
payable to Marilou Santiago. According to the
petitioner, the respondent failed to pay both of these
principal amounts of the loans when they fell due,
so the latter filed a complaint for sum of money and
damages in the RTC of Makati, in order to collect
these principal sums as well as their respective
interests (3% and 4%). For both loans, no
promissory note was executed since petitioner and
respondent were close friends at the time. For her
part, the respondent paid the stipulated monthly
interest for both loans but on their maturity dates,
she failed to pay the principal amounts despite
repeated demands; she also denied that she
contracted the two loans with petitioner and
countered that it was Marilou Santiago to whom
petitioner lent the money. Respondent also claimed
she was merely asked by petitioner to give the
crossed checks to Santiago and that she issued the
checks for P76,000and P20,000 not as payment of
interest but to accommodate petitioner's request that
respondent use her own checks instead of
Santiago's. Petitioner insists that it was upon
respondent's instruction that both checks were made
payable to Santiago. She maintains that it was also
upon respondent's instruction that both checks were
delivered to her (respondent) so that she could, in
turn, deliver the same to Santiago. Furthermore, she
argues that once respondent received the checks, the
latter had possession and control of them such that
she had the choice to either forward them to
Santiago (who was already her debtor), to retain
them or to return them to petitioner.
RTC ruled in favor of petitioner, since there is a
contract of loan between the parties, and ordered the
respondent to pay the petitioner theamounts of
US$100,000 with monthly interest of 3% and
P500,000 at a monthly interest of 4%.
CA reversed the decision of the RTC and ruled that
there was no contract of loan between the parties.
On appeal, the CA reversed the decision of the RTC
and ruled that there was no contract of loan between
the parties.
It must be noted that crossing a check has the
following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the
check may be negotiated only once — to one who
has an account with the bank; (c) and the act of
crossing the check serves as warning to the holder
that the check has been issued for a definite purpose
so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a
holder in due course. Consequently, the receipt of
the [crossed] check by [respondent] is not the
issuance and delivery to the payee in contemplation
of law since the latter is not the person who could
take the checks as a holder, i.e., as a payee or
indorsee thereof, with intent to transfer title thereto.
Neither could she be deemed as an agent of Marilou
Santiago with respect to the checks because she was
merely facilitating the transactions between the
former and [petitioner].
ISSUES: (1) Whether or not there is a contract of
loan between the parties?
(2) Whether or not the respondent is liable for
interests?
HELD: A loan is a real contract, not consensual,
and as such is perfected only upon the delivery of
the object of the contract. This is evident in Art.
1934 of the Civil Code which provides: An accepted
promise to deliver something by way of
commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object
of the contract.
Upon delivery of the object of the contract of loan
(in this case the money received by the debtor when
the checks were encashed) the debtor acquires
ownership of such money or loan proceeds and is
bound to pay the creditor an equal amount. It is
undisputed that the checks were delivered to
respondent. Delivery is the act by which the res or
substance thereof is placed within the actual or
constructive possession or control of another.
Although respondent did not physically receive the
proceeds of the checks, these instruments were
placed in her control and possession under an
arrangement whereby she actually re-lent the
amounts to Santiago.
We hold that the CA committed reversible error
when it ruled that respondent did not borrow the
amounts of US$100,000 and P500,000 from
petitioner. We instead agree with the ruling of the
RTC making respondent liable for the principal
amounts of the loans.
We do not, however, agree that respondent is liable
for the 3% and 4% monthly interest for the
US$100,000 and P500,000 loans respectively. There
was no written proof of the interest payable except
for the verbal agreement that the loans would earn
3% and 4% interest per month. Article 1956 of the
Civil Code provides that "[n]o interest shall be due
unless it has been expressly stipulated in writing."
Be that as it may, while there can be no stipulated
interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled
that: When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due
should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 of the Civil Code.
Hence, respondent is liable for the payment of legal
interest per annum to be computed from November
21, 1995, the date when she received petitioner's
demand letter. From the finality of the decision until
it is fully paid, the amount due shall earn interest at
12% per annum, the interim period being deemed
equivalent to a forbearance of credit
B. COMMODATUM
COMMODATUM
SECTION 1 - Nature of Commodatum
Art. 1935. The bailee in commodatum acquires the
used of the thing loaned but not its fruits; if any
compensation is to be paid by him who acquires the
use, the contract ceases to be a commodatum.
(1941a)
Art. 1936. Consumable goods may be the subject
of commodatum if the purpose of the contract is not
the consumption of the object, as when it is merely
for exhibition. (n)
Art. 1937. Movable or immovable property may be
the object of commodatum. (n)
Art. 1938. The bailor in commodatum need not be
the owner of the thing loaned. (n)
Art. 1939. Commodatum is purely personal in
character. Consequently:
(1) The death of either the bailor or the bailee
extinguishes the contract;
(2) The bailee can neither lend nor lease the object
of the contract to a third person. However, the
members of the bailee's household may make use of
the thing loaned, unless there is a stipulation to the
contrary, or unless the nature of the thing forbids
such use. (n)
Art. 1940. A stipulation that the bailee may make
use of the fruits of the thing loaned is valid. (n) 
 In case of temporary use by the bailor, the contract
SECTION 2. - Obligations of the Bailee


Art. 1941. The bailee is obliged to pay for the
ordinary expenses for the use and preservation of
the thing loaned. (1743a)
Art. 1942. The bailee is liable for the loss of the
thing, even if it should be through a fortuitous
event:
(1) If he devotes the thing to any purpose different
from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated,
or after the accomplishment of the use for which
the commodatum has been constituted;
(3) If the thing loaned has been delivered with
appraisal of its value, unless there is a stipulation
exemption the bailee from responsibility in case of a
fortuitous event;
(4) If he lends or leases the thing to a third person,
who is not a member of his household;
(5) If, being able to save either the thing borrowed
or his own thing, he chose to save the latter. (1744a
and 1745)
Art. 1943. The bailee does not answer for the
deterioration of the thing loaned due only to the use
thereof and without his fault. (1746)
Art. 1944. The bailee cannot retain the thing loaned
on the ground that the bailor owes him something,
even though it may be by reason of expenses.
However, the bailee has a right of retention for
damages mentioned in Article 1951. (1747a)
Art. 1945. When there are two or more bailees to
whom a thing is loaned in the same contract, they
are liable solidarily. (1748a) 

SECTION 3. - Obligations of the Bailor


Art. 1946. The bailor cannot demand the return of
the thing loaned till after the expiration of the
period stipulated, or after the accomplishment of the
use for which the commodatum has been
constituted. However, if in the meantime, he should
have urgent need of the thing, he may demand its
return or temporary use.
of commodatum is suspended while the thing is in
the possession of the bailor. (1749a)
Art. 1947. The bailor may demand the thing at will,
and the contractual relation is called a precarium, in
the following cases:
(1) If neither the duration of the contract nor the use
to which the thing loaned should be devoted, has
been stipulated; or
(2) If the use of the thing is merely tolerated by the
owner. (1750a)
Art. 1948. The bailor may demand the immediate
return of the thing if the bailee commits any act of
ingratitude specified in Article 765. (n)
Art. 1949. The bailor shall refund the extraordinary
expenses during the contract for the preservation of
the thing loaned, provided the bailee brings the
same to the knowledge of the bailor before
incurring them, except when they are so urgent that
the reply to the notification cannot be awaited
without danger.
If the extraordinary expenses arise on the occasion
of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne
equally by both the bailor and the bailee, unless
there is a stipulation to the contrary. (1751a)
Art. 1950. If, for the purpose of making use of the
thing, the bailee incurs expenses other than those
referred to in Articles 1941 and 1949, he is not
entitled to reimbursement. (n)
Art. 1951. The bailor who, knowing the flaws of
the thing loaned, does not advise the bailee of the
same, shall be liable to the latter for the damages
which he may suffer by reason thereof. (1752)
Art. 1952. The bailor cannot exempt himself from
the payment of expenses or damages by abandoning
the thing to the bailee. (n)
REPUBLIC OF THE PHILIPPINES (BUREAU
OF LANDS) vs.
THE HON. COURT OF APPEALS. [G.R. No.
L-46145. November 26, 1986.]
FACTS:
The respondents has a land they wanted to
apply for registration, they have a possessory
information title coupled with their continuous,
adverse and public possession over the land in
question. An examination of the possessory
information title shows that the description and the
area of the land stated therein substantially
coincides with the land applied for and that said
possessory information title had been regularly
issued having been acquired by applicants'
predecessor, Domingo Baloy, under the provisions
of the Spanish Mortgage Law. Applicants presented
their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration
alleging that this land had become public land thru
the operation of Act 627 of the Philippine
Commission. On November 26, 1902 pursuant to
the executive order of the President of the U.S., the
area was declared within the U.S. Naval
Reservation.
Under Act 627 as amended by Act 1138, a period
was fixed within which persons affected thereby
could file their application, (that is within 6 months
from July 8, 1905) otherwise "the said lands or
interests therein will be conclusively adjudged to be
public lands and all claims on the part of private
individuals for such lands or interests therein not to
presented will be forever barred."
Petitioner argues that since Domingo Baloy failed
to file his claim within the prescribed period, the
land had become irrevocably public and could not
be the subject of a valid registration for private
ownership.
The warning was from the Clerk of the Court of
Land Registration, named J.R. Wilson and there has
not been presented a formal order or decision of the
said Court of Land Registration so declaring the
land public because of that failure, it can with
plausibility be said that after all, there was no
judicial declaration to that effect, it is true that the
U.S. Navy did occupy it apparently-for some time,
as a recreation area, as this Court understands from
the communication of the Department of Foreign
Affairs to the U.S. Embassy exhibited in the record,
but the very tenor of the communication apparently
seeks to justify the title of herein applicants, in other
words, what this Court has taken from the
occupation by the U.S. Navy is that during the
interim, the title of applicants was in a state of
suspended animation so to speak but it had not died
either; and the fact being that this land was really
originally private from and after the issuance and
inscription of the possessory information Exh. F
during the Spanish times, it would be most difficult
to sustain position of Director of Lands that it was
land of no private owner; open to public imposition,
and over which he has control; and since
immediately after U.S. Navy had abandoned the
area, applicant came in and asserted title once again,
only to be troubled by first Crispiniano Blanco who
however in due time, quitclaimed in favor of
applicants, and then by private oppositors now,
apparently originally tenants of Blanco, but that
entry of private oppositors sought to be given color
of ownership when they sought to and did file tax
declaration in 1965, should not prejudice the
original rights of applicants thru their possessory
information secured regularly so long ago, the
conclusion must have to be that after all, applicants
had succeeded in bringing themselves within the
provisions of Sec. 19 of Act 496, the land should be
registered in their favor.
ISSUE: Whether or not this is commodatum?
HELD: It is commodatum.
The finding of respondent court that during the
interim of 57 years from November 26, 1902 to
December 17, 1959 (when the U.S. Navy possessed
the area) the possessory rights of Baloy or heirs
were merely suspended and not lost by prescription,
is supported by Exhibit "U," a communication or
letter No. 1108-63, dated June 24, 1963, which
contains an official statement of the position of the
Republic of the Philippines with regard to the status
of the land in question. Said letter recognizes the
fact that Domingo Baloy and/or his heirs have been
in continuous possession of said land since 1894 as
attested by an "Informacion Possessoria" Title,
which was granted by the Spanish Government.
Hence, the disputed property is private land and this
possession was interrupted only by the occupation
of the land by the U.S. Navy in 1945 for
recreational purposes. The U.S. Navy eventually
abandoned the premises. The heirs of the late
Domingo P. Baloy, are now in actual possession,
and this has been so since the abandonment by the
U.S. Navy. A new recreation area is now being used
by the U.S. Navy personnel and this place is remote
from the land in question.
Clearly, the occupancy of the U.S. Navy was not in
the concept of owner. It partakes of the character of
a commodatum. It cannot therefore militate against
the title of Domingo Baloy and his successors-in-
interest. One's ownership of a thing may be lost by
prescription by reason of another's possession if
such possession be under claim of ownership, not
where the possession is only intended to be
transient, as in the case of the U.S. Navy's
occupation of the land concerned, in which case.
Quintos vs Beck
G.R. No. L-46240 November 3, 1939
MARGARITA QUINTOSvs. BECK,
FACTS:
Defendant Beck was a tenant of the plaintiff
and as such, occupied the latter’s house. In 1936,
the plaintiff gratuitously granted to Beck the use of
the furniture, subject to the condition that Beck
would return them to the plaintiff upon the latter’s
demand. The plaintiff sold the property to the
Lopezes and on September 1936, they notified Beck
of the conveyance, giving him 60 days to vacate.
The plaintiff also required Beck to return all the
furniture in the house where they were found.
Beck wrote to the plaintiff stating that she may call
for the furniture in the ground floor of the house.
Beck later informed the plaintiff that he could not
give up 3 gas heaters and 4 electric lamps because
he would use them until the 15th of the month when
the lease is due to expire. Plaintiff refused to get the
furniture in view of the fact that the defendant had
declined to make delivery of all of them. Upon the
expiration of the lease and before vacating the
house, Beck deposited with the Sheriff all the
furniture belonging to the plaintiff.
Plaintiff brought an action to compel Beck to return
the furniture. CFI ordered that Beck return the
heaters and lamps, that plaintiff may call for the
other furniture from the sheriff at her own expense,
and that the fees which the Sheriff may charge for
the deposit of the furniture be paid pro rata by both
parties. Plaintiffs appealed the ruling.
To dispose of the case, it is only necessary to decide
whether the defendant complied with his obligation
to return the furniture upon the plaintiff's demand;
whether the latter is bound to bear the deposit fees
thereof, and whether she is entitled to the costs of
litigation.
ISSUE: W/N a contract of commodatum existed
between the parties
HELD: YES. The contract entered into between the
parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture
to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound
himself to return the furniture to the plaintiff, upon
the latter’s demand. The obligation voluntarily
assumed by the defendant to return the furniture
upon the plaintiff's demand, means that he
should return all of them to the plaintiff at the
latter's residence or house. The defendant did not
comply with this obligation when he merely
placed them at the disposal of the plaintiff,
retaining for his benefit the heaters and lamps. The
provisions of article 1169 of the Civil Code cited by
counsel for the parties are not squarely applicable.
The trial court, therefore, erred when it came to the
legal conclusion that the plaintiff failed to comply
with her obligation to get the furniture when they
were offered to her.
As the defendant had voluntarily undertaken
to return all the furniture to the plaintiff, upon the
latter's demand, the Court could not legally compel
her to bear the expenses occasioned by the deposit
of the furniture at the defendant's behest. The latter,
as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept
the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and
the four electric lamps.
As to the value of the furniture, we do not
believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to
return some of the furniture because under
paragraph 6 of the stipulation of facts, the defendant
has neither agreed to nor admitted the correctness of
the said value. Should the defendant fail to deliver
some of the furniture, the value thereof should be
latter determined by the trial Court through
evidence which the parties may desire to present.
The costs in both instances should be borne by the
defendant. The defendant was the one who breached
the contract of commodatum. In these
circumstances, it is just that he pay the legal
expenses and other judicial costs which the plaintiff
would not have otherwise defrayed. The appealed
judgment is modified and the defendant is ordered
to return and deliver to the plaintiff, in the residence
to return and deliver to the plaintiff, in the residence
or house of the latter, all the furniture. The expenses
which may be occasioned by the delivery to and
deposit of the furniture with the Sheriff shall be for
the account of the defendant.
Delos Santos v. Jarra Digest
G.R. No. L-4150 February 10, 1910
Facts:
The Plaintiff Felix delos Santos filed this
suit against Agustina Jarra. Jarra was the
administratix of the estate of Jimenea. Plaintiff
alleged that he owned 10 1st class carabaos which
he lent to his father-in-law Jimenea to be used in the
animal-power mill without compensation. This was
done on the condition of their return after the work
at the latter’s mill is terminated. When delos Santos
demanded the return of the animals Jimenea
refused, hence this suit.
Issue: W/N the contracts is one of a commodatum
Ruling: YES. The carabaos were given on
commodatum as these were delivered to be used by
defendant. Upon failure of defendant to return the
cattle upon demand, he is under the obligation to
indemnify the plaintiff by paying him their value.
Since the 6 carabaos were not the property of the
deceased or of any of his descendants, it is the duty
of the administratrix of the estate to either return
them or indemnify the owner thereof of their value.
C. SIMPLE LOAN
SIMPLE LOAN OR MUTUUM

Art. 1953. A person who receives a loan of money
or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality. (1753a)
Art. 1954. A contract whereby one person transfers
the ownership of non-fungible things to another
with the obligation on the part of the latter to give
things of the same kind, quantity, and quality shall
be considered a barter. (n)
Art. 1955. The obligation of a person who borrows
money shall be governed by the provisions of
Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than
money, the debtor owes another thing of the same
kind, quantity and quality, even if it should change
in value. In case it is impossible to deliver the same
kind, its value at the time of the perfection of the
loan shall be paid.
Art. 1980. Fixed, savings, and current deposits of
money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
Emilia Manzano vs. the Perezes
(re COMMODATUM)
Petition for review, assailing CA’s decision, which
reversed RTC, dismissing the complaint.
RTC voided the deeds of absolute sale, and ordered
the transfer of lot to Manzano.
Petitioner Emilia Manzano filed a complaint for
annulment of sale against respondents alleging that
she is the owner of the subject residential lot; that in
1979, her sister Nieves Manzano, and predecessor-
in-interest of the herein private respondents,
allegedly borrowed the aforementioned property as
collateral for a projected loan; that she acceded to
the request of her sister upon the latter's promise
that she would return the property immediately
upon payment of her loan. Pursuant to their
understanding, petitioner executed two deeds of
conveyance for the sale of the residential lot on 22
January 1979 and the sale of the house erected
thereon on 2 February 1979, both for a
consideration, plus other valuables allegedly
received by her from Nieves Manzano. After Nieves
died, respondents allegedly refused to return the
subject property to the petitioner even after the
payment of their loan with the Rural Bank.
Petitioner sought the annulment of the deeds of sale
and execution of a deed of transfer or reconveyance
of the subject property in her favor.
The trial court ruled in favor of petitioner. On
appeal, the Court of Appeals reversed the decision
of the trial court. The appellate court was not
convinced by petitioner's claim that there was a
supposed oral agreement of commodatum over the
disputed house and lot. Neither was it persuaded by
her allegation that respondents' predecessor-in-
interest had given no consideration for the sale of
the property in the latter's favor.
Basis of CA ruling:
CA not convinced by Emilia’s claim that there was
an oral agreement of commodatum.
If Emilia was the owner, she would not have agreed
to reacquire 1⁄2 for P10,000.
If agreement was merely to use the property as
collateral, it was not explained why the physical
possession was with the Respondent.
Failure to present payment of real estate tax does
not affect Resp’s claim. Realty tax payment 
 execution thereof, there must be clear and
is not conclusive evidence of ownership. Tax
payments only become conclusive proof is
accompanied by proof of actual possession. And
Emilia was not in possession, hence tax payment
could not go in her favor.
Tax declaration was named after Nieves upon
request of Emilia.
Presumption that a written contract is for a valuable
consideration.
Hence, the present petition.
ISSUE: whether the agreement between the parties
was a commodatum ORan absolute sale?
HELD: Sale

The Supreme Court affirmed the decision of
the Court of Appeals. Petitioner has failed to
discharge her burden of proving her case by
preponderance of evidence. She has presented no
convincing proof of her continued ownership of the
subject property. In addition to her own oral
testimony, she submitted proof of payment of real
property taxes. But the payment, which was made
only after her complaint had already been lodged
before the trial court, was not considered by the
Court in her favor for being self-serving. The Court
did not also give weight to her allegation that
respondents' possession of the subject property was
merely by virtue of her tolerance. The Court ruled
that petitioner's bare allegations, unsubstantiated by
evidence, are not equivalent to proof under our
Rules. On the other hand, respondents presented
two Deeds of Sale, which petitioner executed in
favor of the former's predecessor-in-interest. Both
deeds — for the residential lot and for the house
erected thereon — were each in consideration of
P1.00 "plus other valuables." Having been
notarized, they are presumed to have been duly
executed. Also issued in favor of respondents'
predecessor-in-interest the day after the sale was
Tax Declaration No. 9589 which covered the
property. The Court also stressed that oral testimony
cannot, as a rule, prevail over a written agreement
of the parties. In order to contradict the facts
contained in a notarial document, such as the two
"Kasulatan ng BilihangTuluyan" in the instant case,
as well as the presumption of regularity in the
convincing evidence that is more than merely
preponderant. In the instant case, petitioner has
failed to come up with even a preponderance of
evidence to prove her claim.
WHEREFORE, the Petition is hereby DENIED and
the assailed Decision AFFIRMED. Costs against
petitioner.
C. Simple Loan/Mutuum
Producers Bank of the Philippines (now First
Int’l Bank) v CA
Facts:
Vives (will be the creditor in this case) was asked
by his friend Sanchez to help the latter’s friend,
Doronilla (will be the debtor in this case) in
incorporating Doronilla’s business “Strela”. This
“help” basically involved Vives depositing a certain
amount of money in Strela’s bank account for
purposes of incorporation (rationale: Doronilla had
to show that he had sufficient funds for
incorporation). This amount shall later be returned
to Vives.Relying on the assurances and
representations of Sanchez and Doronilla, Vives
issued a check of P200,00 in favor of Strela and
deposited the same into Strela’s newly-opened bank
account (the passbook was given to the wife of
Vives and the passbook had an instruction that no
withdrawals/deposits will be allowed unless the
passbook is presented).Later on, Vives learned that
Strela was no longer holding office in the address
previously given to him. He later found out that the
funds had already been withdrawn leaving only a
balance of P90,000. The Vives spouses tried to
withdraw the amount, but it was unable to since the
balance had to answer for certain postdated checks
issued by Doronilla.Doronilla made various tenders
of check in favor of Vives in order to pay his debt.
All of which were dishonored.Hence, Vives filed an
action for recovery of sum against Doronilla,
Sanchez, Dumagpi and Producer’s Bank.
TC & CA: ruled in favor of Vives.
Issue/s:
Whether the transaction is a commodatum or a
mutuum. COMMODATUM.
WON the fact that there is an additional P 12,000
(allegedly representing interest) in the amount to be
returned to Vives converts the transaction from
commodatum to mutuum. NO.
WON Producer’s Bank is solidarily liable to Vives,
considering that it was not privy to the transaction
between Vives and Doronilla.
Held/Ratio:
YES. The transaction is a commodatum.
CC 1933 (the provision distinguishing between the
two kinds of loans) seem to imply that if the subject
of the contract is a consumable thing, such as
money, the contract would be a mutuum. However,
there are instances when a commodatum may have
for its object a consumable thing. Such can be found
in CC 1936 which states that “consumable goods
may be the subject of commodatum if the purpose
of the contract is not the consumption of the object,
as when it is merely for exhibition”. In this case, the
intention of the parties was merely for exhibition.
Vives agreed to deposit his money in Strela’s
account specifically for purpose of making it appear
that Streal had sufficient capitalization for
incorporation, with the promise that the amount
should be returned withing 30 days.
CC 1935 states that “the bailee in commodatum
acquires the use of the thing loaned but not its
fruits”. In this case, the additional P 12,000
corresponds to the fruits of the lending of the P
200,000.
Atienza, the Branch Manager of Producer’s Bank,
allowed the withdrawals on the account of Strela
despite the rule written in the passbook that neither
a deposit, nor a withdrawal will be permitted except
upon the production of the passbook (recall in this
case that the passbook was in the possession of the
wife of Vives all along). Hence, this only proves to
show that Atienza allowed the withdrawals because
he was party to Doronilla’s scheme of defrauding
Vives. By virtue of CC 2180, PNB, as employer, is
held primarily and solidarily liable for damages
caused by their employees acting within the scope
of their assigned tasks. Atienza’s acts, in helping
Doronilla, a customer of the bank, were obviously
done in furtherance of the business of the bank,
even though in the process, Atienza violated some
rules.
WHEREFORE, the petition is hereby DENIED.
The assailed Decision and Resolution of the Court
of Appeals are AFFIRMED.
Note ha:
 transaction from a commodatum into a mutuum
2. CIVIL LAW; SPECIAL CONTRACTS; LOAN;
M U T U U M A N D C O M M O D AT U M ,
DISTINGUISHED. — Article 1933 of the Civil
Code distinguishes between the two kinds of loans
in this wise: By the contract of loan, one of the
parties delivers to another, either something not
consumable so that the latter may use the same for a
certain time and return it, in which case the contract
is called a commodatum; or money or other
consumable thing, upon the condition that the same
amount of the same kind and quality shall be paid,
in which case the contract is simply called a loan or
mutuum. Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation
to pay interest. In commodatum, the bailor retains
the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower. The
foregoing provision seems to imply that if the
subject of the contract is a consumable thing, such
as money, the contract would be a mutuum.
However, there are some instances where a
commodatum may have for its object a consumable
thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of
commodatum if the purpose of the contract is not
the consumption of the object, as when it is merely
for exhibition. Thus, if consumable goods are
loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods
and to have the very same goods returned at the end
of the period agreed upon, the loan is a
commodatum and not a mutuum. The rule is that the
intention of the parties thereto shall be accorded
primordial consideration in determining the actual
character of a contract. In case of doubt, the
contemporaneous and subsequent acts of the parties
shall be considered in such determination.
3. ID.; ID.; ID.; ADDITIONAL AMOUNT PAID
TO O R I G I N A L A M O U N T L O A N E D A S
INTEREST DID NOT CONVERT AGREEMENT
O F C O M M O D AT U M TO M U T U U M . —
Doronilla's attempts to return to private respondent
the amount of P200,000.00 which the latter
deposited in Sterela's account together with an
additional P12,000.00, allegedly representing
interest on the mutuum, did not convert the
because such was not the intent of the parties and
because the additional P12,000.00 corresponds to
the fruits of the lending of the P200,000.00. Article
1935 of the Civil Code expressly states that
"[t]hebailee in commodatum acquires the use of the
thing loaned but not its fruits." Hence, it was only
proper for Doronilla to remit to private respondent
the interest accruing to the latter's money deposited
with petitioner.
Saura Import & Export Co. Inc. v. DBP (re
Simple Loan)
In July 1952, Saura, Inc., applied to Rehabilitation
Finance Corp. (RFC), now DBP, for an industrial
loan of P500,000 to be used for the construction of
a factory building, to pay the balance of the jute
mill machinery and equipment and as additional
working capital. In Resolution No.145, the loan
application was approved to be secured first by
mortgage on the factory buildings, the land site, and
machinery and equipment to be installed.
The mortgage was registered and documents for the
promissory note were executed. But then, later on,
was cancelled to make way for the registration of a
mortgage contract over the same property in favor
of Prudential Bank and Trust Co., the latter having
issued Saura letter of credit for the release of the
jute machinery. As security, Saura execute a trust
receipt in favor of the Prudential. For failure of
Saura to pay said obligation, Prudential sued Saura.
After almost 9 years, SauraInc, commenced an
action against RFC, alleging failure on the latter to
comply with its obligations to release the loan
applied for and approved, thereby preventing the
plaintiff from completing or paying contractual
commitments it had entered into, in connection with
its jute mill project.
The trial court ruled in favor of Saura, ruling that
there was a perfected contract between the parties
and that the RFC was guilty of breach thereof.
ISSUE: Whether or not there was a perfected
contract between the parties
HELD:
YES. There was indeed a perfected consensual
contract.
Article 1934 provides: An accepted promise to
deliver something by way of commodatum or
simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be
perfected until delivery of the object of the contract.
There was undoubtedly offer and acceptance in the
case. The application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was
executed and registered. The defendant failed to
fulfill its obligation and the plaintiff is therefore
entitled to recover damages.When an application for
a loan of money was approved by resolution of the
respondent corporation and the responding
mortgage was executed and registered, there arises a
perfected consensual contract.However, it should be
noted that RFC imposed two conditions (availability
of raw materials and increased production) when it
restored the loan to the original amount of
P500,000.00.Saura, Inc. obviously was in no
position to comply with RFC’s conditions. So
instead of doing so and insisting that the loan be
released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled.The action thus taken by
both parties was in the nature of mutual desistance
which is a mode of extinguishing obligations. It is a
concept that derives from the principle that since
mutual agreement can create a contract, mutual
disagreement by the parties can cause its
extinguishment.
WHEREFORE, the judgment appealed from is
reversed and the complaint dismissed.
Note:
1 . C I V I L L AW ; O B L I G AT I O N S A N D
CONTRACTS; CONTRACTS; PERFECTION
UPON ACCEPTANCE OF PROMISE TO
DELIVER SOMETHING BY WAY OF SIMPLE
LOAN; ART. 1954 OF THE CIVIL CODE. —
Where the application of Saura Inc. for a loan of
P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage
executed and registered, there is undoubtedly offer
and acceptance and We hold that there was indeed a
perfected consensual contract as recognized in
Article 1954 of the Civil Code.
2. ID.; ID.; ID.; ID.; DEFENDANT DID NOT
DEVIATE FROM PERFECTED CONTRACT IN
CASE AT BAR. — The terms laid down in RFC
Resolution No. 145 passed on Jan. 7, 1954 which
resolution approved the loan application state that:
"the proceeds of the loan shall be utilized
exclusively for the following purposes: for
construction of factory building — P250,000.00; for
payment of the balance of purchase price of
machinery and equipment — P240,900.00, for
working capital — P9,100.00." There is no serious
dispute that RFC entertained the loan application of
Saura Inc., on the assumption that the factory to be
constructed would utilize locally grown raw
materials principally kenaf . It was in line with such
assumption that when RFC, by Resolution 9083
approved on December 17, 1954, restored the loan
to the original amount of P500,000.00, it imposed
two conditions to wit: (1) that the raw materials
needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity
and (2) that there is prospect of increased
production thereof to provide adequately for the
requirements of the factory." The imposition of
those conditions was by no means a deviation from
the terms of the agreement, but rather a step in its
implementation. There was nothing in said
conditions that contradicted RFC Resolution No.
145.
3. ID.; ID.; ID.; ID.; DEVIATION MADE BY
PLAINTIFF. — Evidently Saura Inc., realized that
it could not meet the conditions required by RFC in
Resolution 9083, and so wrote its letter of January
21, 1955, stating that local jute "will not be
available in sufficient quantity this year or probably
next year," and asking that out of the loan agreed
upon, the sum of P67,586.09 be released "for raw
materials and labor." This was a deviation from the
terms laid down in Resolution No. 145 and
embodied in the mortgage contract, implying as it
did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.
4. ID.; ID.; EXTINGUISHMENT OF
OBLIGATION BY MUTUAL DESISTANCE; IN
INSTANT CASE. — When RFC turned down the
request of Saura Inc., the negotiations which had
been going on for the implementation of the
agreement reached an impasse. Saura Inc.,
obviously was in no position to comply with RFC's
conditions. So instead of doing so and insisting that
the loan be released as agreed upon, Saura Inc.,
asked that the mortgage be cancelled, which was
done on June 15, 1955. The action thus taken by
both parties was in the nature of mutual desistance
— what Manresa terms "mutuodisenso" — which is
a mode of extinguishing obligations. It is a concept
that derives from the principle that since mutual
agreement by the parties can create a contract,
mutual disagreement by the parties can cause its
extinguishment.
BPI Investment Corporation vs CA
GR No. 133632, 15 February 2002
377 SCRA 117
FACTS:
Frank Roa obtained a loan from Ayala
Investment and Development Corporation (AIDC),
for the construction of his house. Said house and lot
were mortgaged to AIDC to secure the loan. Roa
sold the properties to ALS and Litonjua, the latter
paid in cash and assumed the balance of Roa’s
indebtedness wit AIDC. AIDC was not willing to
extend the old interest to private respondents and
proposed a grant of new loan of P500,000 with
higher interest to be applied to Roa’s debt, secured
by the same property. Private respondents executed
a mortgage deed containing the stipulation. The
loan contract was signed on 31 March 1981 and was
perfected on 13 September 1982, when the full loan
was released to private respondents.
BPIIC, AIDC’s predecessor, released to private
respondents P7,146.87, purporting to be what was
left of their loan after full payment of Roa’s loan.
BPIIC filed for foreclosure proceedings on the
ground that private respondents failed to pay the
mortgage indebtedness. Private respondents
maintained that they should not be made to pay
amortization before the actual release of the
P500,000 loan. The suit was dismissed and affirmed
by the CA.
ISSUE: Whether a contract of loan is a consensual
contract.
HELD: NO.
A loan contract is not a consensual contract
but a real contract. It is perfected only upon delivery
of the object of the contract. A contract o loan
involves a reciprocal obligation, wherein the
obligation or promise of each party is the
consideration for that of the other; it is a basic
principle in reciprocal obligations that neither party
incurs in delay, if the other does not comply or is
not ready to comply is a proper manner with what is
incumbent upon him.
Naguiat vs CA and Queaño
GR No. 118375, 03 October 2003
412 SCRA 591
FACTS:
Queaño applied with Naguiat a loan for
P200,000, which the latter granted. Naguiat
indorsed to Queaño Associated bank Check No.
090990 for the amount of P95,000 and issued also
her own Filmanbank Check to the order of Queaño
for the amount of P95,000. The proceeds of these
checks were to constitute the loan granted by
Naguiat to Queaño. To secure the loan, Queaño
executed a Deed of Real Estate Mortgage in favor
of Naguiat, and surrendered the owner’s duplicates
of titles of the mortgaged properties. The deed was
notarized and Queaño issued to Naguiat a
promissory note for the amount of P200,000.
Queaño also issued a post-dated check amounting to
P200,000 payable to the order of Naguait. The
check was dishonoured for insufficiency of funds.
Demand was sent to Queaño. Shortly, Queaño, and
one Ruby Reubenfeldt met with Naguiat. Queaño
told Naguiat that she did not receive the loan
proceeds, adding that the checks were retained by
Reubenfeldt, who purportedly was Naguiat’s agent.
Naguiat applied for extrajudicial foreclosure of the
mortgage. RTC declared the Deed as null and void
and ordered Naguiat to return to Queaño the
owner’s duplicates of titles of the mortgaged lots.
ISSUE: Whether the issuance of check resulted in
the perfection of the loan contract
HELD: NO.
No evidence was submitted by Naguiat that
the checks she issued or endorsed were actually
encashed or deposited. The mere issuance of the
checks did not result in the perfection of the
contract of loan. The Civil Code provides that the
delivery of bills of exchange and mercantile
documents such as checks shall produce the effect
of payment only when they have been cashed. It is
only after the checks have been produced the effect
of payment that the contract of loan may have been
perfected.
Article 1934 of the Civil Code provides: An
accepted promise to deliver something by way of
commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itsel
shall not be perfected until the delivery of the object
of the contract. A loan contract is a real contract, not
consensual, and as such, is perfected only upon the
delivery of the objects of the contract.
Cebu Financial vs CA and Alegre
GR No. 123031, 12 October 1999
316 SCRA 488
FACTS:
Vicente Alegre invested with Cebu
International Finance Corporation (CIFC) P500,000
in cash. CIFC issued promissory note which
covered private respondent’s placement. CIFC
issued BPI Check No. 513397 (the Check) in favor
of private respondent as proceeds of his matured
investment. Mrs. Alegre deposited the Check with
RCBC but BPI dishonoured it, annotating therein
that the “Check is subject of an investigation”. BPI
took possession of the Check pending investigation
of several counterfeit checks drawn against CIFC’s
checking account. Private respondent demanded
from CIFC that he be paid in cash but the latter
refused. Private respondent Alegre filed a case for
recovery of a sum of money against CIFC.
CIFC asserts that since BPI accepted the instrument,
the bank became primarily liable for the payment of
the Check. When BPI offset the value of the Check
against the losses from the forged cheks allegedly
committed by private respondent, the Check was
deemed paid.
ISSUE: Whether petitioner CIFC is discharged
from the liability of paying the value of the Check.
HELD: NO.
In a money market transaction, the investor
is a lender who loans his money to a borrower
through a middleman or dealer. A check is not legal
tender, and therefore cannot constitute valid tender
of payment. Since a negotiable instrument is only
substitute for money and not money, the delivery of
such an instrument does not by itself, operate as
payment. Mere delivery of checks does not
discharge the obligation under a judgment. The
obligation is not extinguished and remains
suspended until the payment by commercial
document is actually realized (Article 1249).
Petition denied.
PANTALEON VS AMERICAN EXPRESS
G.R. No. 174269, May 8 2009
FACTS:
After the Amsterdam incident that happened
involving the delay of American Express Card to
approve his credit card purchases worth
US$13,826.00 at the Coster store, Pantaleon
commenced a complaint for moral and exemplary
damages before the RTC against American Express.
He said that he and his family experienced
inconvenience and humiliation due to the delays in
credit authorization. RTC rendered a decision in
favor of Pantaleon. CA reversed the award of
damages in favor of Pantaleon, holding that AmEx
had not breached its obligations to Pantaleon, as the
purchase at Coster deviated from Pantaleon's
established charge purchase pattern.
ISSUE: 1. Whether or not AmEx had
committed a breach of its obligations to Pantaleon.
2. Whether or not AmEx is liable for damages.
HELD:
1. Yes. The popular notion that credit card
purchases are approved “within seconds,” there
really is no strict, legally determinative point of
demarcation on how long must it take for a credit
card company to approve or disapprove a
customer’s purchase, much less one specifically
contracted upon by the parties. One hour appears to
be patently unreasonable length of time to approve
or disapprove a credit card purchase.
The culpable failure of AmEx herein is not the
failure to timely approve petitioner’s purchase, but
the more elemental failure to timely act on the
same, whether favorably or unfavorably. Even
assuming that AmEx’s credit authorizers did not
have sufficient basis on hand to make a judgment,
we see no reason why it could not have promptly
informed Pantaleon the reason for the delay, and
duly advised him that resolving the same could take
some time.
2. Yes. The reason why Pantaleon is entitled to
damages is not simply because AmEx incurred
delay, but because the delay, for which culpability
lies under Article 1170, led to the particular injuries
under Article 2217 of the Civil Code for which
moral damages are remunerative. The somewhat
unusual attending circumstances to the purchase at
Coster – that there was a deadline for the
completion of that purchase by petitioner before any
delay would redound to the injury of his several
traveling companions – gave rise to the moral
shock, mental anguish, serious anxiety, wounded
feelings and social humiliation sustained by
Pantaleon, as concluded by the RTC.
III. Interest and the Usury Law(Arts 1956 to
1961, 2209, 2212, 2213, Central Bank Circular
No. 799 Series of 2013, Act 2655)
Art. 1956. No interest shall be due unless it has
been expressly stipulated in writing. (1755a)
Art. 1957. Contracts and stipulations, under any
cloak or device whatever, intended to circumvent
the laws against usury shall be void. The borrower
may recover in accordance with the laws on usury.
(n)
Art. 1958. In the determination of the interest, if it
is payable in kind, its value shall be appraised at the
current price of the products or goods at the time
and place of payment. (n)
Art. 1959. Without prejudice to the provisions of
Article 2212, interest due and unpaid shall not earn
interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid,
which as added principal, shall earn new interest.
(n)
Art. 1960. If the borrower pays interest when there
has been no stipulation therefor, the provisions of
this Code concerning solutio indebiti, or natural
obligations, shall be applied, as the case may be. (n)
Art. 1961. Usurious contracts shall be governed by
the Usury Law and other special laws, so far as they
are not inconsistent with this Code. (n) 

Art. 2209. If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent
per annum.
Art. 2212. Interest due shall earn legal interest from
the time it is judicially demanded, although the
obligation may be silent upon this point. (1109a)
Art. 2213. Interest cannot be recovered upon
unliquidated claims or damages, except when the
demand can be established with reasonably
certainty
JARDENIL V. SOLAS
G.R. No. L-47878
24 July 1942
FACTS:
The case is an action for foreclosure of mortgage.
Paragraph 4 of the mortgage deed between the
parties states that Solas agrees to pay Jardenil on or
before 31 March 1934 the amount of P 2,400 with
the interests of the sum at the rate of 12% per year
starting from the date of execution until its maturity
date on 31 March 1934. The mortgage also includes
an extension note of one year from the date of
maturity within which to make payment, without
making any mention of any interest which the
mortgagor should pay during the additional period.
ISSUE:
Whether or not defendant-appellee (Solas) is bound
to pay the stipulated interest continuously up to the
date of payment, regardless whether the actual date
of payment is beyond the stipulated maturity date
HELD: No.
The Court ruled that Solasclearly agreed to
pay interest only up to the date of maturity, or until
March 31, 1934. As the contract is silent as to
whether after that date, in the event of non-payment,
the debtor would continue to pay interest, the Court
cannot in law, indulge in any presumption as to such
interest; otherwise, the Court would be imposing
upon the debtor an obligation that the parties have
not chosen to agree upon. Article 1755 of the (old)
Civil Code provides that "interest shall be due only
when it has been expressly stipulated."
There is nothing in the mortgage deed to show that
the terms stipulated go against the intention of the
parties. Neither has either of the parties shown that,
by mutual mistake, the deed of mortgage fails to
express their agreement since the plaintiff, Jardenil,
did not adduce evidence to establish such mistake.
Since the parties included an extension note of one
year within which to make payment without
mentioning that additional interests should be paid
during that extended period, it can be deduced that
parties intended that no interest should be paid
during the period of grace.
The contract is clear and unmistakable and the
terms employed therein have not been shown to
belie or otherwise fail to express the true intention
of the parties and that the deed has not been assailed
on the ground of mutual mistake which would
require its reformation, same should be given its full
force and effect.
Plaintiff is, therefore, entitled only to the stipulated
interest of 12 per cent on the loan of P2,400 from
November 8, 1932 to March 31, 1934. And it being
a fact that extra judicial demands have been made
on the expiration of the year of grace, he shall be
entitled to legal interest upon the principal and the
accrued interest from April 1, 1935, until full
payment.
CU UNJIENG E HIJOS, Plaintiffs-
Appellees, v. THE MABALACAT SUGAR
COMPANY, ET AL., defendants. 

THE MABALACAT SUGAR
COMPANY, Appellant.
Facts:
Petitioner Cu Unjieng E Hijos, filed an action in the
CFI of Pampanga for purpose of recovering from
the Mabalacat Sugar Company an indebtedness
amounting to P 163,000, with interest, and to
foreclose a mortgage given by the debtor, as well as
attorney’s fees and insurance of the mortgaged
property.
Judgement was rendered in favor of the petitioner.
Respondent Mabalacat Sugar appealed. It raised
two errors from the judgment.
(1) as to whether the action was prematurely started
– although, non compliance on the part of the
mortgage debtor will cause the entire debt due and
foreclosure of the mortgage, the petitioner agreed to
extend the time for payment of the mortgage until
June 30, 1929 with certain interim payments to be
made.
According to the respondent, the agreement for the
extension of time of payment had the effect of
abrogating the stipulation of the original contract
with respect to the acceleration of the maturity of
the debt by non-compliance with the terms of
mortgage.
(2) as to the propriety of the interest charges made
by the petitioner in estimating the amount of the
indebtedness. Interest should be calculated upon the
indebtedness at the rate 12 per cent per annum.
(3) excessive of the attorneys fees allowed by the
court
(4) failure of the trial court to permit an amendment
to be filed by the debtor to its answer
Issue: WON the payment charged was usurious
being in excess of 12% percent?
Held: Yes.
It is well settled that, under article 1109 of
the Civil Code, as well as under section 5 of the
Usury Law (Act No. 2655), the parties may
stipulate that interest shall be compounded; and
rests for the computation of compound interest can
certainly be made monthly, as well as quarterly,
semiannually, or annually. But in the absence of
express stipulation for the accumulation of
compound interest, no interest can be collected
upon interest until the debt is judicially claimed,
and then the rate at which interest upon accrued
interest must be computed is fixed at 6 per cent per
annum.
In the present case, however, the language which
we have quoted above does not justify the charging
of interest upon interest, so far as interest on the
capital is concerned. The provision quoted merely
requires the debtor to pay interest monthly at the
end of each month, such interest to be computed
upon the capital of the loan not already paid.
Clearly this provision does not justify the charging
of compound interest upon the interest accruing
upon the capital monthly. It is true that in
subsections (a), (b) and (c) of article IV of the
mortgage, it is stipulated that the interest can be
thus computed upon sums which the creditor would
have to pay out (a) to maintain insurance upon the
mortgaged property, (b) to pay the land tax upon the
same property, and (c) upon disbursements that
might be made by the mortgagee to maintain the
property in good condition. But the chief thing is
that interest cannot be thus accumulated on unpaid
interest accruing upon the capital of the debt.
THE GOVERNMENT SERVICE INSURANCE
SYSTEM, 
 denominated by the GSIS as Account No. 31442.
vs.
 The Medinas having defaulted in the payment of the
HONORABLE COURT OF APPEALS,.
G.R. No. L-52478 October 30, 1986
PARAS, J.:
Facts:
Private respondents spouses Nemencio R. Medina
and Josefina G. Medina (Medinas for short) applied
with the herein petitioner Government Service
Insurance System (GSIS for short) for a loan of
P600,000.00.
The GSIS Board of Trustees approved under
Resolution No. 5041 only the amount of
P350,000.00, subject to the following conditions:
that the rate of interest shall be 9% per annum
compounded monthly; repayable in ten (10) years at
a monthly amortization of P4,433.65 including
principal and interest, and that any installment or
amortization that remains due and unpaid shall bear
interest at the rate of 9%/12% per month.
The Office of the Economic Coordinator, in a 2nd
Indorsement dated March 26, 1962, further reduced
the approved amount to P295,000.00. The Medinas
accepting the reduced amount, executed a
promissory note and a real estate mortgage in favor
of GSIS.
GSIS and the Office of the Economic Coordinator,
upon request of the Medinas, both approved the
restoration of the amount of P350,000.00
(P295,000.00 + P55,000.00) originally approved by
the GSIS. This P350,000.00 loan was denominated
by the GSIS as Account No. 31055.
The Medinas executed in favor of the GSIS an
Amendment of Real Estate Mortgage
Upon application by the Medinas, the GSIS Board
of Trustees adopted Resolution No. 121 on January
18, 1963, as amended by Resolution No. 348 dated
February 25, 1963, approving an additional loan of
P230,000.00 in favor of the Medinas on the security
of the same mortgaged properties and the additional
properties covered by TCT Nos. 49234, 49235 and
49236, to bear interest at 9% per annum
compounded monthly and repayable in ten years.
This additional loan of P230,000.00 was
monthly amortization on their loan, the GSIS
imposed 9%/12% interest on an installments due
and unpaid. In 1967, the Medinas began defaulting
in the payment of fire insurance premiums.
GSIS notified the Medinas that they had arrearages
in the aggregate amount of P575,652.42 as of April
18, 1974 and demanded payment within seven (7)
days from notice thereof, otherwise, it would
foreclose the mortgage.
GSIS filed an Application for Foreclosure of
Mortgage with the Sheriff of the City of Manila.
The Medinas filed with the Court of First Instance
of Manila a complaint, praying, among other things,
that a restraining order or writ of preliminary
injunction be issued to prevent the GSIS and the
Sheriff of the City of Manila from proceeding with
the extra-judicial foreclosure of their mortgaged
properties.
However, in view of Section 2 of Presidential
Decree No. 385, no restraining order or writ of
preliminary injunction was issued by the trial court .
Under a Notice of Sale on Extra-Judicial
Foreclosure dated June 18, 1975, the real properties
of the Medinas were sold at public auction.
The Medinas filed an Amended Complaint with the
trial court, praying for (a) the declaration of nullity
of their two real estate mortgage contracts with the
GSIS as well as of the extra-judicial foreclosure
proceedings; and (b) the refund of excess payments,
plus damages and attorney's fees.
Dissatisfied with the said judgment, both parties
appealed with the Court of Appeals.
CA ruled in favor of the Medinas. Hence, this
petition.
Issue:
WHETHER OR NOT THE COURT OF APPEALS
ERRED IN HOLDING THAT THE INTEREST
RATES ON THE LOAN ACCOUNTS OF
RESPONDENT-APPELLEE SPOUSES ARE
USURIOUS?
Held:
As to whether or not the interest rates on the loan
accounts of the Medinas are usurious, it has already
been settled that the Usury Law applies only to
interest by way of compensation for the use or
forbearance of money (Lopez v. Hernaez, 32 Phil.
631; Bachrach Motor Co. v. Espiritu, 52 Phil. 346;
Equitable Banking Corporation v. Liwanag, 32
SCRA 293, March 30, 1970). Interest by way of
damages is governed by Article 2209 of the Civil
Code of the Philippines which provides:
Art. 2209. If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of
the interest agreed upon,...
In the Bachrach case (supra) the Supreme Court
ruled that the Civil Code permits the agreement
upon a penalty apart from the interest. Should there
be such an agreement, the penalty does not include
the interest, and as such the two are different and
distinct things which may be demanded separately.
Reiterating the same principle in the later case of
Equitable Banking Corp. (supra), where this Court
held that the stipulation about payment of such
additional rate partakes of the nature of a penalty
clause, which is sanctioned by law
TOLOMEO LIGUTAN and LEONIDAS DE LA
LLANA, petitioners, vs. HON. COURT OF
APPEALS & SECURITY BANK & TRUST
COMPANY, respondents
[G.R. No. 138677. February 12, 2002]
VITUG, J.:
Facts:
Petitioners Tolomeo Ligutan and Leonidas dela Lla
na obtained a loan in the amount of P120,000.00
from respondent Security Bank and Trust
Company. Petitioners executed a promissory note
binding themselves, jointly and severally, with an
interest of 15.189% per annum upon maturity and to
pay a penalty of 5% every month on the outstanding
principal and interest in case of default and also a
10% attorney’s fees if the matter were indorsed to a
lawyer for collection.
The obligation matured, the petitioners were not
able to settle the obligation; The bank gave an
extension, still the same happened. Since the
petitioners still defaulted, the former filed a
complaint for recovery of the due amount.
Issue:
Whether the interest and penalty charge imposed by
private respondent bank on petitioners’ loan
aremanifestly exorbitant, iniquitous and
unconscionable?
Held:
The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof
on the existence and on the measure of damages
caused by the breach. Although a court may not at
liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit that
contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the
courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly
complied with.
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly
objective. Its resolution would depend on such
factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its
consequences, the supervening realities, the
standing and relationship of the parties, and the like,
the application of which, by and large, is addressed
to the sound discretion of the court.
The CA exercised good judgment in reducing the
stipulated penalty interest from 5% to 3% a month.
It was also been held that the 15.189% per annum
stipulated interest and the 10% attorney’s is
reasonable and not excessive. The interest
prescribed in loan financing arrangements is a
fundamental part of the banking business and the
core of a bank's existence.
Issue:
Whether the interest and penalty charge imposed by
private respondent bank on petitioners’ loan
aremanifestly exorbitant, iniquitous and
unconscionable?
Held:
The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof
on the existence and on the measure of damages
caused by the breach. Although a court may not at
liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit that
contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the
courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly
complied with.
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly
objective. Its resolution would depend on such
factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its
consequences, the supervening realities, the
standing and relationship of the parties, and the like,
the application of which, by and large, is addressed
to the sound discretion of the court.
The CA exercised good judgment in reducing the
stipulated penalty interest from 5% to 3% a month.
It was also been held that the 15.189% per annum
stipulated interest and the 10% attorney’s is
reasonable and not excessive. The interest
prescribed in loan financing arrangements is a
fundamental part of the banking business and the
core of a bank's existence.
Eastern Shipping vs CA
GR No. 97412, 12 July 1994
234 SCRA 78
FACTS
Two fiber drums were shipped owned by
Eastern Shipping from Japan. The shipment was
insured with a marine policy. Upon arrival in
Manila unto the custody of metro Port Service,
which excepted to one drum, said to be in bad order
and which damage was unknown the Mercantile
Insurance Company. Allied Brokerage Corporation
received the shipment from Metro, one drum
opened and without seal. Allied delivered the
shipment to the consignee’s warehouse. The latter
excepted to one drum which contained spillages
while the rest of the contents was adulterated/fake.
As consequence of the loss, the insurance company
paid the consignee, so that it became subrogated to
all the rights of action of consignee against the
defendants Eastern Shipping, Metro Port and Allied
Brokerage. The insurance company filed before the
trial court. The trial court ruled in favor of plaintiff
and ordered defendants to pay the former with
present legal interest of 12% per annum from the
date of the filing of the complaint. On appeal by
defendants, the appellate court denied the same and
affirmed in toto the decision of the trial court.
ISSUES
(1) Whether the applicable rate of legal interest is
12% or 6%.
(2) Whether the payment of legal interest on the
award for loss or damage is to be computed from
the time the complaint is filed or from the date the
decision appealed from is rendered.
HELD
(1) The Court held that the legal
interest is 6% computed from the decision of the
court a quo. When an obligation, not constituting a
loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of
6% per annum. No interest shall be adjudged on
unliquidated claims or damages except when or
until the demand can be established with reasonable
certainty.
When the judgment of the court
awarding a sum of money becomes final and
executory, the rate of legal interest shall be 12% per
annum from such finality until satisfaction, this
interim period being deemed to be by then an
equivalent to a forbearance of money.
The interest due shall be 12% PA to be
computed from default, J or EJD.
(2) From the date the judgment is
made. Where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or EJ but
when such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date of
judgment by the court.
(3) The Court held that it should be computed
from the decision rendered by the court a quo
First Fil-Sin Lending Corp. vs Padillo,
GR No. 160533, 12 January 2005, 448 SCRA 71
Gloria Padillo obtained a P500,000 loan from
petitioner First Fil-Sin Lending Corp. She also
obtained another loan from petitioner in the same
amount. In both loans, Padillo executed a
promissory note and disclosure agreement. Padillo
filed an action for sum of money before the RTC of
Manila seeking to recover the amounts she
allegedly paid in excess of her obligation, alleging
that she only agreed to pay interest at the rates of
4.5% and 5% per annum for the two loans and not
4.5% and 5% per month. The trial court dismissed
the complaint ordering her to pay her obligation.
The court also ruled that by issuing checks
representing interest payment at 4.5% and 5%
monthly interest rates,Padillo is estopped from
questioning the provisions of the PNs.
On appeal, the CA reversed the trial court
ruling that, based on disclosure statements, the
interest rates should be imposed on a monthly basis
but only for the 3-month term of the loan. legal
interest rate will apply thereafter. The CA also
found that the penaltycharges of 1% per day of
delay as highly unconscionable. Thus, it was
reduced to 1% per month or 12% per annum.
ISSUE
Whether or not the CA erred in finding that
the applicable interest should be the legal interest of
12% PA despite the clear agreement of the parties.
HELD
The Court held in the negative. When the
terms of the agreement are clear and explicit that
they do not justify an attempt to read into it any
alleged intention of the parties, the terms are to be
understood literally just as they appear on the face
of the contract. Perusal of the PNs and the
disclosure statements, loan obligations of
respondent clearly and unambiguously provide
interest rates of 4.5% per annum and 5% PA.
Nowhere was it stated that the interest rates shall be
applied on a monthly basis.
The same PN provides that “xxx any and all
remaining amount due on the principal upon
maturity shall earn interest at the rate of _____ from
date of maturity until fully paid”. The CA thus
properly imposed the legal interest of 12%PA from
the time the loans matured until the same has been
fully paid. As held in Eastern Shipping Lines vs
CA, “In the absence of stipulation, the interest due
shall be 12% PA to be computed from default”.
Bataan Seedling vs Republic,
GR No. 141009, 2 July 2002, 383 SCRA 590
FACTS
Petitioner entered into a contract with
respondent, represented by the DENR for the
reforestation of a forest land within a period of 3
years. Petitioner undertook to report to DENR any
event or condition which delays or may delay the
project. With the contract was the release of
mobilization fund but the fund was to be returned
upon completion or deducted from periodic release
of moneys to petitioner. Believing that petitioners
failed to comply with their obligations, respondent
sent a notice of cancellation. Petitioners failed to
respond to the notice, thus, respondent filed a
complaint for damages against petitioners. The RTC
held that respondent had sufficient grounds to
cancel the contract but saw no reason why the
mobilization fund and the cash advances should be
refunded or that petitioners are liable for liquidated
damages. Both parties appealed to the CA, which
affirmed the trial court and that the balance of the
fund should be returned with 12% interest.
ISSUE
Whether the order to refund the balance of
the fund with 12% interest p.a. is proper.
HELD
No. Interest at the rate of 12% pa is
impossible if there is no stipulation in the contract.
Herein subject contract does not contain any
stipulation as to interest. However, the amount due
to respondent does not represent a loan or
forbearance of money. The word “forbearance” is
defined, within, the context of usury law, as a
contractual obligation of lender or creditor to
refrain, during given period of time, from requiring
borrower or debtor to repay loan or debt then due
and payable. In the absence of stipulation, the legal
interest is 6% pa on the amount finally adjudged by
the Court.
THE CONSOLIDATED BANK AND TRUST
CORPORATION
(SOLIDBANK), petitioner, vs. THE
COURT OF APPEALS, CONTINENTAL
CEMENT CORPORATION, GREGORY
T. LIM and SPOUSE, respondents.
FACTS
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 five hundred thousand 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 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.
 On September 17, 1990, the trial court rendered
its Decision dismissing 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 Court of Appeals,
which 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.
ISSUE
(There are several issues raised in this case, but
to focus on the issue on interest)
1. WHETHER OR NOT THE AGREEMENT
AMONG THE PARTIES AS TO THE FLOATING
OF INTEREST RATE IS VALID UNDER
APPLICABLE JURISPRUDENCE AND THE
R U L E S A N D R E G U L AT I O N S O F T H E
CENTRAL BANK.
HELD
The court do not find error when the lower
court and the Court of Appeals 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 Court of Appeals
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.[10] 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[11] 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. 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.
FIRST METRO INVESTMENT
CORPORATION
vs.
ESTE DEL SOL MOUNTAIN RESERVE
G.R. No. 141811. November 15, 2001
DE LEON, JR., J.
FACTS:
Petitioner FMIC granted respondent a loan of Seven
Million Three Hundred Eighty Five Thousand Five
Hundred Pesos (P7,385,500.00) to finance the
construction of a sports complex at Montalban,
Rizal. Respondent also executed, as provided for by
the Loan Agreement, an Underwriting Agreement
with underwriting fee, annual supervision fee and
consultancy fee with Consultancy Agreement for
four (4) years, coinciding with the term of the loan.
Interest on the loan was pegged at sixteen (16%)
percent per annum based on the diminishing
balance. The loan was payable in thirty-six (36)
equal and consecutive monthly amortizations to
commence at the beginning of the thirteenth month
from the date of the first release in accordance with
the Schedule of Amortization. In case of default, an
acceleration clause was, among others, provided
and the amount due was made subject to a twenty
(20%) percent one-time penalty on the amount due
and such amount shall bear interest at the highest
rate permitted by law from the date of default until
full payment thereof plus liquidated damages at the
rate of two (2%) percent per month compounded
quarterly on the unpaid balance and accrued
interests together with all the penalties, fees,
expenses or charges thereon until the unpaid
balance is fully paid, plus attorneys fees equivalent
to twenty-five (25%) percent of the sum sought to
be recovered, which in no case shall be less than
Twenty Thousand Pesos (P20,000.00) if the services
of a lawyer were hired.
Este Del Sol Mountain Reserve secured the loan
with a Real Estate Mortgage (REM), including all
improvements, machines and equipment. For
failure to pay its obligation, FMIC caused the
foreclosure of the REM. At the public auction, FIC
was the highest bidder. Petitioner filed to collect for
alleged deficiency balance against respondents
since it failed to collect from the sureties, plus
interest at 21% pa. the trial court ruled in favor of
FMIC. Respondents appealed before the CA which
held that the fees provided for in the Underwriting
and Consultacy Agreements were mere subterfuges
to camouflage the excessively usurious interest
charged. The CA ordered FMIC to reimburse
petitioner representing what is due to petitioner and
what is due to respondent..
ISSUE: Whether or not the Underwriting and
Consultancy Agreements were mere subterfuges to
camouflage the usurious interest charged by the
petitioner.
RULING: YES. No. an apparently lawful loan is
usurious when it is intended that additional
compensation for the loan be disguised by an
ostensibly unrelated contract for the payment by the
borrower for the lender’s services which re of little
value or which are not in fact to be rendered. Article
1957 clearly provides: contracts and stipulations,
under any cloak or device whatever, intended to
circumvent the law against usury shall be void. The
borrower may recover in accordance with the laws
on usury.
ILEANA DR MACALINO
vs
BPI
G.R. No. 175490September 17, 2009
VELASCO, JR
FACTS:
Ileana Macalinao was an approved
cardholder of BPI Mastercard, one of the credit card
facilities of respondent Bank of the Philippine
Islands (BPI). Petitioner Macalinao made some
purchases through the use of the said credit card and
defaulted in paying for said purchases. She
subsequently received a letter dated January 5, 2004
from respondent BPI, demanding payment of the
amount of one hundred forty-one thousand five
hundred eighteen pesos and thirty-four centavos
(PhP 141,518.34). Under the Terms and Conditions
Governing the Issuance and Use of the BPI Credit
and BPI Mastercard, the charges or balance thereof
remaining unpaid after the payment due date
indicated on the monthly Statement of Accounts
shall bear interest at the rate of 3% per month and
an additional penalty fee equivalent to another 3%
per month.For failure of petitioner Macalinao to
settle her obligations, respondent BPI filed with the
Metropolitan Trial Court (MeTC) of Makati City a
complaint for a sum of money against her and her
husband, Danilo SJ. Macalinao.
MeTC = BPI
RTC = BPI (affirmed in toto)
CA = BPI (affirmed with modification)
ISSUE: Whether theInterest Rate and Penalty
Charge of 3% Per Month or 36% Per Annum
Should Be Reduced to 2% Per Month or 24% Per
Annum.
RULING: YES.
The stipulated interest rates of 7% and 5%
per month imposed on respondents loans must be
equitably reduced to 1% per month or 12% per
annum. We need not unsettle the principle we
had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and
higher are excessive, iniquitous, unconscionable
and exorbitant. Such stipulations are void for
being contrary to morals, if not against the
law. While C.B. Circular No. 905-82, which took
effect on January 1, 1983, effectively removed the
ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in
the said circular could possibly be read as
granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave
their borrowers or lead to a hemorrhaging of their
assets.
Since the stipulation on the interest rate is
void, it is as if there was no express contract
thereon. Hence, courts may reduce the interest rate
as reason and equity demand.The same is true with
respect to the penalty charge. Notably, under the
Terms and Conditions Governing the Issuance and
Use of the BPI Credit Card, it was also stated
therein that respondent BPI shall impose an
additional penalty charge of 3% per month.
Pertinently, Article 1229 of the Civil Code states
that The judge shall equitably reduce the penalty
when the principal obligation has been partly or
irregularly complied with by the debtor. Even if
there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or
unconscionable.
SPS CASTRO, DIOSDADO CASTRO
Vs
TAN
GR NO 168940 NOVEMBER 24, 2009
DEL CASTILLO
FACTS:
Respondent Angelina de Leon Tan, and
her husband Ruben Tan were the former registered
owners of a 240-square meter residential lot,
situated at Barrio Canalate, Malolos, Bulacan and
covered by Transfer Certificate of Title No.
T-8540. On February 17, 1994, they entered into an
agreement with petitioners spouses Isagani and
Diosdada Castro denominated as Kasulatan ng
Sanglaan ng Lupa at Bahay (Kasulatan) to secure a
loan of P30,000.00 they obtained from the
latter. Under the Kasulatan, the spouses Tan
undertook to pay the mortgage debt within six
months or until August 17, 1994, with an interest
rate of 5% per month, compounded monthly.
When her husband died on September 2,
1994, respondent Tan was left with the
responsibility of paying the loan. However, she
failed to pay the same upon maturity. Thereafter,
she offered to pay petitioners the principal amount
of P30,000.00 plus a portion of the interest but
petitioners refused and instead demanded payment
of the total accumulated sum of P359,000.00.
On February 5, 1999, petitioners caused
the extrajudicial foreclosure of the real estate
mortgage and emerged as the only bidder in the
auction sale that ensued. The period of redemption
expired without respondent Tan having redeemed
the property; thus title over the same was
consolidated in favor of petitioners. After a writ
of possession was issued, the Sheriff ejected
respondents from the property and delivered the
possession thereof to petitioners.
TC= RESPONDENTS
CA= AFFIRMED RTC
ISSUE: Whether the interest rate
imposed (this time under a loan agreement) is
excessive.
RULING: YES. While we agree with
petitioners that parties to a loan agreement have
wide latitude to stipulate on any interest rate in view
of theCentral Bank Circular No. 905 s. 1982 which
suspended the Usury Law ceiling on interest
effective January 1, 1983, it is also worth stressing
that interest rates whenever unconscionable may
still be declared illegal. There is certainly nothing in
said circular which grants lenders carte blanche
authority to raise interest rates to levels which will
either enslave their borrowers or lead to a
hemorrhaging of their assets.
In this case, the 5% monthly interest rate, or 60%
per annum, compounded monthly, stipulated in the
Kasulatan is even higher than the 3% monthly
interest rate imposed in the Ruiz case. Thus, we
similarly hold the 5% monthly interest to be
excessive, iniquitous, unconscionable and
exorbitant, contrary to morals, and the law. It is
therefore void ab initio for being violative of Article
1306 of the Civil Code. With this, and in accord
with the Medel and Ruiz cases, we hold that the
Court of Appeals correctly imposed the legal
interest of 12% per annum in place of the excessive
interest stipulated in the Kasulatan.”
UCPB
vs
Sps Beluso
GR No. 159912, August 17, 2007
Chico-Nazario, J.
FACTS: Petition for Review onCertiorari declaring
void the interest rate provided in the
promissory notesexecuted by the respondents
Spouses Samuel and Odette Beluso (spouses
Beluso) in favor of petitioner United Coconut
Planters Bank (UCPB)
UCPB granted the spouses Beluso a Promissory
Notes Line under a Credit Agreement whereby
the latter could avail from the former credit of up to
a maximum amount of P1.2 Million pesos
for a term ending on 30 April 1997. The spouses
Beluso constituted, other than their promissory
notes, a real estate mortgage over parcels of land in
Roxas City, covered by Transfer Certificates
of Title No. T-31539 and T-27828, as additional
security for the obligation. The Credit
Agreementwas subsequently amended to increase
the amount of the Promissory Notes Line to a
maximumof P2.35 Million pesos and to extend the
term thereof to 28 February 1998.On 30 April 1997,
the payment of the principal and interest of the
latter two promissory notes
were debited from the spouses Beluso’s account
with UCPB; yet, a consolidated loan
for P1.3Million was again released to the spouses
Beluso under one promissory note with a due dateof
28 February 1998. To completely avail themselves
of the P2.35 Million credit line extended tothem by
UCPB, the spouses Beluso executed two more
promissory notes for a total
of P350,000.00. However, the spouses Beluso
alleged that the amounts covered by these last
two promissory notes were never released or
credited to their account and, thus, claimed that
the principal indebtedness was only P2 Million.The
spouses Beluso, however, failed to make any
payment of the foregoing amounts.On 2 September
1998, UCPB demanded that the spouses Beluso pay
their total obligationof P2,932,543.00 plus 25%
attorney’s fees, but the spouses Beluso failed to
complytherewith. On 28 December 1998, UCPB
foreclosed the properties mortgaged by the
spousesBeluso to secure their credit line, which, by
that time, already ballooned to P3,784,603.00.On 9
February 1999, the spouses Beluso filed a Petition
for Annulment, Accounting and Damagesagainst
UCPB with the RTC of Makati City.
Trial court declared in its judgment that:
the interest rate used by [UCPB] void
the foreclosure and Sheriff’s Certificate of Sale void
UCPB is ordered to return to [the spouses Beluso]
the properties subject of the foreclosure
Spouses Beluso] are hereby ordered to pay [UCPB]
the sum of P1,560,308.00.
Court of Appeals affirmed Trial court's decision
subject to the modification that defendant-
appellant UCPB is not liable for attorney’s fees
or the costs of suit.
ISSUES: should be imposed, thus: “There being no valid
1. Whether or not interest rate stipulated was stipulation as to interest, the legal rate of interest
void shall be charged.”[27] It seems that the RTC
Yes, stipulated interest rate is void because it inadvertently overlooked its non-inclusion in its
contravenes on the principle of mutuality of computation. It must likewise uphold the contract
contracts and itviolates the Truth in lending Act. stipulation providing the compounding of
interest. The provisions in the Credit Agreement
The provision stating that the interest shall be at the
and in the promissory notes providing for the
“rate indicative of DBD retail rate or as
compounding of interest were neither nullified by
determinedby theBranch Head” is indeed dependent
the RTC or the Court of Appeals, nor assailed by the
solely on the will of petitioner UCPB.Under such
spouses Beluso in their petition with the RTC. The
provision, petitionerUCPB has two choices on what
compounding of interests has furthermore been
the interest rate shall be: (1) a rate indicative of the
declared by this Court to be legal.
DBD retail rate; or (2) arate as determined by the
Branch Head. As UCPB is given this choice, the
rate should be categoricallydeterminable
inbothchoices.If either of these two choices presents
an opportunity for UCPB to fix the rate at will, the
bank can easily choose such an option, thus making
the entire interest rate provision violative of the
principle of mutuality of contracts.

In addition, the promissory notes, the copies of

which were presented to the spouses Beluso after
execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the
loan covered by said promissory notes which is
required in TRuth in Lending Act

2. Whether or not Spouses Beluso are subject to

12% interest and compounding interest
stipulations even if declared amount by UCPB
was excessive.

Yes. Default commences upon judicial or

extrajudicial demand.[26] The excess amount in
such a demand does not nullify the demand itself,
which is valid with respect to the proper
amount. There being a valid demand on the part of
UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper
amount and, therefore, the interests and the
penalties began to run at that point. As regards the
award of 12% legal interest in favor of petitioner,
the RTC actually recognized that said legal interest