the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay their value and prayed for the
G.R. No. L-17474 October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry 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 a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the
expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one
year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only
one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On
25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value of
the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction of
yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of Animal
Industry advised him that the book value of the three bulls could not be reduced and that they either be
returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book
value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of
Manila the Republic of the Philippines commenced an action against him praying that he be ordered to
return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just and
equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because
of the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the
pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President
of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of
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dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment —
. . . sentencing the latter (defendant) to pay 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.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18
October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by
the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila.
Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving
spouse of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate,
was notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and
Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the third
bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad Intal, and
praying that the writ of execution be quashed and that a writ of preliminary injunction be issued. On 31
January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On the
same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals
to this Court as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned
the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal
Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ of
execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against the
estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already
had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The contention is without merit. The loan by the
appellee to the late defendant Jose 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 a compensation, then the
contract would be a lease of the bull. Under article 1671 of the Civil 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. And even if the contract be commodatum, still the appellant is liable, because
article 1942 of the Civil Code provides that a bailee in a contract of commodatum —
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
Page 1 of 55
 (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 with:
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.
Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas
having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in
favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the
probate court for payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Barrera, J., concurs in the result.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be presented or filed in the intestate proceedings of
the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that his
civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is
untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper
notice, the legal representative of the deceased to appear and to be substituted for the
deceased, within a period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule
3 which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the
court promptly of such death . . . and to give the name and residence of the executory
administrator, guardian, or other legal representative of the deceased . . . .
G.R. No. L-46240 November 3, 1939
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had
been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, vs.
whether the same be due, not due, or contingent, for funeral expenses and expenses of the last BECK, defendant-appellee.
sickness of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk
of this Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the Mauricio Carlos for appellants.
first publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the Felipe Buencamino, Jr. for appellee.
appointed administratrix of the estate of the said deceased," is not a notice to the court and the appellee
who were to be notified of the defendant's death in accordance with the above-quoted rule, and there
was no reason for such failure to notify, because the attorney who appeared for the defendant was the
same who represented the administratrix in the special proceedings instituted for the administration and
settlement of his estate. The appellee or its attorney or representative could not be expected to know of
the death of the defendant or of the administration proceedings of his estate instituted in another court IMPERIAL, J.:
that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as
required by the rule. The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is that the defendant return to her the three has heaters and the four electric lamps found in the
only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila at
because it was killed while in the custody of the administratrix of his estate. This is the amount prayed her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be
for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the paid pro rata by both parties, without pronouncement as to the costs.
appellant for the quashing of the writ of execution.
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The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff
and the defendant, the former gratuitously granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the condition that the defendant would return them
to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and Rosario
Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving him
sixty days to vacate the premises under one of the clauses of the contract of lease. There after the
plaintiff required the defendant to return all the furniture transferred to him for them in the house where
they were found. On November 5, 1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in the ground floor of the house. On the 7th of the
same month, the defendant wrote another letter to the plaintiff informing her that he could not give up
the three gas heaters and the four electric lamps because he would use them until the 15th of the same
month when the lease in due to expire. The plaintiff refused to get the furniture in view of the fact that
the defendant had declined to make delivery of all of them. On November 15th, before vacating
the house, the defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they
are now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said
sheriff.
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 because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture upon
the plaintiff's demand. In these circumstances, it is just and equitable 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
described in paragraph 3 of the stipulation of facts Exhibit A. 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.
the defendant shall pay the costs in both instances. So ordered.
Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when the
defendant placed them at their disposal; in not ordering the defendant to pay them the value of the
furniture in case they are not delivered; in holding that they should get all the furniture from the Sheriff at
their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the deposit of the
furniture; in ruling that both parties should pay their respective legal expenses or the costs; and in
denying pay their respective legal expenses or the costs; and in denying the motions for reconsideration
and new trial. 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.lawphi1.net

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
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). 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 G.R. No. L-24968 April 27, 1972
defendant did not comply with this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of article 1169
of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court, therefore, SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
erred when it came to the legal conclusion that the plaintiff failed to comply with her obligation to get the vs.
furniture when they were offered to her. DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
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 Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.
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 MAKALINTAL, J.:p
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.
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In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28,
1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and
consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68,
plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of
P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura
on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao
City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a
trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to
be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Among the other terms spelled out in the resolution were the
following:
1. 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 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and
China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to
availability of funds, and as the construction of the factory buildings progresses, to be certified to by an
appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a
modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was
willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker
on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount
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equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as
one of the other co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operations of jute mills, and to submit his findings
thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-
signer for the loan, and asked that the necessary documents be prepared in accordance with the terms
and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary
studies, although in appointing its own committee Saura, Inc. made the observation that the same
"should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in
Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage,
which was duly registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June
10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the
loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution
No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-
examination of all the various aspects of the loan granted the Saura Import & Export Co. under
Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with
special reference as to the advisability of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan
granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up
to P100,000 may be authorized as may be necessary from time to time to place the factory in actual
operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent
herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and
therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The
request was denied by RFC, which added in its letter-reply that it was "constrained to consider as
cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."
Page 4 of 55
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us
the P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly
with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to the
following:
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 action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural Resources
was required "as the intention of the original approval (of the loan) is to develop the manufacture of
sacks on the basis of locally available raw materials." This point is important, and sheds light on the
subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh.
M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the
Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture
copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the
first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is
presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and
Natural Resources as to the availability of local raw materials to provide adequately for the
requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of
January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry
"kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials
as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be
made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
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b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding
the release of your loan under consideration of P500,000. As stated
in our letter of December 22, 1954, the releases of the loan, if
revived, are proposed to be made from time to time, subject to
availability of funds towards the end that the sack factory shall be
placed in actual operating status. We shall be able to act on your
request for revised purpose and manner of releases upon re-
appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture
and Natural Resources certify that the raw materials needed are
available in the immediate vicinity and that there is prospect of
increased production thereof to provide adequately the
requirements of the factory, we wish to reiterate that the basis of
the original approval is to develop the manufacture of sacks on the
basis of the locally available raw materials. Your statement that you
will have to rely on the importation of jute and your request that we
give you assurance that your company will be able to bring in
sufficient jute materials as may be necessary for the operation of
your factory, would not be in line with our principle in approving the
loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura,
Inc.
Page 5 of 55
It appears that the cancellation was requested to make way for the registration of a mortgage contract,
executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co.,
under which contract Saura, Inc. had up to December 31 of the same year within which to pay its
obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said
obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor
of the defendant DBP) to comply with its obligation to release the proceeds of 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 rendered judgment for the plaintiff, ruling that there was a perfected contract between the
parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and
reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been
waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the
plaintiff itself did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code, which provides:
ART. 1954. 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 perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this 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. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted 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. There is no serious
dispute about this. It was in line with such assumption that when RFC, by Resolution No. 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 the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely — "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."
Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its
letter of January 21, 1955, stating that local jute "will not be able 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.
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When RFC turned down the request in its letter of January 25, 1955 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 cf mutual desistance — what Manresa terms
"mutuo disenso"1 — 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.2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged
breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for
cancellation of the mortgage carried no reservation of whatever rights it believed it might have against
RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice
and corn project, which application was disapproved. It was only in 1964, nine years after the loan
agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All
these circumstances demonstrate beyond doubt that the said agreement had been extinguished by
mutual desistance — and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues
raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs
against the plaintiff-appellee.
G.R. No. L-49101 October 24, 1983
RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF
COMMERCE, respondents.
Edgardo I. De Leon for petitioners.
Page 6 of 55
Siguion Reyna, Montecillo & Associates for private respondent.
GUERRERO, J:
Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals, now
Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs. Philippine Bank
of Commerce, et al.," promulgated August 11, 1978 1 as well as the Resolution denying the motion for
reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance
of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of
Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the
spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on
September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration and (b)
the mortgage was executed by one who was not the owner of the mortgaged property. It further alleged
that the property in question was foreclosed pursuant to Act No. 3135 as amended, without, however,
complying with the condition imposed for a valid foreclosure. Granting the validity of the mortgage and
the extrajudicial foreclosure, it finally alleged that respondent Bank should have accepted petitioner's
offer to redeem the property under the principle of equity said justice.
On the other hand, the answer of defendant Bank, now private respondent herein, specifically denied
most of the allegations in the complaint and raised the following affirmative defenses: (a) that the
defendant has not given its consent, much less the requisite written consent, to the sale of the
mortgaged property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that the
demand letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was
notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the
law on contracts requires defendant's consent before Jose Lozano can be released from his bilateral
agreement with the former and doubly so, before plaintiff may be substituted for Jose Lozano and
Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two renewals remain
unpaid despite countless reminders and demands; of that the property in question remained registered
in the name of Jose M. Lozano in the land records of Rizal and there was no entry, notation or indication
of the alleged sale to plaintiff; (g) that it is an established banking practice that payments against
accounts need not be personally made by the debtor himself; and (h) that it is not true that the
mortgage, at the time of its execution and registration, was without consideration as alleged because
the execution and registration of the securing mortgage, the signing and delivery of the promissory note
and the disbursement of the proceeds of the loan are mere implementation of the basic consensual
contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion
for intervention. The intervention was premised on the Deed of Assignment executed by petitioner
Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of
petitioner Honesto Bonnevie over the subject property. The intervention was ultimately granted in order
that all issues be resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:
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WHEREFORE, all the foregoing premises considered, judgment is hereby rendered
dismissing the complaint with costs against the plaintiff and the intervenor.
After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:
1. The lower court erred in not finding that the real estate mortgage executed by Jose
Lozano was null and void;
2. The lower court erred in not finding that the auction sale decide on August 19, 1968
was null and void;
3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the
property;
4. The lower court erred in not finding that the defendant acted in bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision affirming the decision of the lower
court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present petition for
review.
The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby adopt
the facts found the trial court and found by the Court of Appeals to be consistent with the evidence
adduced during trial, to wit:
It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the
owners of the property which they mortgaged on December 6, 1966, to secure the
payment of the loan in the principal amount of P75,000.00 they were about to obtain
from defendant-appellee Philippine Bank of Commerce; that on December 8, 1966,
executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in
consideration of the sum of P100,000.00, P25,000.00 of which amount being payable
to the Lozano spouses upon the execution of the document, and the balance of
P75,000.00 being payable to defendant- appellee; that on December 6, 1966, when
the mortgage was executed by the Lozano spouses in favor of defendant-appellee,
the loan of P75,000.00 was not yet received them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the promissory note for that
amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments
to defendant-appellee on the mortgage in the total amount of P18,944.22; that on
May 4, 1968, plaintiff-appellant assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10,
1968, defendant-appellee applied for the foreclosure of the mortgage, and notice of
sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14,
1968; that auction sale was conducted on August 19, 1968, and the property was sold
to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to
repurchase the property failed, and on October 9, 1969, he caused an adverse claim
to be annotated on the title of the property. (Decision of the Court of Appeals, p. 5).
Page 7 of 55
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the spouses Lozano in favor of
respondent bank was validly and legally executed.
II
Whether the extrajudicial foreclosure of the said mortgage was validly and legally
effected.
III
Whether petitioners had a right to redeem the foreclosed property.
IV
Granting that petitioners had such a right, whether respondent was justified in
refusing their offers to repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They
primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent
Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that when it was executed on
December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was not
received by the Lozano spouses "So much so that in the absence of a principal obligation, there is want
of consideration in the accessory contract, which consequently impairs its validity and fatally affects its
very existence." (Petitioners' Brief, par. 1, p. 7).
This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly
seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano
spouses. The fact that the latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract, the
herein contract of loan was perfected at the same time the contract of mortgage was executed. The
promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not
indicate lack of consideration of the mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent of
the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is
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constituted. These provisions are expressly made part and parcel of the Deed of Sale with Assumption
of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of
mortgage. Coupled with the fact that the sale/assignment was not registered so that the title remained in
the name of the Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses
could rightfully and validly mortgage the property. Respondent Bank had every right to rely on the
certificate of title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the
doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value. (Roxas
vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the
respondent Bank is that a mortgage follows the property whoever the possessor may be and subjects
the fulfillment of the obligation for whose security it was constituted. Finally, it can also be said that
petitioners voluntarily assumed the mortgage when they entered into the Deed of Sale with Assumption
of Mortgage. They are, therefore, estopped from impugning its validity whether on the original loan or
renewals thereof.
Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period required by law.
c) publication of the notice of auction sale in the Luzon Weekly Courier was not in
accordance with law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being
a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not aware of the
same and hence, it may not be obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was
not entitled to any notice because as of May 14, 1968, he had transferred and assigned all his rights
and interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank not likewise
informed of the same. For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly,
Act No. 3135 does not require personal notice on the mortgagor. The requirement on notice is that:
Section 3. Notice shall be given by posting notices of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city
In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14,
1968 and notices of the sale were posted for not less than twenty days in at least three (3) public places
in the Municipality where the property is located. Petitioners were thus placed on constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case
involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly registered
making the mortgaged privy to the sale.
Page 8 of 55
As regards the claim that the period of publication of the notice of auction sale was not in accordance
with law, namely: once a week for at least three consecutive weeks, the Court of Appeals ruled that the
publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication requirement under
Act No. 3135 notwithstanding the fact that June 30 to July 14 is only 14 days. We agree. Act No. 3135
merely requires that such notice shall be published once a week for at least three consecutive weeks."
Such phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean that notice
should be published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance
with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit of
publication, executed by the Publisher, business/advertising manager of the Luzon Weekly Courier,
stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of Sheriff's sale was
published in said paper on June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of
compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published for the dissemination of local
news and general information; that it has a bona fide subscription list of paying subscribers; that it is
published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the
largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67). The testimony
of three witnesses that they do read the Luzon Weekly Courier is no proof that said newspaper is not a
newspaper of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required by law is a question of fact.
It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126).
Nevertheless, the records show that copies of said notice were posted in three conspicuous places in
the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig
Municipal Hall. In the same manner, copies of said notice were also posted in the place where the
property was located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and on
Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal department of
respondent bank, namely:
Q How many days were the notices posted in these two places, if
you know?
A We posted them only once in one day. (TSN, p. 45, July 25,
1973)
is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before the
expiration of the twenty- day period. A single act of posting (which may even extend beyond the period
required by law) satisfies the requirement of law. The burden of proving that the posting requirement
was not complied with is now shifted to the one who alleges non-compliance.
On the question of whether or not the petitioners had a right to redeem the property, We hold that the
Court of Appeals did not err in ruling that they had no right to redeem. No consent having been secured
from respondent Bank to the sale with assumption of mortgage by petitioners, the latter were not validly
substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is charged
with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting
that as purchaser or assignee of the property, as the case may be, the petitioners had acquired a right
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to redeem the property, petitioners failed to exercise said right within the period granted by law. Thru
certificate of sale in favor of appellee was registered on September 2, 1968 and the one year
redemption period expired on September 3, 1969. It was not until September 29, 1969 that petitioner
Honesto Bonnevie first wrote respondent and offered to redeem the property. Moreover, on September
29, 1969, Honesto had at that time already transferred his rights to intervenor Raoul Bonnevie.
On the question of whether or not respondent Court of Appeals erred in holding that respondent Bank
did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to respondent
Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized to make
payments for the amount secured by the mortgage on the subject property, to receive acknowledgment
of payments, obtain the Release of the Mortgage after full payment of the obligation and to take delivery
of the title of said property. On the assumption that the letter was received by respondent Bank, a
careful reading of the same shows that the plaintiff was merely authorized to do acts mentioned therein
and does not mention that petitioner is the new owner of the property nor request that all
correspondence and notice should be sent to him.
The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the
maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied for the
foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect and
misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968,
when respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners'
payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may
be effected, not only the payment of the accrued interest is necessary but also the payment of interest
for the proposed period of renewal as well. Besides, whether or not a loan may be renewed does not
solely depend on the debtor but more so on the discretion of the bank. Respondent Bank may not be,
therefore, charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. L-40824 February 23, 1989
Page 9 of 55
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs Flaviano
Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner Government
Service Insurance System (hereinafter referred to as GSIS) and subsequently, another deed of
mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the sums of P
11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by Transfer Certificate of Title No.
38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses, was given as
security under the aforesaid two deeds. 2 They also executed a 'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM
the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%)
per centum compounded monthly payable in . . . (120)equal monthly installments of . .
. (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS and
to secure the release of the mortgage covering that portion of the land belonging to herein private
respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment
of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the mortgaged
property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all
other documents executed in relation thereto in favor of the Government Service Insurance System" be
declared null and void. It was further prayed that they be allowed to recover said property, and/or the
GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the land.
Additionally, they asked for actual and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not as
sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said
co-owners who were solely benefited by the loans from the GSIS.
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The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to establish
a cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic)
in that the GSIS required their consent to the mortgage of the entire parcel of land
which was covered with only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for
having foreclosed the mortgage without having given sufficient notice to them as
required either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default in such payment.
The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant
to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed that-
In view of all the foregoing, the judgment appealed from is hereby reversed, and
another one entered (1) declaring the foreclosure of the mortgage void insofar as it
affects the share of the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca
and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, which provide that an accommodation party is one
who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor,
but is held liable on the instrument to a holder for value although the latter knew him to be only an
accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The promissory
note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable
instruments. These documents do not comply with the fourth requisite to be considered as such under
Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable
to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not
apply; governance shall be afforded, instead, by the provisions of the Civil Code and special laws on
mortgages.
Page 10 of 55
As earlier indicated, the factual findings of respondent court are that private respondents signed the
documents "only to give their consent to the mortgage as required by GSIS", with the latter having full
knowledge that the loans secured thereby were solely for the benefit of the Lagasca spouses. 12 This
appears to be duly supported by sufficient evidence on record. Indeed, it would be unusual for the GSIS
to arrange for and deduct the monthly amortizations on the loans from the salary as an army officer of
Flaviano Lagasca without likewise affecting deductions from the salary of Isabelo Racho who was also
an army sergeant. Then there is also the undisputed fact, as already stated, that the Lagasca spouses
executed a so-called "Assumption of Mortgage" promising to exclude private respondents and their
share of the mortgaged property from liability to the mortgagee. There is no intimation that the former
executed such instrument for a consideration, thus confirming that they did so pursuant to their original
agreement.
There is no showing that the foregoing requirement on notice was not complied with in the foreclosure
sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of
private respondents or in directing reconveyance of their property or the payment of the value thereof
Indubitably, whether or not private respondents herein benefited from the loan, the mortgage and the
extrajudicial foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of
Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there SO ORDERED.
was no objection in the court below regarding the admissibility of the testimony and documents that
were presented to prove that the private respondents signed the mortgage papers just to accommodate
their co-owners, the Lagasca spouses. Besides, the introduction of such evidence falls under the
exception to said rule, there being allegations in the complaint of private respondents in the court below
regarding the failure of the mortgage contracts to express the true agreement of the parties. 14

However, contrary to the holding of the respondent court, it cannot be said that private respondents are
without liability under the aforesaid mortgage contracts. The factual context of this case is precisely
what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect that third
persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property

So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with respect to private respondents' share in the property. In
consenting thereto, even assuming that private respondents may not be assuming personal liability for
the debt, their share in the property shall nevertheless secure and respond for the performance of the
principal obligation. The parties to the mortgage could not have intended that the same would apply
only to the aliquot portion of the Lagasca spouses in the property, otherwise the consent of the private G.R. No. 138677 February 12, 2002
respondents would not have been required.
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners,
The supposed requirement of prior demand on the private respondents would not be in point here since vs.
the mortgage contracts created obligations with specific terms for the compliance thereof. The facts HON. COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents.
further show that the private respondents expressly bound themselves as solidary debtors in the
promissory note hereinbefore quoted. DECISION

Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act No.
3135, as amended, does not require personal notice on the mortgagor, quoting the requirement on
notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty
days in at least three public places of the municipality where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and
Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 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, to pay the sum borrowed 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

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in case of default. In addition, petitioners agreed to pay 10% of the total amount due by way of
attorney’s fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981; the bank, however, granted an extension but
only up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to petitioners
informing them that they had five days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November 1982, with the Regional Trial Court of
Makati, Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27
March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of
the case reset on two consecutive occasions. In view of the absence of petitioners and their counsel on
28 August 1985, the third hearing date, the bank moved, and the trial court resolved, to consider the
case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of the
trial court declaring them as having waived their right to present evidence and prayed that they be
allowed to prove their case. The court a quo denied the motion in an order, dated 5 September 1988,
and on 20 October 1989, it rendered its decision,1 the dispositive portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2%
service charge and 5% per month penalty charge, commencing on 20 May 1982 until fully
paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as
attorney’s fees; and
"3. To pay the costs of the suit."2
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court of
their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per
month penalty charge and 10% attorney's fees. In its decision3 of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of the 2% service charge which was deleted
pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate court,
both parties filed their respective motions for reconsideration.4Petitioners prayed for the reduction of the
5% stipulated penalty for being unconscionable. The bank, on the other hand, asked that the payment
of interest and penalty be commenced not from the date of filing of complaint but from the time of
default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
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"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest thereon
must commence not on the date of filing of the complaint as we have previously held in our decision but
on the date when the obligation became due.
"Default generally begins from the moment the creditor demands the performance of the obligation.
However, demand is not necessary to render the obligor in default when the obligation or the law so
provides.
"In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the
obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in
case of non-payment from the date of default.
"x x x xxx xxx
"While we maintain that defendants-appellants must be bound by the contract which they acknowledged
and signed, we take cognizance of their plea for the application of the provisions of Article 1229 x x x.
"Considering that defendants-appellants partially complied with their obligation under the promissory
note by the reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will
finally settle their obligation, it is our view and we so hold that in the interest of justice and public policy,
a penalty of 3% per month or 36% per annum would suffice.
"x x x xxx xxx
"WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-
appellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee
Security Bank and Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3%
per month penalty charge commencing May 20, 1982 until fully paid;
"2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorney’s
fees."5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
discovered evidence,6 alleging that while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure
the existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners contended
that the execution of the real estate mortgage had the effect of novating the contract between them and
the bank. Petitioners further averred that the mortgage was extrajudicially foreclosed on 26 August
1986, that they were not informed about it, and the bank did not credit them with the proceeds of the
sale. The appellate court denied the omnibus motion for reconsideration and to admit newly discovered
evidence, ratiocinating that such a second motion for reconsideration cannot be entertained under
Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the
newly-discovered evidence being invoked by petitioners had actually been known to them when the
case was brought on appeal and when the first motion for reconsideration was filed.7
Page 12 of 55
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to this
Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court,
submitting thusly -
"I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest
and the penalty of three (3%) percent per month or thirty-six (36%) percent per annum
imposed by private respondent bank on petitioners’ loan obligation are still manifestly
exorbitant, iniquitous and unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten
(10%) percent award of attorney’s fees which is highly and grossly excessive, unreasonable
and unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting petitioners’ newly
discovered evidence which could not have been timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding that there was a novation
of the cause of action of private respondent’s complaint in the instant case due to the
subsequent execution of the real estate mortgage during the pendency of this case and the
subsequent foreclosure of the mortgage."8
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be
deleted by petitioners was even insufficient to fully cover and compensate for the cost of money brought
about by the radical devaluation and decrease in the purchasing power of the peso, particularly vis-a-
vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank would stress that only
the amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.9
A penalty clause, expressly recognized by law,10 is an accessory undertaking to assume greater liability
on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive force
of the obligation11 and to provide, in effect, for what could be the liquidated damages resulting from such
a breach. 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.12 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.13
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. In Rizal
Commercial Banking Corp. vs. Court of Appeals,14 just an example, the Court has tempered the penalty
charges after taking into account the debtor’s pitiful situation and its offer to settle the entire obligation
with the creditor bank. The stipulated penalty might likewise be reduced when a partial or irregular
performance is made by the debtor.15 The stipulated penalty might even be deleted such as when there
has been substantial performance in good faith by the obligor,16 when the penalty clause itself suffers
from fatal infirmity, or when exceptional circumstances so exist as to warrant it.17
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The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty interest
from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to mention
the repeated acts of breach by petitioners of their contractual obligation, the Court sees no cogent
ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has
not been raised and ventilated before the courts below. In any event, the interest stipulation, on its face,
does not appear as being that excessive. The essence or rationale for the payment of interest, quite
often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being
distinct concepts which may separately be demanded.18 What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking business and the core of
a bank's existence.19
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees
for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of
attorney’s fees has been agreed to by the parties and intended to answer not only for litigation
expenses but also for collection efforts as well, the Court, like the appellate court, deems the award of
10% attorney’s fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to
admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 -
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of
a judgment or final resolution by the same party shall be entertained. Considering that the instant
motion is already a second motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newly-discovered
evidence being invoked by defendants-appellants have actually been existent when the case was
brought on appeal to this court as well as when the first motion for reconsideration was
filed.1âwphi1 Hence, it is quite surprising why defendants-appellants raised the alleged newly-
discovered evidence only at this stage when they could have done so in the earlier pleadings filed
before this court.
"The propriety or acceptability of such a second motion for reconsideration is not contingent upon the
averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented
and rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, depending
on the party’s ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly
discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for
reconsideration."20
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would
not have resulted in the extinguishment of the original contract of loan because of novation. Petitioners
acknowledge that the real estate mortgage contract does not contain any express stipulation by the
parties intending it to supersede the existing loan agreement between the petitioners and the
Page 13 of 55
bank.21 Respondent bank has correctly postulated that the mortgage is but an accessory contract to
secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties to
the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one.22 In
order that an obligation may be extinguished by another which substitutes the same, it is imperative that
it be so declared in unequivocal terms, or that the old and the new obligation be on every point
incompatible with each other.23 An obligation to pay a sum of money is not extinctively novated by a new
instrument which merely changes the terms of payment or adding compatible covenants or where the
old contract is merely supplemented by the new one.24 When not expressed, incompatibility is required
so as to ensure that the parties have indeed intended such novation despite their failure to express it in
categorical terms. The incompatibility, to be sure, should take place in any of the essential elements of
the obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of things,
or from negotiorum gestio to agency, or from a mortgage to antichresis,25 or from a sale to one of
loan;26(2) the object or principal conditions, such as a change of the nature of the prestation; or (3) the
subjects, such as the substitution of a debtor27 or the subrogation of the creditor. Extinctive novation
does not necessarily imply that the new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.
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VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an 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; and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-
forwarder for damages sustained by a shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern
Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance
Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto
the custody of defendant Metro Port Service, Inc. The latter excepted to one drum,
said to be in bad order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment
from defendant Metro Port Service, Inc., one drum opened and without seal (per
"Request for Bad Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries
of 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 (per "Bad
Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to pay
the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants
(per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O).
(pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Page 14 of 55
Defendants filed their respective answers, traversing the material allegations of the
complaint contending that: As for defendant Eastern Shipping it alleged that the
shipment was discharged in good order from the vessel unto the custody of Metro
Port Service so that any damage/losses incurred after the shipment was incurred
after the shipment was turned over to the latter, is no longer its liability (p. 17,
Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent
or at fault for the shipment was already in damage and bad order condition when
received by it, but nonetheless, it still exercised extra ordinary care and diligence in
the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in
the custody of defendants (in whose respective custody, if
determinable);
3. Whether or not defendant(s) should be held liable for the
losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34;
Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).
As to the first issue, there can be no doubt that the shipment
sustained losses/damages. The two drums were shipped in good
order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that
was shipped (Exhs. B and C). But when on December 12, 1981 the
shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the
losses/damages were sustained while in the respective and/or
successive custody and possession of defendants carrier (Eastern),
arrastre operator (Metro Port) and broker (Allied Brokerage). This
becomes evident when the Marine Cargo Survey Report (Exh. G),
with its "Additional Survey Notes", are considered. In the latter
notes, it is stated that when the shipment was "landed on vessel" to
dock of Pier # 15, South Harbor, Manila on December 12, 1981, it
was observed that "one (1) fiber drum (was) in damaged condition,
covered by the vessel's Agent's Bad Order Tally Sheet No. 86427."
The report further states that when defendant Allied Brokerage
withdrew the shipment from defendant arrastre operator's custody
on January 7, 1982, one drum was found opened without seal, cello
bag partly torn but contents intact. Net unrecovered spillages was
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15 kgs. The report went on to state that when the drums reached
the consignee, one drum was found with adulterated/faked
contents. It is obvious, therefore, that these losses/damages
occurred before the shipment reached the consignee while under
the successive custodies of defendants. Under Art. 1737 of the
New Civil Code, the common carrier's duty to observe extraordinary
diligence in the vigilance of goods remains in full force and effect
even if the goods are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of destination, until the
consignee has been advised and has had reasonable opportunity
to remove or dispose of the goods (Art. 1738, NCC). Defendant
Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad
Order Cargoes" (Exhs. 3-Eastern) states that on December 12,
1981 one drum was found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of
12% per annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case or the CIF value
of the loss, whichever is lesser, while the liability of defendant Metro
Port Service, Inc. shall be to the extent of the actual invoice value
of each package, crate box or container in no case to exceed
P5,000.00 each, pursuant to Section 6.01 of the Management
Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim
of defendant/cross-claimant Allied Brokerage
Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
Page 15 of 55
 After a careful scrutiny of the evidence on record. We find that the conclusion drawn
therefrom is correct. As there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants, and therefore they are
liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-
89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE
ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that
novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by, the
carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance
by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161
SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code;
Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of
Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not
observed but these cases, enumerated in Article 17341 of the Civil Code, are exclusive, not one of
which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the
arrastre operator liable in solidum, thus:
The legal relationship between the consignee and the arrastre operator is akin to that
of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5
[1967]. The relationship between the consignee and the common carrier is similar to
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that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line,
et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care
of the goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs
broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that
attendant facts in a given case may not vary the rule. The instant petition has been brought solely by
Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of
fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment
sustained damage while in the successive possession of appellants" (the herein petitioner among
them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case,
is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries
and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred
in its complaint that the total amount of its claim for the value of the undelivered goods amounted to
P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In
the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was
agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port
Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51
with legal interest thereon from the date the complaint was filed on 28 December 1962 until full
payment thereof. The appellants then assailed, inter alia, the award of legal interest. In sustaining the
appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation,
is the legal rate. Such interest normally is allowable from the date of demand, judicial
or extrajudicial. The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty." And as was held by this Court in Rivera
vs. Perez,4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated
and not known until definitely ascertained, assessed and determined by the courts
after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco
v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis
supplied)
Page 16 of 55
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages for
Injury to Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00
which is the value of the boat F B Pacita III together with its accessories, fishing gear
and equipment minus P80,000.00 which is the value of the insurance recovered and
the amount of P10,000.00 a month as the estimated monthly loss suffered by them as
a result of the fire of May 6, 1969 up to the time they are actually paid or already the
total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the
complaint until paid and to pay attorney's fees of P5,000.00 with costs against
defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully
paid. When the appellate court's decision became final, the case was remanded to the lower
court for execution, and this was when the trial court issued its assailed resolution which
applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition
for review on certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12%) percent per annum. This Circular shall take effect
immediately. (Emphasis found in the text) —
should have, instead, been applied. This Court6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods
or credits does not fall within the coverage of the said law for it is not within the ambit
of the authority granted to the Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered
in an Action for Damages for injury to persons and loss of property and does not
involve any loan, much less forbearances of any money, goods or credits. As correctly
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argued by the private respondents, the law applicable to the said case is Article 2209
of the New Civil Code which reads —
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
interest agreed upon, and in the absence of stipulation, the legal
interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial court
awarded private respondent Pedro Manabat actual and compensatory damages in the amount of
P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages arising
from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29,
1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the
amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken
to this Court for review, the case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the
special and environmental circumstances of this case, we deem it reasonable to
render a decision imposing, as We do hereby impose, upon the defendant and the
third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723,
Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION
(P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees)
occasioned by the loss of the building (including interest charges and lost rentals) and
an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for
attorney's fees, the total sum being payable upon the finality of this decision. Upon
failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against
the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of
twelve (12%) per cent per annum imposed on the total amount of the monetary award was in
contravention of law." The Court10 ruled out the applicability of the Reformina and Philippine
Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central
Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans
or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v.
Page 17 of 55
 Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is
true that in the instant case, there is neither a loan or a forbearance, but then no
interest is actually imposed provided the sums referred to in the judgment are paid
upon the finality of the judgment. It is delay in the payment of such final judgment,
that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on
the total sum, from the filing of the complaint until paid; in other words, as part of the
judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis
supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11 was a
petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate
Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to
P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the
amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00
as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of
suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent
to recover damages, held the award, however, for moral damages by the trial court, later sustained by
the IAC, to be inconceivably large. The Court12 thus set aside the decision of the appellate court and
rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred
Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose from a
breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the
trial court moral and exemplary damages without, however, providing any legal interest thereon. When
the decision was appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros
Oriental dated October 31, 1972 is affirmed in all respects, with the modification that
defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay,
jointly and severally, the amounts stated in the dispositive portion of the decision,
including the sum of P1,400.00 in concept of compensatory damages, with interest at
the legal rate from the date of the filing of the complaint until fully paid(Emphasis
supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the
trial court, and an entry of judgment was made. The writ of execution issued by the trial court
directed that only compensatory damages should earn interest at 6% per annum from the date
of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a
petition for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the
legal rate" from the time of the filing of the complaint. . . Said circular [Central Bank
Circular No. 416] does not apply to actions based on a breach of employment
contract like the case at bar. (Emphasis supplied)
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The Court reiterated that the 6% interest per annum on the damages should be computed from
the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas,14decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay
the private respondents certain sums of money as just compensation for their lands so expropriated
"with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under
the Civil Code, the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods
or credits but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the interest adjudged
by the trial court is in the nature of indemnity for damages. The legal interest required
to be paid on the amount of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay in the payment thereof.
Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of
earnings from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985),
Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance
Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American
Express International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or
12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that
there has been a consistent holding that the Central Bank Circular imposing the 12% interest per
annum applies only to loans or forbearance16 of money, goods or credits, as well as to judgments
involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil
Code governs when the transaction involves the payment of indemnities in the concept of damage
arising from the breach or a delay in the performance of obligations in general. Observe, too, that in
these cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum,17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or
one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained
consistent in holding that the running of the legal interest should be from the time of the filing of the
complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the
court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely
ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date
of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning
Page 18 of 55
the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil
and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision
until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of
each case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts18 is breached, the contravenor can be held liable for damages.19 The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.20

G.R. No. 115324 February 19, 2003

II. With regard particularly to an award of interest in the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is imposed, as follows:
PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,
vs.
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
forbearance of money, the interest due should be that which may have been stipulated in
writing.21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed DECISION
from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article
116923 of the Civil Code. CALLEJO, SR., J.:

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court24 at the rate of 6% per
annum.25 No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty.26 Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed
from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT
(6%), shall be imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25, 1991 in
CA-G.R. CV No. 11791 and of its Resolution2 dated May 5, 1994, denying the motion for reconsideration
of said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the
Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private respondent to
deposit in a bank a certain amount of money in the bank account of Sterela for purposes of its
incorporation. She assured private respondent that he could withdraw his money from said account
within a month’s time. Private respondent asked Sanchez to bring Doronilla to their house so that they
could discuss Sanchez’s request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla’s
private secretary, met and discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two
Hundred Thousand Pesos (₱200,000.00) in favor of Sterela. Private respondent instructed his wife,
Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name
of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez,
Mrs. Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization
letter from Doronilla authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza,"
to open an account for Sterela Marketing Services in the amount of ₱200,000.00. In opening the
account, the authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for
Savings Account No. 10-1567 was thereafter issued to Mrs. Vives.4

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Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still
intact. The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them
that part of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only
₱90,000.00 remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining
amount because it had to answer for some postdated checks issued by Doronilla. According to Atienza,
after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account
No. 10-0320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account,
Sterela, through Doronilla, obtained a loan of ₱175,000.00 from the Bank. To cover payment thereof,
Doronilla issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla
could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole
proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received
a letter from Doronilla, assuring him that his money was intact and would be returned to him. On August
13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (₱212,000.00)
in favor of private respondent. However, upon presentment thereof by private respondent to the drawee
bank, the check was dishonored. Doronilla requested private respondent to present the same check on
September 15, 1979 but when the latter presented the check, it was again dishonored.6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the
return of his client’s money. Doronilla issued another check for ₱212,000.00 in private respondent’s
favor but the check was again dishonored for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC)
in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as
Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the
RTC. However, Sanchez passed away on March 16, 1985 while the case was pending before the trial
court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No.
44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.
Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly
and severally –
(a) the amount of ₱200,000.00, representing the money deposited, with interest at the legal
rate from the filing of the complaint until the same is fully paid;
(b) the sum of ₱50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of ₱40,000.00 for attorney’s fees; and
(d) the costs of the suit.
SO ORDERED.8
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Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June 25,
1991, the appellate court affirmed in toto the decision of the RTC.9 It likewise denied with finality
petitioner’s motion for reconsideration in its Resolution dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing that –
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION
BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN
AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S BANK
MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE
PETITIONER SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE
REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS
OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER
COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE
OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS
ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY
DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND THE COSTS OF SUIT. 11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to petitioner’s delay in furnishing private
respondent with copy of the reply12 and several substitutions of counsel on the part of private
respondent.13 On January 17, 2001, the Court resolved to give due course to the petition and required
the parties to submit their respective memoranda.14 Petitioner filed its memorandum on April 16, 2001
while private respondent submitted his memorandum on March 22, 2001.
Page 20 of 55
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private
respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of
₱212,000.00, or ₱12,000 more than what private respondent deposited in Sterela’s bank
account.15 Moreover, the fact that private respondent sued his good friend Sanchez for his failure to
recover his money from Doronilla shows that the transaction was not merely gratuitous but "had a
business angle" to it. Hence, petitioner argues that it cannot be held liable for the return of private
respondent’s ₱200,000.00 because it is not privy to the transaction between the latter and Doronilla.16
It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing
Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said
company. Petitioner asserts that Doronilla’s May 8, 1979 letter addressed to the bank, authorizing Mrs.
Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these
two to withdraw from said account. Hence, the authority to withdraw therefrom remained exclusively
with Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings
account.17 Petitioner points out that no evidence other than the testimonies of private respondent and
Mrs. Vives was presented during trial to prove that private respondent deposited his ₱200,000.00 in
Sterela’s account for purposes of its incorporation.18 Hence, petitioner should not be held liable for
allowing Doronilla to withdraw from Sterela’s savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision since the
findings of fact therein were not accord with the evidence presented by petitioner during trial to prove
that the transaction between private respondent and Doronilla was a mutuum, and that it committed no
wrong in allowing Doronilla to withdraw from Sterela’s savings account.19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the
actual damages suffered by private respondent, and neither may it be held liable for moral and
exemplary damages as well as attorney’s fees.20
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a
mutuum but an accommodation,21 since he did not actually part with the ownership of his ₱200,000.00
and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be
issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the same
time, he retained some degree of control over his money through his wife who was made a signatory to
the savings account and in whose possession the savings account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer, is liable
for the return of his money. He insists that Atienza, petitioner’s assistant manager, connived with
Doronilla in defrauding private respondent since it was Atienza who facilitated the opening of Sterela’s
current account three days after Mrs. Vives and Sanchez opened a savings account with petitioner for
said company, as well as the approval of the authority to debit Sterela’s savings account to cover any
overdrawings in its current account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for review
filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all
over again the evidence presented by the parties during trial.24 The Court’s jurisdiction is in principle
CREDIT TRANS
limited to reviewing errors of law that might have been committed by the Court of Appeals.25 Moreover,
factual findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive
on this Court unless these findings are not supported by the evidence on record.26 There is no showing
of any misapprehension of facts on the part of the Court of Appeals in the case at bar that would require
this Court to review and overturn the factual findings of that court, especially since the conclusions of
fact of the Court of Appeals and the trial court are not only consistent but are also amply supported by
the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the
records reveals that the transaction between them was a commodatum. 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.27 In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private
respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of
making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the
amount shall be returned within thirty (30) days."29 Private respondent merely "accommodated" Doronilla
by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear
to the parties to the transaction that the money would not be removed from Sterela’s savings account
and would be returned to private respondent after thirty (30) days.
Page 21 of 55
Doronilla’s attempts to return to private respondent the amount of ₱200,000.00 which the latter
deposited in Sterela’s account together with an additional ₱12,000.00, allegedly representing interest on
the mutuum, did not convert the transaction from a commodatum into a mutuum because such was not
the intent of the parties and because the additional ₱12,000.00 corresponds to the fruits of the lending
of the ₱200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee 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.
Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the return of
private respondent’s money because it was not privy to the transaction between Doronilla and private
respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no
bearing on the question of petitioner’s liability for the return of private respondent’s money because the
factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was
partly responsible for the loss of private respondent’s money and is liable for its restitution.
Petitioner’s rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela
for Savings Account No. 10-1567 expressly states that—
"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority
duly authenticated, and neither a deposit nor a withdrawal will be permitted except upon the production
of the depositor savings bank book in which will be entered by the Bank the amount deposited or
withdrawn."30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch
Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting the
passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but several
times. Both the Court of Appeals and the trial court found that Atienza allowed said withdrawals because
he was party to Doronilla’s "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of the
defendant bank. Indeed, the evidence indicates that Atienza had not only facilitated the commission of
the fraud but he likewise helped in devising the means by which it can be done in such manner as to
make it appear that the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza was a
key officer therein. The records show that plaintiff had suggested that the ₱200,000.00 be deposited in
his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that it must be in
defendant’s branch in Makati for "it will be easier for them to get a certification". In fact before he was
introduced to plaintiff, Doronilla had already prepared a letter addressed to the Buendia branch
manager authorizing Angeles B. Sanchez and company to open a savings account for Sterela in the
amount of ₱200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x
x" (Exh. 1). This is a clear manifestation that the other defendants had been in consultation with Atienza
from the inception of the scheme. Significantly, there were testimonies and admission that Atienza is the
brother-in-law of a certain Romeo Mirasol, a friend and business associate of Doronilla.1awphi1.nét
CREDIT TRANS
Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla
and Atienza, the latter knew before hand that the money deposited did not belong to Doronilla nor to
Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives that the money
belonged to her and her husband and the deposit was merely to accommodate Doronilla. Atienza even
declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only ones
empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card
pertaining to this account (Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B.
Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of savings deposits
could only be made by persons whose authorized signatures are in the signature cards on file with the
bank. He, however, said that this procedure was not followed here because Sterela was owned by
Doronilla. He explained that Doronilla had the full authority to withdraw by virtue of such ownership. The
Court is not inclined to agree with Atienza. In the first place, he was all the time aware that the money
came from Vives and did not belong to Sterela. He was also told by Mrs. Vives that they were only
accommodating Doronilla so that a certification can be issued to the effect that Sterela had a deposit of
so much amount to be sued in the incorporation of the firm. In the second place, the signature of
Doronilla was not authorized in so far as that account is concerned inasmuch as he had not signed the
signature card provided by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives
nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted
practice that whenever a withdrawal is made in a savings deposit, the bank requires the presentation of
the passbook. In this case, such recognized practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the passbook which Atienza had given to
Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella Dumagpi that a duplicate
passbook was issued to Sterela because the original passbook had been surrendered to the Makati
branch in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who
undoubtedly had a hand in the execution of this certification, was aware that the contents of the same
are not true. He knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it
to her. Besides, as assistant manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original passbook was never surrendered. He
was also cognizant that Estrella Dumagpi was not among those authorized to withdraw so her
certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienza’s active
participation in the perpetration of the fraud and deception that caused the loss. The records indicate
that this account was opened three days later after the ₱200,000.00 was deposited. In spite of his
disclaimer, the Court believes that Atienza was mindful and posted regarding the opening of the current
account considering that Doronilla was all the while in "coordination" with him. That it was he who
facilitated the approval of the authority to debit the savings account to cover any overdrawings in the
current account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x.31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages
caused by their employees acting within the scope of their assigned tasks. To hold the employer liable
under this provision, it must be shown that an employer-employee relationship exists, and that the
employee was acting within the scope of his assigned task when the act complained of was
committed.32 Case law in the United States of America has it that a corporation that entrusts a general
Page 22 of 55
duty to its employee is responsible to the injured party for damages flowing from the employee’s
wrongful act done in the course of his general authority, even though in doing such act, the employee
may have failed in its duty to the employer and disobeyed the latter’s instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that
Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted
Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-1567, in which account private
respondent’s money was deposited, and in transferring the money withdrawn to Sterela’s Current
Account with petitioner. Atienza’s acts of helping Doronilla, a customer of the petitioner, were obviously
done in furtherance of petitioner’s interests34 even though in the process, Atienza violated some of
petitioner’s rules such as those stipulated in its savings account passbook.35 It was established that the
transfer of funds from Sterela’s savings account to its current account could not have been
accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their connivance
which was the cause of private respondent’s loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code,
petitioner is liable for private respondent’s loss and is solidarily liable with Doronilla and Dumagpi for the
return of the ₱200,000.00 since it is clear that petitioner failed to prove that it exercised due diligence to
prevent the unauthorized withdrawals from Sterela’s savings account, and that it was not negligent in
the selection and supervision of Atienza. Accordingly, no error was committed by the appellate court in
the award of actual, moral and exemplary damages, attorney’s fees and costs of suit to private
respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals are AFFIRMED.
SO ORDERED.
G.R. No. 154878 March 16, 2007
CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.
DECISION
CREDIT TRANS
CORONA, J.:
Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and August 20, 2002
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28,
1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia
a crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a
certain Marilou Santiago.5Thereafter, petitioner received from respondent every month (specifically, on
March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,0006 and ₱76,5007 on July
26,8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check9 dated June 29, 1995 in the
amount of ₱500,000, also payable to the order of Marilou Santiago.10 Consequently, petitioner received
from respondent the amount of ₱20,000 every month on August 5, September 5, October 5 and
November 5, 1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and
₱500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of
money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the
sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and ₱500,000, with
interest thereon at 4% a month from November 5, 1995, plus attorney’s fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000
with interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995.13 The
amount of this loan was covered by the first check. On June 29, 1995, respondent again borrowed the
amount of ₱500,000 at an agreed monthly interest of 4%, the maturity date of which was on November
5, 1995.14 The amount of this loan was covered by the second check. For both loans, no promissory
note was executed since petitioner and respondent were close friends at the time.15 Respondent paid
the stipulated monthly interest for both loans but on their maturity dates, she failed to pay the principal
amounts despite repeated demands.161awphi1.nét
Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give
the crossed checks to Santiago.17 She issued the checks for ₱76,000 and ₱20,000 not as payment of
interest but to accommodate petitioner’s request that respondent use her own checks instead of
Santiago’s.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and ₱500,000 at a
monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October
26, 1995 until fully paid;
Page 23 of 55
 2. ₱500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. ₱100,000.00 as and for attorney’s fees; and
4. ₱50,000.00 as and for actual damages.
For lack of merit, [respondent’s] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent] received
a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the
order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of
₱500,000.00, again payable to the order of Marilou Santiago, both of which were issued by
[petitioner]. The checks received by [respondent], being crossed, may not be encashed but only
deposited in the bank by the payee thereof, that is, by Marilou Santiago herself.
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].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan
that existed between the parties. x x x (emphasis supplied)22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of
the CA (which held that there were no contracts of loan between petitioner and respondent) and the
RTC (which held that there werecontracts of loan) are contradictory.24
The petition is impressed with merit.
CREDIT TRANS
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of
the contract.25 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. (Emphasis supplied)
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.26
It is undisputed that the checks were delivered to respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main
question to be answered is: who borrowed money from petitioner — respondent or Santiago?
Petitioner insists that it was upon respondent’s instruction that both checks were made payable to
Santiago.27 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.28 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.29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another.30 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.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago.31 It was highly improbable
that petitioner would grant two loans to a complete stranger without requiring as much as promissory
notes or any written acknowledgment of the debt considering that the amounts involved were quite big.
Respondent, on the other hand, already had transactions with Santiago at that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both
parties’ list of witnesses) testified that respondent’s plan was for petitioner to lend her money at a
monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a higher
rate of 5% and realize a profit of 2%.33 This explained why respondent instructed petitioner to make the
checks payable to Santiago. Respondent has not shown any reason why Ruiz’ testimony should not be
believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of ₱76,000
each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the ₱500,000
loan, she also issued her own checks in the amount of ₱20,000 each for four months.34 According to
respondent, she merely accommodated petitioner’s request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with Santiago.35 She claimed,
however, that Santiago would replace the checks with cash.36Her explanation is simply incredible. It is
Page 24 of 55
difficult to believe that respondent would put herself in a position where she would be compelled to pay ₱500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The total
interest, from her own funds, for loans she allegedly did not contract. We declared in one case that: amount due as of the date of finality will earn interest of 12% perannum until fully paid. The award of
actual damages and attorney’s fees is deleted.
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to
be believed, it must not only proceed from the mouth of a credible witness, but must be credible in itself SO ORDERED.
such as the common experience of mankind can approve as probable under the circumstances. We
have no test of the truth of human testimony except its conformity to our knowledge, observation, and
experience. Whatever is repugnant to these belongs to the miraculous, and is outside of juridical
cognizance.37

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner,
who was listed as one of her (Santiago’s) creditors.38

Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.39 The
presumption is that "evidence willfully suppressed would be adverse if produced."40 Respondent was
not able to overturn this presumption.

We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and ₱500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans. G.R. No. 146364 June 3, 2004

We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the COLITO T. PAJUYO, petitioner,
US$100,000 and ₱500,000 loans respectively. There was no written proof of the interest payable except vs.
for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the COURT OF APPEALS and EDDIE GUEVARRA, respondents.
Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."
DECISION
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: CARPIO, J.:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or The Case
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
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000 Resolution of
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e.,
the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November 1996
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming the 15 December 1995
Code.41
decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6

Hence, respondent is liable for the payment of legal interest per annum to be computed from November
The Antecedents
21, 1995, the date when she received petitioner’s demand letter.42 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.43 In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of
light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
The award of actual damages in the amount of ₱50,000 and ₱100,000 attorney’s fees is deleted since
the RTC decision did not explain the factual bases for these damages.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The
promised that he would voluntarily vacate the premises on Pajuyo’s demand.
February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with
the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and
CREDIT TRANS Page 25 of 55
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where
the house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not
show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of the
MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00) monthly as
reasonable compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and
D) pay the cost of suit.
SO ORDERED. 7 reconsideration. The dispositive portion of the resolution reads:
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision
appealed from, being in accord with the law and evidence presented, and the same is hereby
affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December
1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals,
Guevarra filed with the Supreme Court a "Motion for Extension of Time to File Appeal by Certiorari
Based on Rule 42" ("motion for extension"). Guevarra theorized that his appeal raised pure questions of
law. The Receiving Clerk of the Supreme Court received the motion for extension on 13 December
1996 or one day before the right to appeal expired.
CREDIT TRANS
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the motion
for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10 granting the
motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition for
review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case
No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment
case filed against defendant-appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarra’s petition for review because it was filed out of time. Moreover,
it was Guevarra’s counsel and not Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not
the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by tolerance.
Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made Guevarra’s continued
possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house
on demand.
Page 26 of 55
The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised National
Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment suit, the
RTC has no power to decide Guevarra’s rights under these laws. The RTC declared that in an
ejectment case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title
over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are
in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of
Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the agreement is
not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held
that Guevarra has a better right over the property under Proclamation No. 137. President Corazon C.
Aquino ("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra
was in physical possession of the property. Under Article VI of the Code of Policies Beneficiary
Selection and Disposition of Homelots and Structures in the National Housing Project ("the Code"), the
actual occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of
Appeals concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarra’s motion for extension filed before the Supreme Court
was stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk. The Court of
Appeals concluded that the motion for extension bore a date, contrary to Pajuyo’s claim that the motion
for extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since
he filed the motion one day before the expiration of the reglementary period on 14 December 1996.
Thus, the motion for extension properly complied with the condition imposed by the Court of Appeals in
its 28 January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the
petition for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyo’s argument that the appellate court should have dismissed the
petition for review because it was Guevarra’s counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he
had extensively argued on the merits of the case. This technicality, the appellate court opined, was
clearly an afterthought.
The Issues
CREDIT TRANS
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND
DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondent’s Motion for an Extension
of thirty days to file petition for review at the time when there was no more period to
extend as the decision of the Regional Trial Court had already become final and
executory.
2) in giving due course, instead of dismissing, private respondent’s Petition for
Review even though the certification against forum-shopping was signed only by
counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact
a commodatum, instead of a Contract of Lease as found by the Metropolitan Trial
Court and in holding that "the ejectment case filed against defendant-appellant is
without legal and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case
No. Q-96-26943 and in holding that the parties are in pari delicto being both
squatters, therefore, illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of
the National Government Center Housing Project instead of deciding the same under
the Kasunduan voluntarily executed by the parties, the terms and conditions of which
are the laws between themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive issues
Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for review
because the RTC decision had already become final and executory when the appellate court acted on
Guevarra’s motion for extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with
the Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that
the filing of the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had already
expired.
We are not persuaded.
Page 27 of 55
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the
Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact
and law.14 Decisions of the regional trial courts involving pure questions of law are appealable directly to
this Court by petition for review.15These modes of appeal are now embodied in Section 2, Rule 41 of the
1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarra’s petition
for review gives the impression that the issues he raised were pure questions of law. There is a
question of law when the doubt or difference is on what the law is on a certain state of facts.16 There is a
question of fact when the doubt or difference is on the truth or falsity of the facts alleged.17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s petition for
review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and not
the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute a
valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatter’s
structure stands be considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal.
However, some factual questions still have to be resolved because they have a bearing on the legal
questions raised in the petition for review. These factual matters refer to the metes and bounds of the
disputed property and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we
declared that the Court of Appeals could grant extension of time in appeals by petition for review.
In Liboro v. Court of Appeals,19 we clarified that the prohibition against granting an extension of time
applies only in a case where ordinary appeal is perfected by a mere notice of appeal. The prohibition
does not apply in a petition for review where the pleading needs verification. A petition for review, unlike
an ordinary appeal, requires preparation and research to present a persuasive position.20The drafting of
the petition for review entails more time and effort than filing a notice of appeal.21 Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’sclarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for
review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact on
the lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC decision could not
have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s motion for
extension. The Court of Appeals gave due course to the motion for extension because it complied with
the condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated
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that the Court of Appeals would only give due course to the motion for extension if filed on time. The
motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension are
(1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the date
of filing of the motion for extension.24 It is the date of the filing of the motion or pleading, and not the
date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if
the motion for extension bears no date, the date of filing stamped on it is the reckoning point for
determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Court’s
Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly
one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for
review at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the procedural issues
against Guevarra’s petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court.25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
court’s jurisdiction after voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to sign the
certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the
verification, claiming that the counsel’s verification is insufficient since it is based only on "mere
information."
A party’s failure to sign the certification against forum shopping is different from the party’s failure to sign
personally the verification. The certificate of non-forum shopping must be signed by the party, and not
by counsel.27 The certification of counsel renders the petition defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.29 It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is
filed in good faith.30 The party need not sign the verification. A party’s representative, lawyer or any
person who personally knows the truth of the facts alleged in the pleading may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely
an afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve
the Issue of Possession
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Settled is the rule that the defendant’s claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if
the ownership is inseparably linked with the possession.33 The adjudication on the issue of ownership is
only provisional and will not bar an action between the same parties involving title to the land.34 This
doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible
entry and unlawful detainer, where the only issue for adjudication is the physical or material possession
over the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case?
The Court of Appeals believed so and held that it would just leave the parties where they are since they
are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except
to prove the nature of the possession when necessary to resolve the issue of physical
possession.36 The same is true when the defendant asserts the absence of title over the property. The
absence of title over the contested lot is not a ground for the courts to withhold relief from the parties in
an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.37 It does not even matter if a party’s title to the property is questionable,38 or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.39 Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.40 Neither is the
unlawful withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself.41Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right
lawfully ejects him.42 To repeat, the only issue that the court has to settle in an ejectment suit is the right
to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff had
prior possession and had already introduced improvements on the public land. The plaintiff had a
pending application for the land with the Bureau of Lands when the defendant ousted him from
possession. The plaintiff filed the action of forcible entry against the defendant. The government was not
a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because while
the application of the plaintiff was still pending, title remained with the government, and the Bureau of
Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that courts
have jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff,
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by priority of his application and of his entry, acquired prior physical possession over the public land
applied for as against other private claimants. That prior physical possession enjoys legal protection
against other private claimants because only a court can take away such physical possession in an
ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the
public land without the owner’s permission. Title to the land remained with the government because it
had not awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant
were in effect squatting on government property. Yet, we upheld the courts’ jurisdiction to resolve the
issue of possession even if the plaintiff and the defendant in the ejectment case did not have any title
over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession to respect and resort to the law alone to
obtain what he claims is his.45 The party deprived of possession must not take the law into his own
hands.46 Ejectment proceedings are summary in nature so the authorities can settle speedily actions to
recover possession because of the overriding need to quell social disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was
in force in this country before the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the physical possession of real
property, irrespective of the question as to who has the title thereto. Under the Spanish Civil
Code we had the accion interdictal, a summary proceeding which could be brought within one
year from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291);
and as early as October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No.
190 of the Philippine Commission) we implanted the common law action of forcible entry
(section 80 of Act No. 190), the object of which has been stated by this Court to be "to
prevent breaches of the peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal would create that
some advantage must accrue to those persons who, believing themselves entitled to
the possession of property, resort to force to gain possession rather than to some
appropriate action in the court to assert their claims." (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act (Act No. 926)
the action of forcible entry was already available in the courts of the country. So the question to
be resolved is, Did the Legislature intend, when it vested the power and authority to alienate
and dispose of the public lands in the Lands Department, to exclude the courts from
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entertaining the possessory action of forcible entry between rival claimants or occupants of any
land before award thereof to any of the parties? Did Congress intend that the lands applied for,
or all public lands for that matter, be removed from the jurisdiction of the judicial Branch of the
Government, so that any troubles arising therefrom, or any breaches of the peace or disorders
caused by rival claimants, could be inquired into only by the Lands Department to the
exclusion of the courts? The answer to this question seems to us evident. The Lands
Department does not have the means to police public lands; neither does it have the means to
prevent disorders arising therefrom, or contain breaches of the peace among settlers; or to
pass promptly upon conflicts of possession. Then its power is clearly limited to disposition
and alienation, and while it may decide conflicts of possession in order to make proper
award, the settlement of conflicts of possession which is recognized in the court herein
has another ultimate purpose, i.e., the protection of actual possessors and occupants
with a view to the prevention of breaches of the peace. The power to dispose and
alienate could not have been intended to include the power to prevent or settle
disorders or breaches of the peace among rival settlers or claimants prior to the final
award. As to this, therefore, the corresponding branches of the Government must continue to
exercise power and jurisdiction within the limits of their respective functions. The vesting of
the Lands Department with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches of the Government
of the exercise of the respective functions or powers thereon, such as the authority to
stop disorders and quell breaches of the peace by the police, the authority on the part
of the courts to take jurisdiction over possessory actions arising therefrom not
involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the courts
will not interfere with the administration of matters concerning the same. (50 C. J. 1093-1094.)
We have no quarrel with this principle. The determination of the respective rights of rival
claimants to public lands is different from the determination of who has the actual physical
possession or occupation with a view to protecting the same and preventing disorder and
breaches of the peace. A judgment of the court ordering restitution of the possession of a
parcel of land to the actual occupant, who has been deprived thereof by another through the
use of force or in any other illegal manner, can never be "prejudicial interference" with the
disposition or alienation of public lands. On the other hand, if courts were deprived of
jurisdiction of cases involving conflicts of possession, that threat of judicial action
against breaches of the peace committed on public lands would be eliminated, and a
state of lawlessness would probably be produced between applicants, occupants or
squatters, where force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in our jurisdiction, is a summary
and expeditious remedy whereby one in peaceful and quiet possession may recover the
possession of which he has been deprived by a stronger hand, by violence or terror; its
ultimate object being to prevent breach of the peace and criminal disorder. (Supia and Batioco
vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession as a
fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The
title or right to possession is never in issue in an action of forcible entry; as a matter of fact,
evidence thereof is expressly banned, except to prove the nature of the possession. (Second
4, Rule 72, Rules of Court.) With this nature of the action in mind, by no stretch of the
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imagination can conclusion be arrived at that the use of the remedy in the courts of justice
would constitute an interference with the alienation, disposition, and control of public lands. To
limit ourselves to the case at bar can it be pretended at all that its result would in any way
interfere with the manner of the alienation or disposition of the land contested? On the
contrary, it would facilitate adjudication, for the question of priority of possession having been
decided in a final manner by the courts, said question need no longer waste the time of the
land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and ‘in pari
delicto potior est conditio defedentis.’ The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its application.
One of these exceptions is where the application of the pari delicto rule would violate well-established
public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible entry and
unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless
of the actual condition of the title to the property, the party in peaceable quiet possession shall
not be turned out by strong hand, violence or terror. In affording this remedy of restitution the
object of the statute is to prevent breaches of the peace and criminal disorder which would
ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing themselves entitled
to the possession of property, resort to force to gain possession rather than to some
appropriate action in the courts to assert their claims. This is the philosophy at the foundation
of all these actions of forcible entry and detainer which are designed to compel the party out of
possession to respect and resort to the law alone to obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught
with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem and
lawlessness. A squatter would oust another squatter from possession of the lot that the latter had
illegally occupied, emboldened by the knowledge that the courts would leave them where they are.
Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at all
cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of
possession seek to prevent.53 Even the owner who has title over the disputed property cannot take the
law into his own hands to regain possession of his property. The owner must go to court.
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Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a serious and urgent matter that cannot be left
to the squatters to decide. To do so would make squatters receive better treatment under the law. The
law restrains property owners from taking the law into their own hands. However, the principle of pari
delicto as applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters
or violently retake possession of properties usurped from them. Courts should not leave squatters to
their own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals
refused to rule on the issue of physical possession. Nevertheless, the appellate court held that the
pivotal issue in this case is who between Pajuyo and Guevarra has the "priority right as beneficiary of
the contested land under Proclamation No. 137."54 According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it
declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137.
He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated claim
that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the
project administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No. 137 into
law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137.
Even when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra
did not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve the
issue of possession. However, the jurisdiction of the courts would be limited to the issue of physical
possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival claimants
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to public land is, however, distinct from the determination of who has the actual physical possession or
who has a better right of physical possession.56 The administrative disposition and alienation of public
lands should be threshed out in the proper government agency.57
The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should
not preempt the decision of the administrative agency mandated by law to determine the qualifications
of applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and breaches of peace.58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyo’s prior possession of the lot and ownership of the house built on it.
Guevarra expressly admitted the existence and due execution of the Kasunduan.
The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng
"walang bayad." Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to
vacate the premises on Pajuyo’s demand but Guevarra broke his promise and refused to heed Pajuyo’s
demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
person from another of the possession of real property to which the latter is entitled after the expiration
or termination of the former’s right to hold possession under a contract, express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.60 The defendant’s refusal to comply with the demand makes his
continued possession of the property unlawful.61 The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance
of the owner.62
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyo’s forbearance. Pajuyo did
not require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarra’s refusal to
comply with Pajuyo’s demand to vacate made Guevarra’s continued possession of the property
unlawful.
We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
Page 31 of 55
In a contract of commodatum, one of the parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it.63 An essential feature of commodatum is
that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is
for a certain period.64 Thus, the bailor cannot demand the return of the thing loaned until after expiration
of the period stipulated, or after accomplishment of the use for which the commodatum is
constituted.65 If the bailor should have urgent need of the thing, he may demand its return for temporary
use.66 If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at
will, in which case the contractual relation is called a precarium.67 Under the Civil Code, precarium is a
kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease.69 The
tenant’s withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra
as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of
commission, administration and commodatum.70 These contracts certainly involve the obligation to
deliver or return the thing received.71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter.
Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy.
Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right
to physical possession of the contested property. The Kasunduan is the undeniable evidence of
Guevarra’s recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a possessor
in bad faith. The absence of a contract would not yield a different result, as there would still be an
implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra bases his argument on
the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on
socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide who
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between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is
physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the distinctions
between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he
must allege and prove prior possession.75 But in unlawful detainer, the defendant unlawfully withholds
possession after the expiration or termination of his right to possess under any contract, express or
implied. In such a case, prior physical possession is not required.76
Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s transient right
to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the
property because Guevarra had to seek Pajuyo’s permission to temporarily hold the property and
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still
rested with Pajuyo and this is evidence of actual possession.
Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in the eyes
of the law does not mean that a man has to have his feet on every square meter of the ground before
he is deemed in possession.77 One may acquire possession not only by physical occupation, but also by
the fact that a thing is subject to the action of one’s will.78 Actual or physical occupation is not always
necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
property."80 We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the
case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This
case is between squatters. Had the government participated in this case, the courts could have evicted
the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we cannot
evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the
courts in settling the issue of physical possession. Stripping both the plaintiff and the defendant of
possession just because they are squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then rather settle the issue of physical
possession among themselves than seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed property. This would subvert the
policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.81
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In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of
physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.82 The owner can still go to court to recover lawfully
the property from the person who holds the property without legal title. Our ruling here does not diminish
the power of government agencies, including local governments, to condemn, abate, remove or
demolish illegal or unauthorized structures in accordance with existing laws.
Attorney’s Fees and Rentals
The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s fees as part
of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code.83 Thus, the
award of attorney’s fees is the exception rather than the rule.84 Attorney’s fees are not awarded every
time a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate.85 We therefore delete the attorney’s fees awarded to Pajuyo.
We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not
dispute this factual finding of the two courts. We find the amount reasonable compensation to Pajuyo.
The ₱300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated
11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943,
affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch
31 in Civil Case No. 12432, is REINSTATEDwith MODIFICATION. The award of attorney’s fees is
deleted. No costs.
SO ORDERED.
G.R. Nos. 173654-765 August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
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CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner People of the
Philippines, represented by the Office of the Solicitor General, praying for the reversal of the Orders
dated 30 January 2006 and 9 June 2006 of the Regional Trial Court (RTC) of the 6th Judicial Region,
Branch 68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against respondents
Teresita Puig and Romeo Porras, and denying petitioner’s Motion for Reconsideration, in Criminal
Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor’s Office filed before Branch 68 of the RTC in
Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig (Puig) and Romeo
Porras (Porras) who were the Cashier and Bookkeeper, respectively, of private complainant Rural Bank
of Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma, except for the
amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court, above-named [respondents],
conspiring, confederating, and helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and with intent of gain, did then and
there willfully, unlawfully and feloniously take, steal and carry away the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage and prejudice of the
said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence of probable
cause that would have necessitated the issuance of a warrant of arrest based on the following grounds:
(1) the element of ‘taking without the consent of the owners’ was missing on the ground
that it is the depositors-clients, and not the Bank, which filed the complaint in these cases, who
are the owners of the money allegedly taken by respondents and hence, are the real parties-
in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence, guardianship or
vigilance between the respondents and the offended party that would have created a
high degree of confidence between them which the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the respondents to push through
would be violative of the right of the respondents under Section 14(2), Article III of the 1987 Constitution
which states that in all criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of the Revised Rules of
Criminal Procedure, the RTC dismissed the cases on 30 January 2006 and refused to issue a warrant
of arrest against Puig and Porras.
Page 33 of 55
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioner’s Motion for Reconsideration was issued by the RTC,
finding as follows:
Accordingly, the prosecution’s Motion for Reconsideration should be, as it hereby, DENIED.
The Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45, raising the sole
legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT SUFFICIENTLY
ALLEGE THE ELEMENT OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND THE
QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30 January
2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed with Criminal Cases
No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and current deposits
of money in banks and similar institutions shall be governed by the provisions concerning simple loans."
Corollary thereto, Article 1953 of the same Code provides that "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." Thus, it posits that the depositors who place their money with the
bank are considered creditors of the bank. The bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of qualified
theft, citing that a perusal of the Informations will show that they specifically allege that the respondents
were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., respectively, and that they took
various amounts of money with grave abuse of confidence, and without the knowledge and consent of
the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the ground that a
Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal because a finding of probable
cause for the issuance of a warrant of arrest presupposes evaluation of facts and circumstances, which
is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of Justice, is the
principal party to file a Petition for Review on Certiorari, considering that the incident was indorsed by
the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the Informations
and, therefore, because of this defect, there is no basis for the existence of probable cause which will
justify the issuance of the warrant of arrest. Petitioner assails the dismissal contending that the
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Informations for Qualified Theft sufficiently state facts which constitute (a) the qualifying circumstance
of grave abuse of confidence; and (b) the element of taking, with intent to gain and without the consent
of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC judge found the
allegations in the Information inadequate. He ruled that the Information failed to state facts constituting
the qualifying circumstance of grave abuse of confidence and the element of taking without the consent
of the owner, since the owner of the money is not the Bank, but the depositors therein. He also
cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of dependence,
guardianship or vigilance, between the respondents and the offended party that has created a
high degree of confidence between them, which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no probable
cause simply on the insufficiency of the allegations in the Informations concerning the facts constitutive
of the elements of the offense charged. This, therefore, makes the issue of sufficiency of the allegations
in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is committed as
follows, viz:
ART. 310. Qualified Theft. – The crime of theft shall be punished by the penalties next higher
by two degrees than those respectively specified in the next preceding article, if committed by
a domestic servant, or with grave abuse of confidence, or if the property stolen is motor
vehicle, mail matter or large cattle or consists of coconuts taken from the premises of a
plantation, fish taken from a fishpond or fishery or if property is taken on the occasion of fire,
earthquake, typhoon, volcanic eruption, or any other calamity, vehicular accident or civil
disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of another’s
property without violence or intimidation against persons or force upon things. The elements of the
crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
Page 34 of 55
 3. That the said taking be done with intent to gain;
4. That it be done without the owner’s consent;
5. That it be accomplished without the use of violence or intimidation against persons, nor of
force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires, inter alia, that
the information must state the acts or omissions complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules of Court, is
enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting the
offense and the qualifying and aggravating circumstances must be stated in ordinary and
concise language and not necessarily in the language used in the statute but in terms sufficient
to enable a person of common understanding to know what offense is being charged as well
as its qualifying and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging the acts or
omissions complained of as constituting the offense. The test is whether it enables a person of common
understanding to know the charge against him, and the court to render judgment properly.5
The portion of the Information relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x x x.
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their employer.
Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is very
clear not only from the express provisions of the law, but from established jurisprudence. The
relationship between banks and depositors has been held to be that of creditor and debtor. Articles 1953
and 1980 of the New Civil Code, as appropriately pointed out by petitioner, provide as follows:
Article 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.
Article 1980. Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature of
possession by the Bank of the money deposits therein, and the duties being performed by its
employees who have custody of the money or have come into possession of it. The Court has
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consistently considered the allegations in the Information that such employees acted with grave abuse
of confidence, to the damage and prejudice of the Bank, without particularly referring to it as owner of
the money deposits, as sufficient to make out a case of Qualified Theft. For a graphic illustration, we
cite Roque v. People,6where the accused teller was convicted for Qualified Theft based on this
Information:
That on or about the 16th day of November, 1989, in the municipality of Floridablanca,
province of Pampanga, Philippines and within the jurisdiction of his Honorable Court, the
above-named accused ASUNCION GALANG ROQUE, being then employed as teller of the
Basa Air Base Savings and Loan Association Inc. (BABSLA) with office address at Basa Air
Base, Floridablanca, Pampanga, and as such was authorized and reposed with the
responsibility to receive and collect capital contributions from its member/contributors of said
corporation, and having collected and received in her capacity as teller of the BABSLA the sum
of TEN THOUSAND PESOS (P10,000.00), said accused, with intent of gain, with grave
abuse of confidence and without the knowledge and consent of said corporation, did
then and there willfully, unlawfully and feloniously take, steal and carry away the amount
of P10,000.00, Philippine currency, by making it appear that a certain depositor by the name of
Antonio Salazar withdrew from his Savings Account No. 1359, when in truth and in fact said
Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the damage and prejudice
of BABSLA in the total amount of P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the teller’s
possession due to the confidence reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of Qualified Theft
based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992 and February
13, 1992, both dates inclusive, in the City of Manila, Philippines, the said accused did then and
there wilfully, unlawfully and feloniously, with intent of gain and without the knowledge and
consent of the owner thereof, take, steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch,
Manila represented by its Branch Manager, HELEN U. FARGAS, to the damage and prejudice
of the said owner in the aforesaid amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of
confidence and unfaithfulness, he being the Branch Operation Officer of the said complainant
and as such he had free access to the place where the said amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial and
Industrial Bank (PCIB), is Qualified Theft. Appellant could not have committed the crime had
Page 35 of 55
 he not been holding the position of Luneta Branch Operation Officer which gave him not only
sole access to the bank vault xxx. The management of the PCIB reposed its trust and
confidence in the appellant as its Luneta Branch Operation Officer, and it was this trust and
confidence which he exploited to enrich himself to the damage and prejudice of PCIB x x x.9
From another end, People v. Locson,10 in addition to People v. Sison, described the nature of
possession by the Bank. The money in this case was in the possession of the defendant as receiving
teller of the bank, and the possession of the defendant was the possession of the Bank. The Court held
therein that when the defendant, with grave abuse of confidence, removed the money and appropriated
it to his own use without the consent of the Bank, there was taking as contemplated in the crime of
Qualified Theft.11
resolution of the prosecutor and its supporting evidence. Soliven v. Makasiar,15 as reiterated in Allado
v. Driokno,16 explained that probable cause for the issuance of a warrant of arrest is the existence of
such facts and circumstances that would lead a reasonably discreet and prudent person to believe that
an offense has been committed by the person sought to be arrested.17 The records reasonably indicate
that the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as the case
may be, to relieve the respondents from the pain of going through a trial once it is ascertained that no
probable cause exists to form a sufficient belief as to the guilt of the respondents, conversely, it is also
equally imperative upon the judge to proceed with the case upon a showing that there is a prima
facie case against the respondents.

Conspicuously, in all of the foregoing cases, where the Informations merely alleged the positions of the WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby GRANTED. The
respondents; that the crime was committed with grave abuse of confidence, with intent to gain and Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing Criminal Cases No. 05-3054 to
without the knowledge and consent of the Bank, without necessarily stating the phrase being 05-3165 are REVERSED and SET ASIDE. Let the corresponding Warrants of Arrest issue against
assiduously insisted upon by respondents, "of a relation by reason of dependence, guardianship or herein respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in
vigilance, between the respondents and the offended party that has created a high degree of Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-3165,
confidence between them, which respondents abused,"12 and without employing the word "owner" inclusive, with reasonable dispatch. No pronouncement as to costs.
in lieu of the "Bank" were considered to have satisfied the test of sufficiency of allegations.
SO ORDERED.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in this case,
there is even no reason to quibble on the allegation in the Informations that they acted with grave abuse
of confidence. In fact, the Information which alleged grave abuse of confidence by accused herein is
even more precise, as this is exactly the requirement of the law in qualifying the crime of Theft.

In summary, the Bank acquires ownership of the money deposited by its clients; and the employees of
the Bank, who are entrusted with the possession of money of the Bank due to the confidence reposed
in them, occupy positions of confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.

On the theory of the defense that the DOJ is the principal party who may file the instant petition, the
ruling in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court thus enunciated:

In a criminal case in which the offended party is the State, the interest of the private
complainant or the offended party is limited to the civil liability arising therefrom. Hence, if a
criminal case is dismissed by the trial court or if there is an acquittal, a reconsideration of the
order of dismissal or acquittal may be undertaken, whenever legally feasible, insofar as the G.R. No. 123498 November 23, 2007
criminal aspect thereof is concerned and may be made only by the public prosecutor; or in the
case of an appeal, by the State only, through the OSG. x x x. BPI FAMILY BANK, Petitioner,
vs.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is well-settled that in AMADO FRANCO and COURT OF APPEALS, Respondents.
appeals by certiorari under Rule 45 of the Rules of Court, only errors of law may be raised,14 and herein
petitioner certainly raised a question of law. DECISION

As an aside, even if we go beyond the allegations of the Informations in these cases, a closer look at NACHURA, J.:
the records of the preliminary investigation conducted will show that, indeed, probable cause exists for
the indictment of herein respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge
shall issue a warrant of arrest only upon a finding of probable cause after personally evaluating the Banks are exhorted to treat the accounts of their depositors with meticulous care and utmost fidelity. We
reiterate this exhortation in the case at bench.
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Before us is a Petition for Review on Certiorari seeking the reversal of the Court of Appeals (CA)
Decision1 in CA-G.R. CV No. 43424 which affirmed with modification the judgment2 of the Regional Trial
Court, Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.
This case has its genesis in an ostensible fraud perpetrated on the petitioner BPI Family Bank (BPI-FB)
allegedly by respondent Amado Franco (Franco) in conspiracy with other individuals,3 some of whom
opened and maintained separate accounts with BPI-FB, San Francisco del Monte (SFDM) branch, in a
series of transactions.
On August 15, 1989, Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and
current account with BPI-FB. Soon thereafter, or on August 25, 1989, First Metro Investment
Corporation (FMIC) also opened a time deposit account with the same branch of BPI-FB with a deposit
of ₱100,000,000.00, to mature one year thence.
Subsequently, on August 31, 1989, Franco opened three accounts, namely, a current,4 savings,5 and
time deposit,6with BPI-FB. The current and savings accounts were respectively funded with an initial
deposit of ₱500,000.00 each, while the time deposit account had ₱1,000,000.00 with a maturity date of
August 31, 1990. The total amount of ₱2,000,000.00 used to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of Franco’s introduction of Eladio Teves,7 who was
looking for a conduit bank to facilitate Tevesteco’s business transactions, to Jaime Sebastian, who was
then BPI-FB SFDM’s Branch Manager. In turn, the funding for the ₱2,000,000.00 check was part of the
₱80,000,000.00 debited by BPI-FB from FMIC’s time deposit account and credited to Tevesteco’s
current account pursuant to an Authority to Debit purportedly signed by FMIC’s officers.
It appears, however, that the signatures of FMIC’s officers on the Authority to Debit were forged.8 On
September 4, 1989, Antonio Ong,9 upon being shown the Authority to Debit, personally declared his
signature therein to be a forgery. Unfortunately, Tevesteco had already effected several withdrawals
from its current account (to which had been credited the ₱80,000,000.00 covered by the forged
Authority to Debit) amounting to ₱37,455,410.54, including the ₱2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect its interests in light of FMIC’s forgery claim, BPI-
FB, thru its Senior Vice-President, Severino Coronacion, instructed Jesus Arangorin10 to debit Franco’s
savings and current accounts for the amounts remaining therein.11 However, Franco’s time deposit
account could not be debited due to the capacity limitations of BPI-FB’s computer.12
In the meantime, two checks13 drawn by Franco against his BPI-FB current account were dishonored
upon presentment for payment, and stamped with a notation "account under garnishment." Apparently,
Franco’s current account was garnished by virtue of an Order of Attachment issued by the Regional
Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati Case), which had been filed by
BPI-FB against Franco et al.,14 to recover the ₱37,455,410.54 representing Tevesteco’s total
withdrawals from its account.
Notably, the dishonored checks were issued by Franco and presented for payment at BPI-FB prior to
Franco’s receipt of notice that his accounts were under garnishment.15 In fact, at the time the Notice of
Garnishment dated September 27, 1989 was served on BPI-FB, Franco had yet to be impleaded in the
Makati case where the writ of attachment was issued.
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It was only on May 15, 1990, through the service of a copy of the Second Amended Complaint in Civil
Case No. 89-4996, that Franco was impleaded in the Makati case.16 Immediately, upon receipt of such
copy, Franco filed a Motion to Discharge Attachment which the Makati RTC granted on May 16, 1990.
The Order Lifting the Order of Attachment was served on BPI-FB on even date, with Franco demanding
the release to him of the funds in his savings and current accounts. Jesus Arangorin, BPI-FB’s new
manager, could not forthwith comply with the demand as the funds, as previously stated, had already
been debited because of FMIC’s forgery claim. As such, BPI-FB’s computer at the SFDM Branch
indicated that the current account record was "not on file."
With respect to Franco’s savings account, it appears that Franco agreed to an arrangement, as a favor
to Sebastian, whereby ₱400,000.00 from his savings account was temporarily transferred to Domingo
Quiaoit’s savings account, subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan Embassy. As part of the
arrangement, Sebastian retained custody of Quiaoit’s savings account passbook to ensure that no
withdrawal would be effected therefrom, and to preserve Franco’s deposits.
On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB deducted the amount of
₱63,189.00 from the remaining balance of the time deposit account representing advance interest paid
to him.
These transactions spawned a number of cases, some of which we had already resolved.
FMIC filed a complaint against BPI-FB for the recovery of the amount of ₱80,000,000.00 debited from
its account.17The case eventually reached this Court, and in BPI Family Savings Bank, Inc. v. First
Metro Investment Corporation,18 we upheld the finding of the courts below that BPI-FB failed to exercise
the degree of diligence required by the nature of its obligation to treat the accounts of its depositors with
meticulous care. Thus, BPI-FB was found liable to FMIC for the debited amount in its time deposit. It
was ordered to pay ₱65,332,321.99 plus interest at 17% per annum from August 29, 1989 until fully
restored. In turn, the 17% shall itself earn interest at 12% from October 4, 1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna Lizardo and Yolanda Tica (Buenaventura, et
al.),19 recipients of a ₱500,000.00 check proceeding from the ₱80,000,000.00 mistakenly credited to
Tevesteco, likewise filed suit. Buenaventura et al., as in the case of Franco, were also prevented from
effecting withdrawals20 from their current account with BPI-FB, Bonifacio Market, Edsa, Caloocan City
Branch. Likewise, when the case was elevated to this Court docketed as BPI Family Bank v.
Buenaventura,21 we ruled that BPI-FB had no right to freeze Buenaventura, et al.’s accounts and
adjudged BPI-FB liable therefor, in addition to damages.
Meanwhile, BPI-FB filed separate civil and criminal cases against those believed to be the perpetrators
of the multi-million peso scam.22 In the criminal case, Franco, along with the other accused, except for
Manuel Bienvenida who was still at large, were acquitted of the crime of Estafa as defined and
penalized under Article 351, par. 2(a) of the Revised Penal Code.23 However, the civil case24 remains
under litigation and the respective rights and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPI-FB’s refusal to heed Franco’s demands to unfreeze his accounts and
release his deposits therein, the latter filed on June 4, 1990 with the Manila RTC the subject suit. In his
complaint, Franco prayed for the following reliefs: (1) the interest on the remaining balance25 of his
current account which was eventually released to him on October 31, 1991; (2) the balance26 on his
savings account, plus interest thereon; (3) the advance interest27 paid to him which had been deducted
Page 37 of 55
when he pre-terminated his time deposit account; and (4) the payment of actual, moral and exemplary
damages, as well as attorney’s fees.
BPI-FB traversed this complaint, insisting that it was correct in freezing the accounts of Franco and
refusing to release his deposits, claiming that it had a better right to the amounts which consisted of part
of the money allegedly fraudulently withdrawn from it by Tevesteco and ending up in Franco’s accounts.
BPI-FB asseverated that the claimed consideration of ₱2,000,000.00 for the introduction facilitated by
Franco between George Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the
other, spoke volumes of Franco’s participation in the fraudulent transaction.
On August 4, 1993, the Manila RTC rendered judgment, the dispositive portion of which reads as
follows:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Franco] and against
[BPI-FB], ordering the latter to pay to the former the following sums:
1. ₱76,500.00 representing the legal rate of interest on the amount of ₱450,000.00 from May
18, 1990 to October 31, 1991;
2. ₱498,973.23 representing the balance on [Franco’s] savings account as of May 18, 1990,
together with the interest thereon in accordance with the bank’s guidelines on the payment
therefor;
3. ₱30,000.00 by way of attorney’s fees; and
4. ₱10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of factual and legal anchor.
Costs against [BPI-FB].
SO ORDERED.28
Unsatisfied with the decision, both parties filed their respective appeals before the CA. Franco confined
his appeal to the Manila RTC’s denial of his claim for moral and exemplary damages, and the diminutive
award of attorney’s fees. In affirming with modification the lower court’s decision, the appellate court
decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is hereby AFFIRMED with modification
ordering [BPI-FB] to pay [Franco] ₱63,189.00 representing the interest deducted from the time deposit
of plaintiff-appellant. ₱200,000.00 as moral damages and ₱100,000.00 as exemplary damages, deleting
the award of nominal damages (in view of the award of moral and exemplary damages) and increasing
the award of attorney’s fees from ₱30,000.00 to ₱75,000.00.
Cost against [BPI-FB].
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SO ORDERED.29
In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1) Franco had a better right to the
deposits in the subject accounts which are part of the proceeds of a forged Authority to Debit; (2)
Franco is entitled to interest on his current account; (3) Franco can recover the ₱400,000.00 deposit in
Quiaoit’s savings account; (4) the dishonor of Franco’s checks was not legally in order; (5) BPI-FB is
liable for interest on Franco’s time deposit, and for moral and exemplary damages; and (6) BPI-FB’s
counter-claim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the lower courts that BPI-FB cannot unilaterally freeze
Franco’s accounts and preclude him from withdrawing his deposits. However, contrary to the appellate
court’s ruling, we hold that Franco is not entitled to unearned interest on the time deposit as well as to
moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Franco’s accounts, BPI-FB urges us that
the legal consequence of FMIC’s forgery claim is that the money transferred by BPI-FB to Tevesteco is
its own, and considering that it was able to recover possession of the same when the money was
redeposited by Franco, it had the right to set up its ownership thereon and freeze Franco’s accounts.
BPI-FB contends that its position is not unlike that of an owner of personal property who regains
possession after it is stolen, and to illustrate this point, BPI-FB gives the following example: where X’s
television set is stolen by Y who thereafter sells it to Z, and where Z unwittingly entrusts possession of
the TV set to X, the latter would have the right to keep possession of the property and preclude Z from
recovering possession thereof. To bolster its position, BPI-FB cites Article 559 of the Civil Code, which
provides:
Article 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in
good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor.
BPI-FB’s argument is unsound. To begin with, the movable property mentioned in Article 559 of the Civil
Code pertains to a specific or determinate thing.30 A determinate or specific thing is one that is
individualized and can be identified or distinguished from others of the same kind.31
In this case, the deposit in Franco’s accounts consists of money which, albeit characterized as a
movable, is generic and fungible.32 The quality of being fungible depends upon the possibility of the
property, because of its nature or the will of the parties, being substituted by others of the same kind,
not having a distinct individuality.33
Significantly, while Article 559 permits an owner who has lost or has been unlawfully deprived of a
movable to recover the exact same thing from the current possessor, BPI-FB simply claims ownership
of the equivalent amount of money, i.e., the value thereof, which it had mistakenly debited from FMIC’s
account and credited to Tevesteco’s, and subsequently traced to Franco’s account. In fact, this is what
Page 38 of 55
BPI-FB did in filing the Makati Case against Franco, et al. It staked its claim on the money itself which
passed from one account to another, commencing with the forged Authority to Debit.
It bears emphasizing that money bears no earmarks of peculiar ownership,34 and this characteristic is all
the more manifest in the instant case which involves money in a banking transaction gone awry. Its
primary function is to pass from hand to hand as a medium of exchange, without other evidence of its
title.35 Money, which had passed through various transactions in the general course of banking
business, even if of traceable origin, is no exception.
Thus, inasmuch as what is involved is not a specific or determinate personal property, BPI-FB’s
illustrative example, ostensibly based on Article 559, is inapplicable to the instant case.
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMIC’s deposits to Tevesteco’s account. BPI-FB
conveniently forgets that the deposit of money in banks is governed by the Civil Code provisions on
simple loan or mutuum.36 As there is a debtor-creditor relationship between a bank and its depositor,
BPI-FB ultimately acquired ownership of Franco’s deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount on demand.37Although BPI-FB owns the deposits
in Franco’s accounts, it cannot prevent him from demanding payment of BPI-FB’s obligation by drawing
checks against his current account, or asking for the release of the funds in his savings account. Thus,
when Franco issued checks drawn against his current account, he had every right as creditor to expect
that those checks would be honored by BPI-FB as debtor.
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of Franco based on its
mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco was
allegedly involved in. To grant BPI-FB, or any bank for that matter, the right to take whatever action it
pleases on deposits which it supposes are derived from shady transactions, would open the floodgates
of public distrust in the banking industry.
Our pronouncement in Simex International (Manila), Inc. v. Court of Appeals38 continues to resonate,
thus:
The banking system is an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving
of money or as active instruments of business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with respect and even gratitude and, most
of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life’s savings to
the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for
him. The ordinary person, with equal faith, usually maintains a modest checking account for security
and convenience in the settling of his monthly bills and the payment of ordinary expenses. x x x.
In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such
account consists only of a few hundred pesos or of millions. The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit,
confident that the bank will deliver it as and to whomever directs. A blunder on the part of the bank, such
as the dishonor of the check without good reason, can cause the depositor not a little embarrassment if
not also financial loss and perhaps even civil and criminal litigation.
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The point is that as a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care, always having
in mind the fiduciary nature of their relationship. x x x.
Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know the signatures of
its customers. Having failed to detect the forgery in the Authority to Debit and in the process
inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability thereon to Franco
and the other payees of checks issued by Tevesteco, or prevent withdrawals from their respective
accounts without the appropriate court writ or a favorable final judgment.
Further, it boggles the mind why BPI-FB, even without delving into the authenticity of the signature in
the Authority to Debit, effected the transfer of ₱80,000,000.00 from FMIC’s to Tevesteco’s account,
when FMIC’s account was a time deposit and it had already paid advance interest to FMIC. Considering
that there is as yet no indubitable evidence establishing Franco’s participation in the forgery, he remains
an innocent party. As between him and BPI-FB, the latter, which made possible the present
predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on Franco’s current account, BPI-FB argues that its non-
compliance with the Makati RTC’s Order Lifting the Order of Attachment and the legal consequences
thereof, is a matter that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct holding of the appellate court in this respect. The
Manila RTC’s order to pay interests on Franco’s current account arose from BPI-FB’s unjustified refusal
to comply with its obligation to pay Franco pursuant to their contract of mutuum. In other words, from
the time BPI-FB refused Franco’s demand for the release of the deposits in his current account,
specifically, from May 17, 1990, interest at the rate of 12% began to accrue thereon.39
Undeniably, the Makati RTC is vested with the authority to determine the legal consequences of BPI-
FB’s non-compliance with the Order Lifting the Order of Attachment. However, such authority does not
preclude the Manila RTC from ruling on BPI-FB’s liability to Franco for payment of interest based on its
continued and unjustified refusal to perform a contractual obligation upon demand. After all, this was the
core issue raised by Franco in his complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in Quiaoit’s account, we find no reason to depart from
the factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that the deposits in his account are actually owned
by Franco who simply accommodated Jaime Sebastian’s request to temporarily transfer ₱400,000.00
from Franco’s savings account to Quiaoit’s account.40 His testimony cannot be characterized as hearsay
as the records reveal that he had personal knowledge of the arrangement made between Franco,
Sebastian and himself.41
BPI-FB makes capital of Franco’s belated allegation relative to this particular arrangement. It insists that
the transaction with Quiaoit was not specifically alleged in Franco’s complaint before the Manila RTC.
However, it appears that BPI-FB had impliedly consented to the trial of this issue given its extensive
cross-examination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Page 39 of 55
Section 5. Amendment to conform to or authorize presentation of evidence.— When issues not raised
by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made upon
motion of any party at any time, even after judgment; but failure to amend does not affect the result of
the trial of these issues. If evidence is objected to at the trial on the ground that it is now within the
issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with
liberality if the presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the amendment to be made.
(Emphasis supplied)
In all, BPI-FB’s argument that this case is not the right forum for Franco to recover the ₱400,000.00
begs the issue. To reiterate, Quiaoit, testifying during the trial, unequivocally disclaimed ownership of
the funds in his account, and pointed to Franco as the actual owner thereof. Clearly, Franco’s action for
the recovery of his deposits appropriately covers the deposits in Quiaoit’s account.
Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist that the dishonor of Franco’s
checks respectively dated September 11 and 18, 1989 was legally in order in view of the Makati RTC’s
supplemental writ of attachment issued on September 14, 1989. It posits that as the party that applied
for the writ of attachment before the Makati RTC, it need not be served with the Notice of Garnishment
before it could place Franco’s accounts under garnishment.
The argument is specious. In this argument, we perceive BPI-FB’s clever but transparent ploy to
circumvent Section 4,42 Rule 13 of the Rules of Court. It should be noted that the strict requirement on
service of court papers upon the parties affected is designed to comply with the elementary requisites of
due process. Franco was entitled, as a matter of right, to notice, if the requirements of due process are
to be observed. Yet, he received a copy of the Notice of Garnishment only on September 27, 1989,
several days after the two checks he issued were dishonored by BPI-FB on September 20 and 21,
1989. Verily, it was premature for BPI-FB to freeze Franco’s accounts without even awaiting service of
the Makati RTC’s Notice of Garnishment on Franco.
Additionally, it should be remembered that the enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the property attached by virtue thereof. Section 5, Rule
13 of the Rules of Court specifically provides that "no levy or attachment pursuant to the writ issued x x
x shall be enforced unless it is preceded, or contemporaneously accompanied, by service of summons,
together with a copy of the complaint, the application for attachment, on the defendant within the
Philippines."
Franco was impleaded as party-defendant only on May 15, 1990. The Makati RTC had yet to acquire
jurisdiction over the person of Franco when BPI-FB garnished his accounts.43 Effectively, therefore, the
Makati RTC had no authority yet to bind the deposits of Franco through the writ of attachment, and
consequently, there was no legal basis for BPI-FB to dishonor the checks issued by Franco.
Fifth. Anent the CA’s finding that BPI-FB was in bad faith and as such liable for the advance interest it
deducted from Franco’s time deposit account, and for moral as well as exemplary damages, we find it
proper to reinstate the ruling of the trial court, and allow only the recovery of nominal damages in the
amount of ₱10,000.00. However, we retain the CA’s award of ₱75,000.00 as attorney’s fees.
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In granting Franco’s prayer for interest on his time deposit account and for moral and exemplary
damages, the CA attributed bad faith to BPI-FB because it (1) completely disregarded its obligation to
Franco; (2) misleadingly claimed that Franco’s deposits were under garnishment; (3) misrepresented
that Franco’s current account was not on file; and (4) refused to return the ₱400,000.00 despite the fact
that the ostensible owner, Quiaoit, wanted the amount returned to Franco.
In this regard, we are guided by Article 2201 of the Civil Code which provides:
Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good
faith is liable shall be those that are the natural and probable consequences of the breach of the
obligation, and which the parties have foreseen or could have reasonable foreseen at the time the
obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages
which may be reasonably attributed to the non-performance of the obligation. (Emphasis supplied.)
We find, as the trial court did, that BPI-FB acted out of the impetus of self-protection and not out of
malevolence or ill will. BPI-FB was not in the corrupt state of mind contemplated in Article 2201 and
should not be held liable for all damages now being imputed to it for its breach of obligation. For the
same reason, it is not liable for the unearned interest on the time deposit.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it partakes of the nature of fraud.44 We have held that it is
a breach of a known duty through some motive of interest or ill will.45 In the instant case, we cannot
attribute to BPI-FB fraud or even a motive of self-enrichment. As the trial court found, there was no
denial whatsoever by BPI-FB of the existence of the accounts. The computer-generated document
which indicated that the current account was "not on file" resulted from the prior debit by BPI-FB of the
deposits. The remedy of freezing the account, or the garnishment, or even the outright refusal to honor
any transaction thereon was resorted to solely for the purpose of holding on to the funds as a security
for its intended court action,46 and with no other goal but to ensure the integrity of the accounts.
We have had occasion to hold that in the absence of fraud or bad faith,47 moral damages cannot be
awarded; and that the adverse result of an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting such damages.48
An award of moral damages contemplates the existence of the following requisites: (1) there must be an
injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a
culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on
any of the cases stated in Article 2219 of the Civil Code.49
Franco could not point to, or identify any particular circumstance in Article 2219 of the Civil Code,50 upon
which to base his claim for moral damages.1âwphi1
Thus, not having acted in bad faith, BPI-FB cannot be held liable for moral damages under Article 2220
of the Civil Code for breach of contract.51
Page 40 of 55
We also deny the claim for exemplary damages. Franco should show that he is entitled to moral, CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,
temperate, or compensatory damages before the court may even consider the question of whether vs.
exemplary damages should be awarded to him.52 As there is no basis for the award of moral damages, COURT OF APPEALS, VICENTE ALEGRE, respondents.
neither can exemplary damages be granted.
QUISUMBING, J.:
While it is a sound policy not to set a premium on the right to litigate,53 we, however, find that Franco is
entitled to reasonable attorney’s fees for having been compelled to go to court in order to assert his This petition for review on certiorari assails respondent appellate court's Decision, 1 dated December 8,
right. Thus, we affirm the CA’s grant of ₱75,000.00 as attorney’s fees. 1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial Court of Makati, Branch
132. The dispositive portion of the trial court's decision reads:
Attorney’s fees may be awarded when a party is compelled to litigate or incur expenses to protect his
interest,54 or when the court deems it just and equitable.55 In the case at bench, BPI-FB refused to WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to
unfreeze the deposits of Franco despite the Makati RTC’s Order Lifting the Order of Attachment and pay plaintiff [herein private respondent]:
Quiaoit’s unwavering assertion that the ₱400,000.00 was part of Franco’s savings account. This refusal
constrained Franco to incur expenses and litigate for almost two (2) decades in order to protect his
interests and recover his deposits. Therefore, this Court deems it just and equitable to grant Franco (1) the principal sum of P514,390.94 with legal interest thereon
₱75,000.00 as attorney’s fees. The award is reasonable in view of the complexity of the issues and the computed from August 6, 1991 until fully paid; and
time it has taken for this case to be resolved.56
(2) the costs of suit.
Sixth. As for the dismissal of BPI-FB’s counter-claim, we uphold the Manila RTC’s ruling, as affirmed by
the CA, that BPI-FB is not entitled to recover ₱3,800,000.00 as actual damages. BPI-FB’s alleged loss SO ORDERED. 2
of profit as a result of Franco’s suit is, as already pointed out, of its own making. Accordingly, the denial
of its counter-claim is in order. Based on the records, the following are the pertinent facts of the case:

WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals Decision dated November Cebu International Finance Corporation (CIFC), a quasi-banking institution, is engaged in money
29, 1995 is AFFIRMED with the MODIFICATION that the award of unearned interest on the time deposit market operations.
and of moral and exemplary damages is DELETED.

On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand
No pronouncement as to costs. (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note
for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos
SO ORDERED. (P516,238.67) covered private respondent's placement plus interest at twenty and a half (20.5%)
percent for thirty-two (32) days.

On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred
fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of the
private respondent as proceeds of his matured investment plus interest. The CHECK was drawn from
petitioner's current account number 0011-0803-59, maintained with the Bank of the Philippine Islands
(BPI), main branch at Makati City.1âwphi1.nêt

On June 17, 1991, private respondent's wife deposited the CHECK with Rizal Commercial Banking
Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the
"Check (is) Subject of an Investigation." BPI took custody of the CHECK pending an investigation of
several counterfeit checks drawn against CIFC's aforestated checking account. BPI used the check to
trace the perpetrators of the forgery.

G.R. No. 123031 October 12, 1999 Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several
occasions, that he be paid in cash. CIFC refused the request, and instead instructed private respondent
to wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent, through counsel,

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made a formal demand for the payment of his money market placement. In turn, CIFC promised to
replace the CHECK but required an impossible condition that the original must first be surrendered.
On February 25, 1992, private respondent Alegre filed a complaint 3 for recovery of a sum of money
against the petitioner with the Regional Trial Court of Makati (RTC-Makati), Branch 132.
On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a separate civil
action 4 for collection of a sum of money with the RTC-Makati, Branch 147. The collection suit alleged
that BPI unlawfully deducted from CIFC's checking account, counterfeit checks amounting to one
million, seven hundred twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos
(P1,724,364.58). The action included the prayer to collect the amount of the CHECK paid to Vicente
Alegre but dishonored by BPI.
Meanwhile, in response to Alegre's complaint with RTC-Makati, Branch 132, CIFC filed a motion for
leave of court to file a third-party complaint against BPI. BPI was impleaded by CIFC to enforce a right,
for contribution and indemnity, with respect to Alegre's claim. CIFC asserted that the CHECK it issued in
favor of Alegre was genuine, valid and sufficiently funded.
On July 23, 1992, the trial court granted CIFC's motion. However, BPI moved to dismiss the third-party
complaint on the ground of pendency of another action with RTC-Makati, Branch 147. Acting on the
motion, the trial court dismissed the third-party complaint on November 4, 1992, after finding that the
third party complaint filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with
RTC-Makati Branch 147.
Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22, 1993, Vito
Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK, retained the
original copy and forwarded only a certified true copy to RCBC. When Arieta was recalled on July 20,
1993, he testified that on July 16, 1993, BPI encashed and deducted the said amount from the account
of CIFC, but the proceeds, as well as the CHECK remained in BPI's custody. The bank's move was in
accordance with the Compromise Agreement 5 it entered with CIFC to end the litigation in RTC-Makati,
Branch 147. The compromise agreement, which was submitted for the approval of the said court,
provided that:
1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of
P1,724,364.58 plus P20,000 litigation expenses as full and final
settlement of all of plaintiff's claims as contained in the Amended
Complaint dated September 10, 1992. The aforementioned amount
shall be credited to plaintiff's current account No. 0011-0803-59
maintained at defendant's Main Branch upon execution of this
Compromise Agreement.
2. Thereupon, defendant shall debit the sum of P514,390.94 from
the aforesaid current account representing payment/discharge of
BPI Check No. 513397 payable to Vicente Alegre.
3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case
No. 92-515 arising from the alleged dishonor of BPI Check No.
513397, plaintiff cannot go after the defendant: otherwise stated,
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the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may
however set-up the defense of payment/discharge stipulated in par.
2 above. 6
On July 27, 1993, BPI filed a separate collection suit 7 against Vicente Alegre with the RTC-Makati,
Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena and Lita A.
Anda and forged several checks of BPI's client, CIFC. The total amount of counterfeit checks was
P1,724,364.58. BPI prevented the encashment of some checks amounting to two hundred ninety five
thousand, seven hundred seventy-five pesos and seven centavos (P295,775.07). BPI admitted that the
CHECK, payable to Vicente Alegre for P514,390.94, was deducted from BPI's claim, hence, the balance
of the loss incurred by BPI was nine hundred fourteen thousand, one hundred ninety-eight pesos and
fifty-seven centavos (P914,198.57), plus costs of suit for twenty thousand (P20,000.00) pesos. The
records are silent on the outcome of this case.
On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente Alegre.
CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the decision
of the trial court.
Hence this appeal, 8 in which petitioner interposes the following assignments of errors:
1. The Honorable Court of Appeals erred in affirming the finding of
the Honorable Trial Court holding that petitioner was not discharged
from the liability of paying the value of the subject check to private
respondent after BPI has debited the value thereof against
petitioner's current account.
2. The Honorable Court of Appeals erred in applying the provisions
of paragraph 2 of Article 1249 of the Civil Code in the instant case.
The applicable law being the Negotiable Instruments Law.
3. The Honorable Court of Appeals erred in affirming the Honorable
Trial Court's findings that the petitioner was guilty of negligence and
delay in the performance of its obligation to the private respondent.
4. The Honorable Court of Appeals erred in affirming the Honorable
Trial Court's decision ordering petitioner to pay legal interest and
the cost of suit.
5. The Honorable Court of Appeals erred in affirming the Honorable
Trial Court's dismissal of petitioner's third-party complaint against
BPI.
These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE
APPLIES IN THE PRESENT CASE;
Page 42 of 55
 2. WHETHER OR NOT "BPI CHECK NO. 513397" WAS VALIDLY
DISCHARGED; and
3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY
COMPLAINT OF PETITIONER AGAINST BPI BY REASON OF LIS
PENDENS WAS PROPER?
On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are
the pertinent laws to govern its money market transaction with private respondent, and not paragraph 2
of Article 1249 of the Civil Code. Petitioner stresses that it had already been discharged from the liability
of paying the value of the CHECK due to the following circumstances:
1) There was "ACCEPTANCE" of the subject check by BPI, the
drawee bank, as defined under the Negotiable Instruments Law,
and therefore, BPI, the drawee bank, became primarily liable for the
payment of the check, and consequently, the drawer, herein
petitioner, was discharged from its liability thereon;
2) Moreover, BPI, the drawee bank, has not validly DISHONORED
the subject check; and,
3) The act of BPI, the drawee bank of debiting/deducting the value
of the check from petitioner's account amounted to and/or
constituted a discharge of the drawer's (petitioner's) liability under
the instrument/subject check. 9
Petitioner cites Section 137 of the Negotiable Instruments Law, which states:
Liability of drawee retaining or destroying bill — Where a drawee to whom a
bill is delivered for acceptance destroys the same, or refuses within twenty-
four hours after such delivery or such other period as the holder may allow,
to return the bill accepted or non-accepted to the Holder, he will be deemed
to have accepted the same.
Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the
payment of the CHECK. Consequently, when BPI offset the value of CHECK against the losses from the
forged checks allegedly committed by the private respondent, the check was deemed paid.
Art. 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly provides
for the medium in the "payment of debts." It provides that:
The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency, which is
legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
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they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be held
in abeyance.
Considering the nature of a money market transaction, the above-quoted provision should be applied in
the present controversy. As held in Perez vs. Court of Appeals, 10 a "money market is a market dealing
in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do
not deal directly with each other but through a middle man or dealer in open market. In a money market
transaction, the investor is a lender who loans his money to a borrower through a middleman or
dealer. 11
In the case at bar, the money market transaction between the petitioner and the private respondent is in
the nature of a loan. The private respondent accepted the CHECK, instead of requiring payment in
money. Yet, when he presented it to RCBC for encashment, as early as June 17, 1991, the same was
dishonored by non-acceptance, with BPI's annotation: "Check (is) subject of an investigation." These
facts were testified to by BPI's manager. Under these circumstances, and after the notice of
dishonor, 12 the holder has an immediate right of recourse against the drawer, 13 and consequently could
immediately file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the
legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid
tender of payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals, 14 this Court held:
Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citation
omitted). A check, whether a manager's check or ordinary check, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender of payment and may
be refused receipt by the obligee or creditor. 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
(Art. 1249, Civil Code, par. 3.) 15
Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFC's
current account, this did not ipso facto operate as a discharge or payment of the instrument. Although
the value of the CHECK was deducted from the funds of CIFC, it was not delivered to the payee,
Vicente Alegre. Instead, BPI offset the amount against the losses it incurred from forgeries of CIFC
checks, allegedly committed by Alegre. The confiscation of the value of the check was agreed upon by
CIFC and BPI. The parties intended to amicably settle the collection suit filed by CIFC with the RTC-
Makati, Branch 147, by entering into a compromise agreement, which reads:
xxx xxx xxx
2. Thereupon, defendant shall debit the sum of P514,390.94 from
the aforesaid current account representing payment/discharge of
BPI Check No. 513397 payable to Vicente Alegre.
Page 43 of 55
 3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case
No. 92-515 arising from the alleged dishonor of BPI Check No.
513397, plaintiff cannot go after the defendant; otherwise stated,
the defendant shall not be liable to the plaintiff. Plaintiff however
(sic) set-up the defense of payment/discharge stipulated in par. 2
above. 16
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced. 17 It is an agreement between two or more persons who, for
preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which
they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of
losing. 18 The compromise agreement could not bind a party who did not sign the compromise
agreement nor avail of its benefits. 19 Thus, the stipulations in the compromise agreement is
unenforceable against Vicente Alegre, not a party thereto. His money could not be the subject of an
agreement between CIFC and BPI. Although Alegre's money was in custody of the bank, the bank's
possession of it was not in the concept of an owner. BPI cannot validly appropriate the money as its
own. The codal admonition on this issue is clear:
Art. 1317 —
No one may contract in the name of another without being authorized by the latter, or
unless he has by law a right to represent him.
A Contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party. 20
BPI's confiscation of Alegre's money constitutes garnishment without the parties going through a valid
proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to
his claim the property of the defendant in the hands of a third person or money owed to such third
person or a garnishee to the defendant. 21 The garnishment procedure must be upon proper order of
RTC-Makati, Branch 62, the court who had jurisdiction over the collection suit filed by BPI against
Alegre. In effect, CIFC has not yet tendered a valid payment of its obligation to the private respondent.
Tender of payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former's obligation and demanding that the latter accept the
same. 22 Tender of payment cannot be presumed by a mere inference from surrounding circumstances.
147 of this Court and the Third Party Complaint in the instant case would readily show
that the parties are not only identical but also the cause of action being asserted,
which is the recovery of the value of BPI Check No. 513397 is the same. In Civil Case
No. 92-1940 and in the Third Party Complaint the rights asserted and relief prayed
for, the reliefs being founded on the facts, are identical.
xxx xxx xxx
WHEREFORE, the motion to dismiss is granted and consequently, the Third Party
Complaint is hereby ordered dismissed on ground of lis pendens. 24
We agree with the observation of the respondent court that, as between the third party claim filed by the
petitioner against BPI in Civil Case No. 92-515 and petitioner's ancillary claim against the bank in Civil
Case No. 92-1940, there is identity of parties as well as identity of rights asserted, and that any
judgment that may be rendered in one case will amount to res judicata in another.
The compromise agreement between CIFC and BPI, categorically provided that "In case plaintiff is
adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI
Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated, the defendant
shall not be liable to the plaintiff." 25Clearly, this stipulation expressed that CIFC had already abandoned
any further claim against BPI with respect to the value of BPI Check No. 513397. To ask this Court to
allow BPI to be a party in the case at bar, would amount to res judicata and would violate terms of the
compromise agreement between CIFC and BPI. The general rule is that a compromise has upon the
parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or
which by implication from its terms should be deemed to have been included therein. 26 This holds true
even if the agreement has not been judicially approved. 27
WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 44085 is AFFIRMED. Costs against petitioner.1âwphi1.nêt
SO ORDERED.

With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the
following requisites must concur: (a) identity of parties or at least such as to represent the same interest
in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same
acts; and (c) the identity in the two cases should be such that the judgment which may be rendered in
one would, regardless of which party is successful, amount to res judicata in the other. 23

The trial court's ruling as adopted by the respondent court states, thus:

A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International
Finance Corporation vs. Bank of the Philippine Islands now pending before Branch G.R. No. 133632 February 15, 2002

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BPI INVESTMENT CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of
the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of
mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS
Management and Development Corporation and Antonio K. Litonjua,1 consolidated with (b) Civil Case
No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad
faith. It awarded private respondents the amount of ₱300,000 for moral damages, ₱50,000 for
exemplary damages, and ₱50,000 for attorney’s fees and expenses for litigation. It likewise dismissed
the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house
on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure
the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio
Litonjua for ₱850,000. They paid ₱350,000 in cash and assumed the ₱500,000 balance of Roa’s
indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of ₱500,000 to be applied to Roa’s debt and
secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum
on the outstanding principal balance payable within ten years in equal monthly amortization of
₱9,996.58 and penalty interest at the rate of 21% per annum per day from the date the amortization
became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above
stipulations with the provision that payment of the monthly amortization shall commence on May 1,
1981.
On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of
₱190,601.35. This reduced Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated when
BPIIC applied thereto the proceeds of private respondents’ loan of ₱500,000.
On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what was
left of their loan after full payment of Roa’s loan.
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In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that
they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to
Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (₱475,585.31). A
notice of sheriff’s sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among
others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30,
1984. They maintained that they should not be made to pay amortization before the actual release of
the ₱500,000 loan in August and September 1982. Further, out of the ₱500,000 loan, only the total
amount of ₱464,351.77 was released to private respondents. Hence, applying the effects of legal
compensation, the balance of ₱35,648.23 should be applied to the initial monthly amortization for the
loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development
Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of
loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest at
20% plus service charge of 1% per annum, payable on equal monthly and successive amortizations at
P9,283.83 for ten (10) years or one hundred twenty (120) months. The amortization schedule attached
as Annex "A" to the "Deed of Mortgage" is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay
ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorney’s fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.2
Both parties appealed to the Court of Appeals. However, private respondents’ appeal was dismissed for
non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.3
Page 45 of 55
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of
the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only
on September 13, 1982, the date when BPIIC released the purported balance of the ₱500,000 loan
after deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly amortization
should commence only a month after the said date, as can be inferred from the stipulations in the
contract. This, despite the express agreement of the parties that payment shall commence on May 1,
1981. From October 1982 to June 1984, the total amortization due was only ₱194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984, they already paid a
total amount of ₱201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents’ delinquency in the
payment of their loan. This fact constituted sufficient ground for moral damages in favor of private
respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where
BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE
LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA
122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY
DAMAGES AND ATTORNEY’S FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY
ALS AND OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS.
COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple
loan is perfected upon the delivery of the object of the contract, the loan contract in this case was
perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual
contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably
with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract
was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the
amortization and interests on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on August
1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage
of Frank Roa’s loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute
Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing
the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan
should be attributed to private respondents. As BPIIC only agreed to extend a ₱500,000 loan, private
respondents were required to reduce Frank Roa’s loan below said amount. According to petitioner,
private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code,4 a simple loan
is perfected upon the delivery of the object of the contract, hence a real contract. In this case, even
though the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982,
when the full loan was released to private respondents. They submit that petitioner
misread Bonnevie. To give meaning to Article 1934, according to private respondents, Bonnevie must
be construed to mean that the contract to extend the loan was perfected on March 31, 1981 but the
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contract of loan itself was only perfected upon the delivery of the full loan to private respondents on
September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected
on March 31, 1981, and their payment did not start a month thereafter, still no default took place.
According to private respondents, a perfected loan agreement imposes reciprocal obligations, where
the obligation or promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay
the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. Therefore, private respondents conclude, they did not
incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was
only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract.5 Petitioner misapplied Bonnevie. The
contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first
clause of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445, petitioner
applied for a loan of ₱500,000 with respondent bank. The latter approved the application through a
board resolution. Thereafter, the corresponding mortgage was executed and registered. However,
because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action
for damages. We recognized in this case, a perfected consensual contract which under normal
circumstances could have made the bank liable for not releasing the loan. However, since the fault was
attributable to petitioner therein, the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages. However,
said contract does not constitute the real contract of loan which requires the delivery of the object of the
contract for its perfection and which gives rise to obligations only on the part of the borrower.6
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the second release of the loan. Following
the intentions of the parties on the commencement of the monthly amortization, as found by the Court of
Appeals, private respondents’ obligation to pay commenced only on October 13, 1982, a month after
the perfection of the contract.7
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein
the obligation or promise of each party is the consideration for that of the other.8 As averred by private
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS
and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the
supposed release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in
delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him.9 Only when a party has performed his part of the contract can he demand that the other party
also fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only
demand for the payment of the monthly amortization after September 13, 1982 for it was only then
when it complied with its obligation under the loan contract. Therefore, in computing the amount due as
of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.
Page 46 of 55
Other points raised by petitioner in connection with the first issue, such as the date of actual release of SO ORDERED.
the loan and whether private respondents were the cause of the delay in the release of the loan, are
factual. Since petitioner has not shown that the instant case is one of the exceptions to the basic rule
that only questions of law can be raised in a petition for review under Rule 45 of the Rules of
Court,10 factual matters need not tarry us now. On these points we are bound by the findings of the
appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised
its right under the mortgage contract because private respondents were irregular in their monthly
amortization.1âwphi1 It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA
707, where we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals "the negligence of the appellant is not so gross as to warrant moral and temperate damages,"
except that, said Court reduced those damages by only P5,000.00 instead of eliminating them. Neither
can we agree with the findings of both the Trial Court and respondent Court that the SSS had acted
maliciously or in bad faith. The SSS was of the belief that it was acting in the legitimate exercise of its
right under the mortgage contract in the face of irregular payments made by private respondents and
placed reliance on the automatic acceleration clause in the contract. The filing alone of the foreclosure
application should not be a ground for an award of moral damages in the same way that a clearly
unfounded civil action is not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages
because it insisted on the payment of amortization on the loan even before it was released. Further, it
did not make the corresponding deduction in the monthly amortization to conform to the actual amount
of loan released, and it immediately initiated foreclosure proceedings when private respondents failed to
make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of monthly
amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
Consequently, we should rule out the award of moral and exemplary damages.11
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually released
to private respondents and the date when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages should be given in recognition of their
rights which were violated by BPIIC.12 For this purpose, the amount of ₱25,000 is sufficient.
Lastly, as in SSS where we awarded attorney’s fees because private respondents were compelled to
litigate, we sustain the award of ₱50,000 in favor of private respondents as attorney’s fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated
April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral
and exemplary damages in favor of private respondents is DELETED, but the award to them of
attorney’s fees in the amount of ₱50,000 is UPHELD. Additionally, petitioner is ORDERED to pay
private respondents ₱25,000 as nominal damages. Costs against petitioner.
G.R. No. 118375 October 3, 2003
CELESTINA T. NAGUIAT, petitioner,
vs.
COURT OF APPEALS and AURORA QUEAÑO, respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the Sixteenth
Division of the respondent Court of Appeals promulgated on 21 December 19941 , which affirmed in toto
the decision handed down by the Regional Trial Court (RTC) of Pasay City.2
The case arose when on 11 August 1981, private respondent Aurora Queaño (Queaño) filed a
complaint before the Pasay City RTC for cancellation of a Real Estate Mortgage she had entered into
with petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision, declaring the questioned
Real Estate Mortgage void, which Naguiat appealed to the Court of Appeals. After the Court of Appeals
upheld the RTC decision, Naguiat instituted the present petition.1ªvvphi1.nét
The operative facts follow:
Queaño applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos (₱200,000.00),
which Naguiat granted. On 11 August 1980, Naguiat indorsed to Queaño Associated Bank Check No.
090990 (dated 11 August 1980) for the amount of Ninety Five Thousand Pesos (₱95,000.00), which
was earlier issued to Naguiat by the Corporate Resources Financing Corporation. She also issued her
own Filmanbank Check No. 065314, to the order of Queaño, also dated 11 August 1980 and for the
amount of Ninety Five Thousand Pesos (₱95,000.00). The proceeds of these checks were to constitute
the loan granted by Naguiat to Queaño.3

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To secure the loan, Queaño executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor of
Naguiat, and surrendered to the latter the owner’s duplicates of the titles covering the mortgaged
properties.4 On the same day, the mortgage deed was notarized, and Queaño issued to Naguiat a
promissory note for the amount of TWO HUNDRED THOUSAND PESOS (₱200,000.00), with interest
at 12% per annum, payable on 11 September 1980.5Queaño also issued a Security Bank and Trust
Company check, postdated 11 September 1980, for the amount of TWO HUNDRED THOUSAND
PESOS (₱200,000.00) and payable to the order of Naguiat.
Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of
funds. On the following day, 12 September 1980, Queaño requested Security Bank to stop payment of
her postdated check, but the bank rejected the request pursuant to its policy not to honor such requests
if the check is drawn against insufficient funds.6
On 16 October 1980, Queaño received a letter from Naguiat’s lawyer, demanding settlement of the
loan. Shortly thereafter, Queaño and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the
meeting, Queaño told Naguiat that she did not receive the proceeds of the loan, adding that the checks
were retained by Ruebenfeldt, who purportedly was Naguiat’s agent.7
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province, who
then scheduled the foreclosure sale on 14 August 1981. Three days before the scheduled sale, Queaño
filed the case before the Pasay City RTC,8 seeking the annulment of the mortgage deed. The trial court
eventually stopped the auction sale.9
On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and
void, and ordering Naguiat to return to Queaño the owner’s duplicates of her titles to the mortgaged
lots.10 Naguiat appealed the decision before the Court of Appeals, making no less than eleven
assignments of error. The Court of Appeals promulgated the decision now assailed before us that
affirmed in toto the RTC decision. Hence, the present petition.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of whether
Queaño had actually received the loan proceeds which were supposed to be covered by the two checks
Naguiat had issued or indorsed. Naguiat claims that being a notarial instrument or public document, the
mortgage deed enjoys the presumption that the recitals therein are true. Naguiat also questions the
admissibility of various representations and pronouncements of Ruebenfeldt, invoking the rule on the
non-binding effect of the admissions of third persons.11
The resolution of the issues presented before this Court by Naguiat involves the determination of facts,
a function which this Court does not exercise in an appeal by certiorari. Under Rule 45 which governs
appeal by certiorari, only questions of law may be raised12 as the Supreme Court is not a trier of
facts.13 The resolution of factual issues is the function of lower courts, whose findings on these matters
are received with respect and are in fact generally binding on the Supreme Court.14 A question of law
which the Court may pass upon must not involve an examination of the probative value of the evidence
presented by the litigants.15 There is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or
difference arises as to the truth or the falsehood of alleged facts.16
Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the
lower courts.17 But Naguiat’s case does not fall under any of the exceptions. In any event, both the
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decisions of the appellate and trial courts are supported by the evidence on record and the applicable
laws.
Against the common finding of the courts below, Naguiat vigorously insists that Queaño received the
loan proceeds. Capitalizing on the status of the mortgage deed as a public document, she cites the rule
that a public document enjoys the presumption of validity and truthfulness of its contents. The Court of
Appeals, however, is correct in ruling that the presumption of truthfulness of the recitals in a public
document was defeated by the clear and convincing evidence in this case that pointed to the absence
of consideration.18 This Court has held that the presumption of truthfulness engendered by notarized
documents is rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this
case.19
On the other hand, absolutely 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. For 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.20 It is only after the checks have produced the effect of payment that the contract of loan may
be deemed perfected. Art. 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 itself 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 object of the contract.21 In this case, the objects of the contract are the loan proceeds which Queaño
would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If indeed the
checks were encashed or deposited, Naguiat would have certainly presented the corresponding
documentary evidence, such as the returned checks and the pertinent bank records. Since Naguiat
presented no such proof, it follows that the checks were not encashed or credited to Queaño’s
account.1awphi1.nét
Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the
ground that they could not bind her following the res inter alia acta alteri nocere non debet rule. The
Court of Appeals rejected the argument, holding that since Ruebenfeldt was an authorized
representative or agent of Naguiat the situation falls under a recognized exception to the rule.22 Still,
Naguiat insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a
stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queaño the
checks she issued or indorsed to Queaño, pending delivery by the latter of additional collateral.
Ruebenfeldt served as agent of Naguiat on the loan application of Queaño’s friend, Marilou Farralese,
and it was in connection with that transaction that Queaño came to know Naguiat.23 It was also
Ruebenfeldt who accompanied Queaño in her meeting with Naguiat and on that occasion, on her own
and without Queaño asking for it, Reubenfeldt actually drew a check for the sum of ₱220,000.00
payable to Naguiat, to cover for Queaño’s alleged liability to Naguiat under the loan agreement.24
The Court of Appeals recognized the existence of an "agency by estoppel25 citing Article 1873 of the
Civil Code.26Apparently, it considered that at the very least, as a consequence of the interaction
Page 48 of 55
between Naguiat and Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the agent of
Naguiat, but Naguiat did nothing to correct Queaño’s impression. In that situation, the rule is clear. One
who clothes another with apparent authority as his agent, and holds him out to the public as such,
cannot be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent
third parties dealing with such person in good faith, and in the honest belief that he is what he appears
to be.27 The Court of Appeals is correct in invoking the said rule on agency by estoppel.1awphi1.nét
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant
in the face of the fact that the checks issued or indorsed to Queaño were never encashed or deposited
to her account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not
remit and the borrower did not receive the proceeds of the loan. That being the case, it follows that the
mortgage which is supposed to secure the loan is null and void. The consideration of the mortgage
contract is the same as that of the principal contract from which it receives life, and without which it
cannot exist as an independent contract.28 A mortgage contract being a mere accessory contract, its
validity would depend on the validity of the loan secured by it.29
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.
SO ORDERED.
G.R. No. 174269 August 25, 2010
POLO S. PANTALEON, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.
RESOLUTION
BRION, J.:
We resolve the motion for reconsideration filed by respondent American Express International, Inc.
(AMEX) dated June 8, 2009,1 seeking to reverse our Decision dated May 8, 2009 where we ruled that
AMEX was guilty of culpable delay in fulfilling its obligation to its cardholder –petitioner Polo Pantaleon.
Based on this conclusion, we held AMEX liable for moral and exemplary damages, as well as attorney’s
fees and costs of litigation.2
CREDIT TRANS
FACTUAL ANTECEDENTS
The established antecedents of the case are narrated below.
AMEX is a resident foreign corporation engaged in the business of providing credit services through the
operation of a charge card system. Pantaleon has been an AMEX cardholder since 1980.3
In October 1991, Pantaleon, together with his wife (Julialinda), daughter (Regina), and son (Adrian
Roberto), went on a guided European tour. On October 25, 1991, the tour group arrived in Amsterdam.
Due to their late arrival, they postponed the tour of the city for the following day.4
The next day, the group began their sightseeing at around 8:50 a.m. with a trip to the Coster Diamond
House (Coster). To have enough time for take a guided city tour of Amsterdam before their departure
scheduled on that day, the tour group planned to leave Coster by 9:30 a.m. at the latest.
While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth a total of
US$13,826.00. Pantaleon presented his American Express credit card to the sales clerk to pay for this
purchase. He did this at around 9:15 a.m. The sales clerk swiped the credit card and asked Pantaleon
to sign the charge slip, which was then electronically referred to AMEX’s Amsterdam office at 9:20 a.m.5
At around 9:40 a.m., Coster had not received approval from AMEX for the purchase so Pantaleon asked
the store clerk to cancel the sale. The store manager, however, convinced Pantaleon to wait a few more
minutes. Subsequently, the store manager informed Pantaleon that AMEX was asking for bank
references; Pantaleon responded by giving the names of his Philippine depository banks.
At around 10 a.m., or 45 minutes after Pantaleon presented his credit card, AMEX still had not approved
the purchase. Since the city tour could not begin until the Pantaleons were onboard the tour bus, Coster
decided to release at around 10:05 a.m. the purchased items to Pantaleon even without AMEX’s
approval.
When the Pantaleons finally returned to the tour bus, they found their travel companions visibly irritated.
This irritation intensified when the tour guide announced that they would have to cancel the tour
because of lack of time as they all had to be in Calais, Belgium by 3 p.m. to catch the ferry to London.6
From the records, it appears that after Pantaleon’s purchase was transmitted for approval to AMEX’s
Amsterdam office at 9:20 a.m.; was referred to AMEX’s Manila office at 9:33 a.m.; and was approved by
the Manila office at 10:19 a.m. At 10:38 a.m., AMEX’s Manila office finally transmitted the Approval
Code to AMEX’s Amsterdam office. In all, it took AMEX a total of 78 minutes to approve Pantaleon’s
purchase and to transmit the approval to the jewelry store.7
After the trip to Europe, the Pantaleon family proceeded to the United States. Again, Pantaleon
experienced delay in securing approval for purchases using his American Express credit card on two
separate occasions. He experienced the first delay when he wanted to purchase golf equipment in the
amount of US$1,475.00 at the Richard Metz Golf Studio in New York on October 30, 1991. Another
delay occurred when he wanted to purchase children’s shoes worth US$87.00 at the Quiency Market in
Boston on November 3, 1991.
Page 49 of 55
Upon return to Manila, Pantaleon sent AMEX a letter demanding an apology for the humiliation and
inconvenience he and his family experienced due to the delays in obtaining approval for his credit card
purchases. AMEX responded by explaining that the delay in Amsterdam was due to the amount
involved – the charged purchase of US$13,826.00 deviated from Pantaleon’s established charge
purchase pattern. Dissatisfied with this explanation, Pantaleon filed an action for damages against the
credit card company with the Makati City Regional Trial Court (RTC).
On August 5, 1996, the RTC found AMEX guilty of delay, and awarded Pantaleon ₱500,000.00 as moral
damages, ₱300,000.00 as exemplary damages, ₱100,000.00 as attorney’s fees, and ₱85,233.01 as
litigation expenses.
8
On appeal, the CA reversed the awards. While the CA recognized that delay in the nature of mora
accipiendi or creditor’s default attended AMEX’s approval of Pantaleon’s purchases, it disagreed with
the RTC’s finding that AMEX had breached its contract, noting that the delay was not attended by bad
faith, malice or gross negligence. The appellate court found that AMEX exercised diligent efforts to
effect the approval of Pantaleon’s purchases; the purchase at Coster posed particularly a problem
because it was at variance with Pantaleon’s established charge pattern. As there was no proof that
AMEX breached its contract, or that it acted in a wanton, fraudulent or malevolent manner, the appellate
court ruled that AMEX could not be held liable for any form of damages.
Pantaleon questioned this decision via a petition for review on certiorari with this Court.
In our May 8, 2009 decision, we reversed the appellate court’s decision and held that AMEX was guilty
of mora solvendi, or debtor’s default. AMEX, as debtor, had an obligation as the credit provider to act on
Pantaleon’s purchase requests, whether to approve or disapprove them, with "timely dispatch." Based
on the evidence on record, we found that AMEX failed to timely act on Pantaleon’s purchases.
Based one ly, tual obligations. 271,ct; moral damages le. uitable that attorney'workers;plaitniff' the
testimony of AMEX’s credit authorizer Edgardo Jaurique, the approval time for credit card charges
would be three to four seconds under regular circumstances. In Pantaleon’s case, it took AMEX 78
minutes to approve the Amsterdam purchase. We attributed this delay to AMEX’s Manila credit
authorizer, Edgardo Jaurique, who had to go over Pantaleon’s past credit history, his payment record
and his credit and bank references before he approved the purchase. Finding this delay unwarranted,
we reinstated the RTC decision and awarded Pantaleon moral and exemplary damages, as well as
attorney’s fees and costs of litigation.
THE MOTION FOR RECONSIDERATION
In its motion for reconsideration, AMEX argues that this Court erred when it found AMEX guilty of
culpable delay in complying with its obligation to act with timely dispatch on Pantaleon’s purchases.
While AMEX admits that it normally takes seconds to approve charge purchases, it emphasizes that
Pantaleon experienced delay in Amsterdam because his transaction was not a normal one. To recall,
Pantaleon sought to charge in a single transaction jewelry items purchased from Coster in the total
amount of US$13,826.00 or ₱383,746.16. While the total amount of Pantaleon’s previous purchases
using his AMEX credit card did exceed US$13,826.00, AMEX points out that these purchases were
made in a span of more than 10 years, not in a single transaction.
CREDIT TRANS
Because this was the biggest single transaction that Pantaleon ever made using his AMEX credit card,
AMEX argues that the transaction necessarily required the credit authorizer to carefully review
Pantaleon’s credit history and bank references. AMEX maintains that it did this not only to ensure
Pantaleon’s protection (to minimize the possibility that a third party was fraudulently using his credit
card), but also to protect itself from the risk that Pantaleon might not be able to pay for his purchases on
credit. This careful review, according to AMEX, is also in keeping with the extraordinary degree of
diligence required of banks in handling its transactions. AMEX concluded that in these lights, the
thorough review of Pantaleon’s credit record was motivated by legitimate concerns and could not be
evidence of any ill will, fraud, or negligence by AMEX.
AMEX further points out that the proximate cause of Pantaleon’s humiliation and embarrassment was
his own decision to proceed with the purchase despite his awareness that the tour group was waiting for
him and his wife. Pantaleon could have prevented the humiliation had he cancelled the sale when he
noticed that the credit approval for the Coster purchase was unusually delayed.
In his Comment dated February 24, 2010, Pantaleon maintains that AMEX was guilty of mora solvendi,
or delay on the part of the debtor, in complying with its obligation to him. Based on jurisprudence, a just
cause for delay does not relieve the debtor in delay from the consequences of delay; thus, even if
AMEX had a justifiable reason for the delay, this reason would not relieve it from the liability arising from
its failure to timely act on Pantaleon’s purchase.
In response to AMEX’s assertion that the delay was in keeping with its duty to perform its obligation with
extraordinary diligence, Pantaleon claims that this duty includes the timely or prompt performance of its
obligation.
As to AMEX’s contention that moral or exemplary damages cannot be awarded absent a finding of
malice, Pantaleon argues that evil motive or design is not always necessary to support a finding of bad
faith; gross negligence or wanton disregard of contractual obligations is sufficient basis for the award of
moral and exemplary damages.
OUR RULING
We GRANT the motion for reconsideration.
Brief historical background
A credit card is defined as "any card, plate, coupon book, or other credit device existing for the purpose
of obtaining money, goods, property, labor or services or anything of value on credit."9 It traces its roots
to the charge card first introduced by the Diners Club in New York City in 1950.10 American Express
followed suit by introducing its own charge card to the American market in 1958.11
In the Philippines, the now defunct Pacific Bank was responsible for bringing the first credit card into the
country in the 1970s.12 However, it was only in the early 2000s that credit card use gained wide
acceptance in the country, as evidenced by the surge in the number of credit card holders then.13
Nature of Credit Card Transactions
Page 50 of 55
To better understand the dynamics involved in credit card transactions, we turn to the United States
case of Harris Trust & Savings Bank v. McCray14 which explains:
The bank credit card system involves a tripartite relationship between the issuer bank, the cardholder,
and merchants participating in the system. The issuer bank establishes an account on behalf of the
person to whom the card is issued, and the two parties enter into an agreement which governs their
relationship. This agreement provides that the bank will pay for cardholder’s account the amount of
merchandise or services purchased through the use of the credit card and will also make cash loans
available to the cardholder. It also states that the cardholder shall be liable to the bank for advances and
payments made by the bank and that the cardholder’s obligation to pay the bank shall not be affected or
impaired by any dispute, claim, or demand by the cardholder with respect to any merchandise or
service purchased.
The merchants participating in the system agree to honor the bank’s credit cards. The bank irrevocably
agrees to honor and pay the sales slips presented by the merchant if the merchant performs his
undertakings such as checking the list of revoked cards before accepting the card. x x x.
These slips are forwarded to the member bank which originally issued the card. The cardholder
receives a statement from the bank periodically and may then decide whether to make payment to the
bank in full within a specified period, free of interest, or to defer payment and ultimately incur an interest
charge.
15
We adopted a similar view in CIR v. American Express International, Inc. (Philippine branch), where
we also recognized that credit card issuers are not limited to banks. We said:
Under RA 8484, the credit card that is issued by banks in general, or by non-banks in particular, refers
to "any card x x x or other credit device existing for the purpose of obtaining x x x goods x x x or
services x x x on credit;" and is being used "usually on a revolving basis." This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services "on a continuing basis as long as the outstanding balance does
not exceed a specified limit." The card holder is, therefore, given "the power to obtain present control of
goods or service on a promise to pay for them in the future."
Business establishments may extend credit sales through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of uncollectible accounts from their customers. Under this
system, the establishments do not deposit in their bank accounts the credit card drafts that arise from
the credit sales. Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.
The credit card company, in turn, sends checks as payment to these business establishments, but it
does not redeem the drafts at full price. The agreement between them usually provides for discounts to
be taken by the company upon its redemption of the drafts. At the end of each month, it then bills its
credit card holders for their respective drafts redeemed during the previous month. If the holders fail to
pay the amounts owed, the company sustains the loss.
Simply put, every credit card transaction involves three contracts, namely: (a) the sales contract
between the credit card holder and the merchant or the business establishment which accepted the
CREDIT TRANS
credit card; (b) the loan agreement between the credit card issuer and the credit card holder; and lastly,
(c) the promise to pay between the credit card issuer and the merchant or business establishment.16
Credit card issuer – cardholder relationship
When a credit card company gives the holder the privilege of charging items at establishments
associated with the issuer,17 a necessary question in a legal analysis is – when does this relationship
begin? There are two diverging views on the matter. In City Stores Co. v. Henderson,18 another U.S.
decision, held that:
The issuance of a credit card is but an offer to extend a line of open account credit. It is unilateral and
supported by no consideration. The offer may be withdrawn at any time, without prior notice, for any
reason or, indeed, for no reason at all, and its withdrawal breaches no duty – for there is no duty to
continue it – and violates no rights.
Thus, under this view, each credit card transaction is considered a separate offer and acceptance.
Novack v. Cities Service Oil Co.19 echoed this view, with the court ruling that the mere issuance of a
credit card did not create a contractual relationship with the cardholder.
On the other end of the spectrum is Gray v. American Express Company20 which recognized the card
membership agreement itself as a binding contract between the credit card issuer and the card holder.
Unlike in the Novack and the City Stores cases, however, the cardholder in Gray paid an annual fee for
the privilege of being an American Express cardholder.
In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship between the
credit card issuer and the credit card holder as a contractual one that is governed by the terms and
conditions found in the card membership agreement.21 This contract provides the rights and liabilities of
a credit card company to its cardholders and vice versa.
We note that a card membership agreement is a contract of adhesion as its terms are prepared solely
by the credit card issuer, with the cardholder merely affixing his signature signifying his adhesion to
these terms.22 This circumstance, however, does not render the agreement void; we have uniformly held
that contracts of adhesion are "as binding as ordinary contracts, the reason being that the party who
adheres to the contract is free to reject it entirely."23 The only effect is that the terms of the contract are
construed strictly against the party who drafted it.24
On AMEX’s obligations to Pantaleon
We begin by identifying the two privileges that Pantaleon assumes he is entitled to with the issuance of
his AMEX credit card, and on which he anchors his claims. First, Pantaleon presumes that since his
credit card has no pre-set spending limit, AMEX has the obligation to approve all his charge requests.
Conversely, even if AMEX has no such obligation, at the very least it is obliged to act on his charge
requests within a specific period of time.
i. Use of credit card a mere offer to enter into loan agreements
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Although we recognize the existence of a relationship between the credit card issuer and the credit card
holder upon the acceptance by the cardholder of the terms of the card membership agreement
(customarily signified by the act of the cardholder in signing the back of the credit card), we have to
distinguish this contractual relationship from the creditor-debtor relationship which only arises after the
credit card issuer has approved the cardholder’s purchase request. The first relates merely to an
agreement providing for credit facility to the cardholder. The latter involves the actual credit on loan
agreement involving three contracts, namely: the sales contract between the credit card holder and the
merchant or the business establishment which accepted the credit card; the loan agreement between
the credit card issuer and the credit card holder; and the promise to pay between the credit card issuer
and the merchant or business establishment.
From the loan agreement perspective, the contractual relationship begins to exist only upon the meeting
of the offer25 and acceptance of the parties involved. In more concrete terms, when cardholders use
their credit cards to pay for their purchases, they merely offer to enter into loan agreements with the
credit card company. Only after the latter approves the purchase requests that the parties enter into
binding loan contracts, in keeping with Article 1319 of the Civil Code, which provides:
Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
This view finds support in the reservation found in the card membership agreement itself, particularly
paragraph 10, which clearly states that AMEX "reserve[s] the right to deny authorization for any
requested Charge." By so providing, AMEX made its position clear that it has no obligation to approve
any and all charge requests made by its card holders.
ii. AMEX not guilty of culpable delay
Since AMEX has no obligation to approve the purchase requests of its credit cardholders, Pantaleon
cannot claim that AMEX defaulted in its obligation. Article 1169 of the Civil Code, which provides the
requisites to hold a debtor guilty of culpable delay, states:
Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation. x x x.
The three requisites for a finding of default are: (a) that the obligation is demandable and liquidated; (b)
the debtor delays performance; and (c) the creditor judicially or extrajudicially requires the debtor’s
performance.26
Based on the above, the first requisite is no longer met because AMEX, by the express terms of the
credit card agreement, is not obligated to approve Pantaleon’s purchase request. Without a
demandable obligation, there can be no finding of default.
Apart from the lack of any demandable obligation, we also find that Pantaleon failed to make the
demand required by Article 1169 of the Civil Code.
As previously established, the use of a credit card to pay for a purchase is only an offer to the credit
card company to enter a loan agreement with the credit card holder. Before the credit card issuer
CREDIT TRANS
accepts this offer, no obligation relating to the loan agreement exists between them. On the other
hand, a demand is defined as the "assertion of a legal right; xxx an asking with authority, claiming or
challenging as due."27 A demand presupposes the existence of an obligation between the parties.
Thus, every time that Pantaleon used his AMEX credit card to pay for his purchases, what the stores
transmitted to AMEX were his offers to execute loan contracts. These obviously could not be classified
as the demand required by law to make the debtor in default, given that no obligation could arise on the
part of AMEX until after AMEX transmitted its acceptance of Pantaleon’s offers. Pantaleon’s act of
"insisting on and waiting for the charge purchases to be approved by AMEX"28 is not the demand
contemplated by Article 1169 of the Civil Code.
For failing to comply with the requisites of Article 1169, Pantaleon’s charge that AMEX is guilty of
culpable delay in approving his purchase requests must fail.
iii. On AMEX’s obligation to act on the offer within a specific period of time
Even assuming that AMEX had the right to review his credit card history before it approved his purchase
requests, Pantaleon insists that AMEX had an obligation to act on his purchase requests, either to
approve or deny, in "a matter of seconds" or "in timely dispatch." Pantaleon impresses upon us the
existence of this obligation by emphasizing two points: (a) his card has no pre-set spending limit; and
(b) in his twelve years of using his AMEX card, AMEX had always approved his charges in a matter of
seconds.
Pantaleon’s assertions fail to convince us.
We originally held that AMEX was in culpable delay when it acted on the Coster transaction, as well as
the two other transactions in the United States which took AMEX approximately 15 to 20 minutes to
approve. This conclusion appears valid and reasonable at first glance, comparing the time it took to
finally get the Coster purchase approved (a total of 78 minutes), to AMEX’s "normal" approval time of
three to four seconds (based on the testimony of Edgardo Jaurigue, as well as Pantaleon’s previous
experience). We come to a different result, however, after a closer look at the factual and legal
circumstances of the case.
AMEX’s credit authorizer, Edgardo Jaurigue, explained that having no pre-set spending limit in a credit
card simply means that the charges made by the cardholder are approved based on his ability to pay,
as demonstrated by his past spending, payment patterns, and personal
resources.29 Nevertheless, every time Pantaleon charges a purchase on his credit card, the credit
card company still has to determine whether it will allow this charge, based on his past credit
history. This right to review a card holder’s credit history, although not specifically set out in the card
membership agreement, is a necessary implication of AMEX’s right to deny authorization for any
requested charge.
As for Pantaleon’s previous experiences with AMEX (i.e., that in the past 12 years, AMEX has always
approved his charge requests in three or four seconds), this record does not establish that Pantaleon
had a legally enforceable obligation to expect AMEX to act on his charge requests within a matter of
seconds. For one, Pantaleon failed to present any evidence to support his assertion that AMEX acted
on purchase requests in a matter of three or four seconds as an established practice. More importantly,
even if Pantaleon did prove that AMEX, as a matter of practice or custom, acted on its customers’
Page 52 of 55
purchase requests in a matter of seconds, this would still not be enough to establish a legally
demandable right; as a general rule, a practice or custom is not a source of a legally demandable or
enforceable right.30
We next examine the credit card membership agreement, the contract that primarily governs the
relationship between AMEX and Pantaleon. Significantly, there is no provision in this agreement that
obligates AMEX to act on all cardholder purchase requests within a specifically defined period
of time. Thus, regardless of whether the obligation is worded was to "act in a matter of seconds" or to
"act in timely dispatch," the fact remains that no obligation exists on the part of AMEX to act within a
specific period of time. Even Pantaleon admits in his testimony that he could not recall any provision in
the Agreement that guaranteed AMEX’s approval of his charge requests within a matter of minutes.31
Nor can Pantaleon look to the law or government issuances as the source of AMEX’s alleged obligation
to act upon his credit card purchases within a matter of seconds. As the following survey of Philippine
law on credit card transactions demonstrates, the State does not require credit card companies to act
upon its cardholders’ purchase requests within a specific period of time.
Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of 1998, approved on February
11, 1998, is the controlling legislation that regulates the issuance and use of access devices,32 including
credit cards. The more salient portions of this law include the imposition of the obligation on a credit
card company to disclose certain important financial information33 to credit card applicants, as well as a
definition of the acts that constitute access device fraud.
As financial institutions engaged in the business of providing credit, credit card companies fall under the
supervisory powers of the Bangko Sentral ng Pilipinas (BSP).34 BSP Circular No. 398 dated August 21,
2003 embodies the BSP’s policy when it comes to credit cards –
The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer credit through
innovative products such as credit cards under conditions of fair and sound consumer credit
practices. The BSP likewise encourages competition and transparency to ensure more efficient
delivery of services and fair dealings with customers. (Emphasis supplied)
Based on this Circular, "x x x [b]efore issuing credit cards, banks and/or their subsidiary credit card
companies must exercise proper diligence by ascertaining that applicants possess good credit standing
and are financially capable of fulfilling their credit commitments."35 As the above-quoted policy expressly
states, the general intent is to foster "fair and sound consumer credit practices."
Other than BSP Circular No. 398, a related circular is BSP Circular No. 454, issued on September 24,
2004, but this circular merely enumerates the unfair collection practices of credit card companies – a
matter not relevant to the issue at hand.
In light of the foregoing, we find and so hold that AMEX is neither contractually bound nor legally
obligated to act on its cardholders’ purchase requests within any specific period of time, much less a
period of a "matter of seconds" that Pantaleon uses as his standard. The standard therefore is implicit
and, as in all contracts, must be based on fairness and reasonableness, read in relation to the Civil
Code provisions on human relations, as will be discussed below.
AMEX acted with good faith
CREDIT TRANS
Thus far, we have already established that: (a) AMEX had neither a contractual nor a legal obligation to
act upon Pantaleon’s purchases within a specific period of time; and (b) AMEX has a right to review a
cardholder’s credit card history. Our recognition of these entitlements, however, does not give
AMEX an unlimited right to put off action on cardholders’ purchase requests for indefinite
periods of time. In acting on cardholders’ purchase requests, AMEX must take care not to abuse its
rights and cause injury to its clients and/or third persons. We cite in this regard Article 19, in conjunction
with Article 21, of the Civil Code, which provide:
Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due and observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
Article 19 pervades the entire legal system and ensures that a person suffering damage in the course of
another’s exercise of right or performance of duty, should find himself without relief.36 It sets the
standard for the conduct of all persons, whether artificial or natural, and requires that everyone, in the
exercise of rights and the performance of obligations, must: (a) act with justice, (b) give everyone his
due, and (c) observe honesty and good faith. It is not because a person invokes his rights that he can
do anything, even to the prejudice and disadvantage of another.37
While Article 19 enumerates the standards of conduct, Article 21 provides the remedy for the person
injured by the willful act, an action for damages. We explained how these two provisions correlate with
each other in GF Equity, Inc. v. Valenzona:38
[Article 19], known to contain what is commonly referred to as the principle of abuse of rights, sets
certain standards which must be observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the following: to act with justice; to give everyone his
due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all
rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A
right, though by itself legal because recognized or granted by law as such, may nevertheless
become the source of some illegality. When a right is exercised in a manner which does not
conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong
is thereby committed for which the wrongdoer must be held responsible. But while Article 19 lays
down a rule of conduct for the government of human relations and for the maintenance of social order, it
does not provide a remedy for its violation. Generally, an action for damages under either Article 20 or
Article 21 would be proper.
In the context of a credit card relationship, although there is neither a contractual stipulation nor a
specific law requiring the credit card issuer to act on the credit card holder’s offer within a definite period
of time, these principles provide the standard by which to judge AMEX’s actions.
According to Pantaleon, even if AMEX did have a right to review his charge purchases, it abused this
right when it unreasonably delayed the processing of the Coster charge purchase, as well as his
purchase requests at the Richard Metz’ Golf Studio and Kids’ Unlimited Store; AMEX should have
known that its failure to act immediately on charge referrals would entail inconvenience and result in
humiliation, embarrassment, anxiety and distress to its cardholders who would be required to wait
before closing their transactions.39
Page 53 of 55
It is an elementary rule in our jurisdiction that good faith is presumed and that the burden of proving bad
faith rests upon the party alleging it.40 Although it took AMEX some time before it approved Pantaleon’s
three charge requests, we find no evidence to suggest that it acted with deliberate intent to cause
Pantaleon any loss or injury, or acted in a manner that was contrary to morals, good customs or public
policy. We give credence to AMEX’s claim that its review procedure was done to ensure Pantaleon’s
own protection as a cardholder and to prevent the possibility that the credit card was being fraudulently
used by a third person.
Pantaleon countered that this review procedure is primarily intended to protect AMEX’s interests, to
make sure that the cardholder making the purchase has enough means to pay for the credit extended.
Even if this were the case, however, we do not find any taint of bad faith in such motive. It is but natural
for AMEX to want to ensure that it will extend credit only to people who will have sufficient means to pay
for their purchases. AMEX, after all, is running a business, not a charity, and it would simply be
ludicrous to suggest that it would not want to earn profit for its services. Thus, so long as AMEX
exercises its rights, performs its obligations, and generally acts with good faith, with no intent to cause
harm, even if it may occasionally inconvenience others, it cannot be held liable for damages.
We also cannot turn a blind eye to the circumstances surrounding the Coster transaction which, in our
opinion, justified the wait. In Edgardo Jaurigue’s own words:
Q 21: With reference to the transaction at the Coster Diamond House covered by Exhibit H,
also Exhibit 4 for the defendant, the approval came at 2:19 a.m. after the request was relayed
at 1:33 a.m., can you explain why the approval came after about 46 minutes, more or less?
A21: Because we have to make certain considerations and evaluations of [Pantaleon’s] past
spending pattern with [AMEX] at that time before approving plaintiff’s request because
[Pantaleon] was at that time making his very first single charge purchase of
US$13,826 [this is below the US$16,112.58 actually billed and paid for by the plaintiff because
the difference was already automatically approved by [AMEX] office in Netherland[s] and the
record of [Pantaleon’s] past spending with [AMEX] at that time does not favorably
support his ability to pay for such purchase. In fact, if the foregoing internal policy of
[AMEX] had been strictly followed, the transaction would not have been approved at all
considering that the past spending pattern of the plaintiff with [AMEX] at that time does not
support his ability to pay for such purchase.41
xxxx
Q: Why did it take so long?
A: It took time to review the account on credit, so, if there is any delinquencies [sic] of the
cardmember. There are factors on deciding the charge itself which are standard measures in
approving the authorization. Now in the case of Mr. Pantaleon although his account is single
charge purchase of US$13,826. [sic] this is below the US$16,000. plus actually billed x x x we
would have already declined the charge outright and asked him his bank account to support
his charge. But due to the length of his membership as cardholder we had to make a decision
on hand.42
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As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for AMEX’s approval was because
he had to go over Pantaleon’s credit card history for the past twelve months.43 It would certainly be
unjust for us to penalize AMEX for merely exercising its right to review Pantaleon’s credit history
meticulously.
Finally, we said in Garciano v. Court of Appeals that "the right to recover [moral damages] under Article
21 is based on equity, and he who comes to court to demand equity, must come with clean hands.
Article 21 should be construed as granting the right to recover damages to injured persons who are not
themselves at fault."44 As will be discussed below, Pantaleon is not a blameless party in all this.
Pantaleon’s action was the proximate cause for his injury
Pantaleon mainly anchors his claim for moral and exemplary damages on the embarrassment and
humiliation that he felt when the European tour group had to wait for him and his wife for approximately
35 minutes, and eventually had to cancel the Amsterdam city tour. After thoroughly reviewing the
records of this case, we have come to the conclusion that Pantaleon is the proximate cause for this
embarrassment and humiliation.
As borne by the records, Pantaleon knew even before entering Coster that the tour group would have to
leave the store by 9:30 a.m. to have enough time to take the city tour of Amsterdam before they left the
country. After 9:30 a.m., Pantaleon’s son, who had boarded the bus ahead of his family, returned to the
store to inform his family that they were the only ones not on the bus and that the entire tour group was
waiting for them. Significantly, Pantaleon tried to cancel the sale at 9:40 a.m. because he did not want
to cause any inconvenience to the tour group. However, when Coster’s sale manager asked him to wait
a few more minutes for the credit card approval, he agreed, despite the knowledge that he had already
caused a 10-minute delay and that the city tour could not start without him.
In Nikko Hotel Manila Garden v. Reyes,45 we ruled that a person who knowingly and voluntarily exposes
himself to danger cannot claim damages for the resulting injury:
The doctrine of volenti non fit injuria ("to which a person assents is not esteemed in law as injury")
refers to self-inflicted injury or to the consent to injury which precludes the recovery of damages by one
who has knowingly and voluntarily exposed himself to danger, even if he is not negligent in doing so.
This doctrine, in our view, is wholly applicable to this case. Pantaleon himself testified that the most
basic rule when travelling in a tour group is that you must never be a cause of any delay because the
schedule is very strict.46 When Pantaleon made up his mind to push through with his purchase, he must
have known that the group would become annoyed and irritated with him. This was the natural,
foreseeable consequence of his decision to make them all wait.
We do not discount the fact that Pantaleon and his family did feel humiliated and embarrassed when
they had to wait for AMEX to approve the Coster purchase in Amsterdam. We have to acknowledge,
however, that Pantaleon was not a helpless victim in this scenario – at any time, he could have
cancelled the sale so that the group could go on with the city tour. But he did not.
More importantly, AMEX did not violate any legal duty to Pantaleon under the circumstances under the
principle of damnum absque injuria, or damages without legal wrong, loss without injury.47 As we held in
BPI Express Card v. CA:48
Page 54 of 55
We do not dispute the findings of the lower court that private respondent suffered damages as a result
of the cancellation of his credit card. However, there is a material distinction between damages and
injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from
the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus,
there can be damage without injury in those instances in which the loss or harm was not the result of a
violation of a legal duty. In such cases, the consequences must be borne by the injured person alone,
the law affords no remedy for damages resulting from an act which does not amount to a legal injury or
wrong. These situations are often called damnum absque injuria.

In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he
must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff
- a concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying
basis for the award of tort damages is the premise that an individual was injured in contemplation of law.
Thus, there must first be a breach of some duty and the imposition of liability for that breach before
damages may be awarded; and the breach of such duty should be the proximate cause of the injury.

Pantaleon is not entitled to damages

Because AMEX neither breached its contract with Pantaleon, nor acted with culpable delay or the willful
intent to cause harm, we find the award of moral damages to Pantaleon unwarranted.

Similarly, we find no basis to award exemplary damages. In contracts, exemplary damages can only be
awarded if a defendant acted "in a wanton, fraudulent, reckless, oppressive or malevolent
manner."49 The plaintiff must also show that he is entitled to moral, temperate, or compensatory
damages before the court may consider the question of whether or not exemplary damages should be
awarded.50

As previously discussed, it took AMEX some time to approve Pantaleon’s purchase requests because it
had legitimate concerns on the amount being charged; no malicious intent was ever established here. In
the absence of any other damages, the award of exemplary damages clearly lacks legal basis.1avvphi1

Neither do we find any basis for the award of attorney’s fees and costs of litigation. No premium should
be placed on the right to litigate and not every winning party is entitled to an automatic grant of
attorney's fees.51 To be entitled to attorney’s fees and litigation costs, a party must show that he falls
under one of the instances enumerated in Article 2208 of the Civil Code.52 This, Pantaleon failed to do.
Since we eliminated the award of moral and exemplary damages, so must we delete the award for
attorney's fees and litigation expenses.

Lastly, although we affirm the result of the CA decision, we do so for the reasons stated in this
Resolution and not for those found in the CA decision.

WHEREFORE, premises considered, we SET ASIDE our May 8, 2009 Decision and GRANT the
present motion for reconsideration. The Court of Appeals Decision dated August 18, 2006 is
hereby AFFIRMED. No costs.

SO ORDERED.

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