Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-46145 November 26, 1986

REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner, vs. THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by RICARDO BALOY, ET AL.,respondents.

Pelaez, Jalondoni, Adriano and Associates for respondents.

PARAS, J.:p

This case originally emanated from a decision of the then Court of First Instance of Zambales in LRC Case No. 11-0, LRC Record No. N-29355, denying respondents' application for registration. From said order of denial the applicants, heirs of Domingo Baloy, represented by Ricardo P. Baloy, (herein private respondents) interposed on appeal to the Court of Appeals which was docketed as CA-G.R. No. 52039-R. The appellate court, thru its Fifth Division with the Hon. Justice Magno Gatmaitan as ponente, rendered a decision dated February 3, 1977 reversing the decision appealed from and thus approving the application for registration. Oppositors (petitioners herein) filed their Motion for Reconsideration alleging among other things that applicants' possessory information title can no longer be invoked and that they were not able to prove a registerable title over the land. Said Motion for Reconsideration was denied, hence this petition for review on certiorari.

Applicants' claim is anchored on their possessory information title (Exhibit F which had been translated in Exhibit F-1) coupled with their continuous, adverse and public possession over the land in question. An examination of the possessory information title shows that the description and the area of the land stated therein substantially coincides with the land applied for and that said possessory information title had been regularly issued having been acquired by applicants' predecessor, Domingo Baloy, under the provisions of the Spanish Mortgage Law. Applicants presented their tax declaration on said lands on April 8, 1965.

The Director of Lands opposed the registration alleging that this land had become public land thru the operation of Act 627 of the Philippine Commission. On November 26, 1902 pursuant to the executive order of the President of the U.S., the area was declared within the U.S. Naval Reservation. Under Act 627 as amended by Act 1138, a period was fixed within which persons affected thereby could file their application, (that is within 6 months from July 8, 1905) otherwise "the said lands or interest therein will be conclusively adjudged to be public lands and all claims on the part of private individuals for such lands or interests therein not to presented will be forever barred." Petitioner argues that since Domingo Baloy failed to file his claim within the prescribed period, the land had become irrevocably public and could not be the subject of a valid registration for private ownership.

Considering the foregoing facts respondents Court of Appeals ruled as follows:

... perhaps, the consequence was that upon failure of Domingo Baloy to have filed his application within that period the land had become irrevocably public; but perhaps also, for the reason that warning was from the Clerk of the Court of Land Registration, named J.R. Wilson and there has not been presented a formal order or decision of the said Court of Land Registration so declaring the land public because of that failure, it can with plausibility be said that after all, there was no judicial declaration to that effect, it is true that the U.S. Navy did occupy it apparently for some time, as a recreation area, as this Court understands from the communication of the Department of Foreign Affairs to the U.S. Embassy exhibited in the record, but the very tenor of the communication apparently seeks to justify the title of herein applicants, in other words, what this Court has taken from the occupation by the U.S. Navy is that during the interim, the title of applicants was in a state of suspended animation so to speak but it had not died either; and the fact being that this land was really originally private from and after the issuance and inscription of the possessory information Exh. F during the Spanish times, it would be most difficult to sustain position of Director of Lands that it was land of no private owner; open to public disposition, and over which he has control; and since immediately after U.S. Navy had abandoned the area, applicant came in and asserted title once again, only to be troubled by first Crispiniano Blanco who however in due time, quitclaimed in favor of applicants, and then by private oppositors now, apparently originally tenants of Blanco, but that entry of private oppositors sought to be given color of ownership when they sought to and did file tax declaration in 1965, should not prejudice the original rights of applicants thru their possessory information secured regularly so long ago, the conclusion must have to be that after all, applicants had succeeded in bringing themselves within the provisions of Sec. 19 of Act 496, the land should be registered in their favor;

IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses, judgment appealed from the application is approved, and once this decision shall have become final, if ever it would be, let decree issue in favor of applicants with the personal circumstances outlined in the application, costs against private oppositors.

Petitioner now comes to Us with the following:

ASSIGNMENT OF ERRORS:

1. Respondent court erred in holding that to bar private respondents from asserting any right under their possessory information title there is need for a court order to that effect.

2. Respondent court erred in not holding that private respondents' rights by virtue of their possessory information title was lost by prescription.

3. Respondent court erred in concluding that applicants have registerable title.

A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before any affected land can "be conclusively adjudged to be public land." Sec. 3, Act 627 reads as follows:

SEC. 3. Immediately upon receipt of the notice from the civil Governor in the preceeding section mentioned it shall be the duty of the judge of the Court of Land Registration to issue a notice, stating that the lands within the limits aforesaid have been reserved for military purposes, and announced and declared to be military reservations, and that claims for all private lands, buildings, and interests therein, within the limits aforesaid, must be presented for registration under the Land Registration Act within six calendar months from the date of issuing the notice, and that all lands, buildings, and interests therein within the limits aforesaid not so presented within the time therein limited will be conclusively adjudged to be public lands and all claims on the part of private individuals for such lands, buildings, or an interest therein not so presented will be forever barred. The clerk of the Court of Land Registration shall immediately upon the issuing of such notice by the judge cause the same to be published once a week for three successive weeks in two newspapers, one of which newspapers shall be in the English Language, and one in the Spanish language in the city or province where the land lies, if there be no such Spanish or English newspapers having a general circulation in the city or province wherein the land lies, then it shall be a sufficient compliance with this section if the notice be published as herein provided, in a daily newspaper in the Spanish language and one in the English language, in the City of Manila, having a general circulation. The clerk shall also cause a duly attested copy of the notice in the Spanish language to be posted in conspicuous place at each angle formed by the lines of the limits of the land reserved. The clerk shall also issue and cause to be personally served the notice in the Spanish language upon every person living upon or in visible possession of any part of the military reservation. If the person in possession is the head of the family living upon the hand, it shall be sufficient to serve the notice upon him, and if he is absent it shall be sufficient to leave a copy at his usual place of residence. The clerk shall certify the manner in which the notices have been published, posted, and served, and his certificate shall be conclusive proof of such publication, posting, and service, but the court shall have the power to cause such further notice to be given as in its opinion may be necessary.

Clearly under said provisions, private land could be deemed to have become public land only by virtue of a judicial declaration after due notice and hearing. It runs contrary therefore to the contention of petitioners that failure to present claims set forth under Sec. 2 of Act 627 made the land ipso facto public without any deed of judicial pronouncement. Petitioner in making such declaration relied on Sec. 4 of Act 627 alone. But in construing a statute the entire provisions of the law must be considered in order to establish the correct interpretation as intended by the law-making body. Act 627 by its terms is not self-executory and requires implementation by the Court of Land Registration. Act 627, to the extent that it creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly construed so as to safeguard private respondents' rights. Significantly, petitioner does not even allege the existence of any judgment of the Land Registration court with respect to the land in question. Without a judgment or order declaring the land to be public, its private character and the possessory information title over it must be respected. Since no such order has been rendered by the Land Registration Court it necessarily follows that it never became public land thru the operation of Act 627. To assume otherwise is to deprive private respondents of their property without due process of law. In fact it can be presumed that the notice required by law to be given by publication and by personal service did not include the name of Domingo Baloy and the subject land, and hence he and his lane were never brought within the operation of Act 627 as amended. The procedure laid down in Sec. 3 is a requirement of due process. "Due process requires that the statutes which under it is attempted to deprive a citizen of private property without or against his consent must, as in expropriation cases, be strictly complied with, because such statutes are in derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511).

We also find with favor private respondents' views that court judgments are not to be presumed. It would be absurd to speak of a judgment by presumption. If it could be contended that such a judgment may be presumed, it could equally be contended that applicants' predecessor Domingo Baloy presumably seasonably filed a claim, in accordance with the legal presumption that a person takes ordinary care of his concerns, and that a judgment in his favor was rendered.

The finding of respondent court that during the interim of 57 years from November 26, 1902 to December 17, 1959 (when the U.S. Navy possessed the area) the possessory rights of Baloy or heirs were merely suspended and not lost by prescription, is supported by Exhibit "U," a communication or letter No. 1108-63, dated June 24, 1963, which contains an official statement of the position of the Republic of the Philippines with regard to the status of the land in question. Said letter recognizes the fact that Domingo Baloy and/or his heirs have been in continuous possession of said land since 1894 as attested by an "Informacion Possessoria" Title, which was granted by the Spanish Government. Hence, the disputed property is private land and this possession was interrupted only by the occupation of the land by the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned the premises. The heirs of the late Domingo P. Baloy, are now in actual possession, and this has been so since the abandonment by the U.S. Navy. A new recreation area is now being used by the U.S. Navy personnel and this place is remote from the land in question.

Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the character of acommodatum. It cannot therefore militate against the title of Domingo Baloy and his successors-in-interest. One's ownership of a thing may be lost by prescription by reason of another's possession if such possession be under claim of ownership, not where the possession is only intended to be transient, as in the case of the U.S. Navy's occupation of the land concerned, in which case the owner is not divested of his title, although it cannot be exercised in the meantime.

WHEREFORE, premises considered, finding no merit in the petition the appealed decision is hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time ago can properly be considered res judicata by respondent Court of Appeals in the present two cases between petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of private respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there is no possibility of acquisitive prescription which requires 10 years possession with just title and 30 years of possession without; that the principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of facts; and that those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole controversy started when the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building, convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto. After trial on the merits, the land registration court promulgated its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent and the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied that of the Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition.

It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. B—B-4 ) to defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and peacefully and has constructed permanent structures thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of ownership and/or long and continuous possession of the two lots in question since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs contend that the question of possession and ownership have already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res judicata would not prevent them from litigating the issues of long possession and ownership because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;

6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as owners of the land, neither was it declared that they were not owners of the land, but it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings are res judicata between the parties. They can no longer be altered by presentation of evidence because those issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to open the door to endless litigations by continuous determination of issues without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question under its ownership, on its evaluation of evidence and conclusion of facts.

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support the same and the alleged purchases were never mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.

There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and the new convent only 2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the house, but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined to review said decision, thereby in effect, affirming it. It has become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision may no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with costs against petitioner.

SO ORDERED.

Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.

Footnotes

1 Associate Justices Conrado T. Limcaoco, Jose C. Campos, Jr. and Gloria C. Paras.

2 Decision in CA-G.R. No. CV Nos. 05148 and 05149 dated August 31, 1987; pp. 11 2-117, Rollo.

3 Pp. 5-15, Petition; pp. 6-17, Rollo.

4 Arts. 1134 and 1129, Civil Code.

5 Presiding Justice Magno S. Gatmaitan, Associate Justices Pacifico P. de Castro and Samuel Reyes.

6 Land Reg. No. N-91, LRC Rec. No. N-22991 of the then C.F.I. of Baguio City.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. 26085 August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants, vs. BENITO GONZALEZ SY CHIAM, defendants-appellee.

Araneta and Zaragoza for appellants. Eusebio Orense for appelle.

JOHNSON, J.:

PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The principal questions presented by this appeal are:

(a) Is the contract in question a pacto de retro or a mortgage?

(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and agrees to pay a certain amount per month as rent, may such rent render such a contract usurious when the amount paid as rent, computed upon the purchase price, amounts to a higher rate of interest upon said amount than that allowed by law?

(c) May the contract in the present case may be modified by parol evidence?

ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the municipality of Tarlac of the Province of Tarlac for the price of P25,000, promising to pay therefor in three installments. The first installment of P2,000 was due on or before the 2d day of May, 1921; the second installment of P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at 12 per cent interest was due and payable on or about the 30th day of November, 1922. One of the conditions of that contract of purchase was that on failure of the purchaser (plaintiffs and appellants) to pay the balance of said purchase price or any of the installments on the date agreed upon, the property bought would revert to the original owner.

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far as the record shows upon the due dates. The balance of P15,000 due on said contract of purchase was paid on or about the 1st day of December, 1922, in the manner which will be explained below. On the date when the balance of P15,000 with interest was paid, the vendor of said property had issued to the purchasers transfer certificate of title to said property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title from No. 40, which shows that said land was originally registered in the name of the vendor on the 7th day of November, 1913.

PRESENT FACTS

On the 7th day of November, 1922 the representative of the vendor of the property in question wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the latter that if the balance of said indebtedness was not paid, an action would be brought for the purpose of recovering the property, together with damages for non compliance with the condition of the contract of purchase. The pertinent parts of said letter read as follows:

Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente, procederemos judicialmente contra Vd. para reclamar la devolucion del camarin y los daños y perjuicios ocasionados a la compañia por su incumplimiento al contrato.

Somos de Vd. atentos y S. S.

SMITH, BELL & CO., LTD.

By (Sgd.) F. I. HIGHAM

Treasurer.

General Managers

LUZON RICE MILLS INC.

According to Exhibits B and D, which represent the account rendered by the vendor, there was due and payable upon said contract of purchase on the 30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of the vendor of said property of November 7, 1922, the purchasers, the appellants herein, realizing that they would be unable to pay the balance due, began to make an effort to borrow money with which to pay the balance due, began to make an effort to borrow money with which to pay the balance of their indebtedness on the purchase price of the property involved. Finally an application was made to the defendant for a loan for the purpose of satisfying their indebtedness to the vendor of said property. After some negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check the sum of P16,965.09. The defendant, in addition to said amount paid by check, delivered to the plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract of pacto de retro, making a total paid by the defendant to the plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery of said contract. Said contracts was dated the 28th day of November, 1922, and is in the words and figures following:

Sepan todos por la presente:

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores de edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta Ciudad de Manila.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion a la cantidad de diecisiete mil quinientos pesos (P17,500) moneda filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos y

causahabientes, una finca que, segun el Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited" que al incorporarse se donomino y se denomina "Luzon Rice Mills Inc.," y que esta corporacion nos ha transferido en venta absoluta, se describe como sigue:

Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el Municipio de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida; midiendo una extension superficcial de cuatro mil doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan marcados en el plano y sobre el terreno los puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera, siendo la declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1.º de febrero de 1913.

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco años sin ejercitar el derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si el conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.

(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar a la terminacion de este arrendamieno y a la perdida del derecho de retracto que nos hemos reservado, como si naturalmente hubiera expirado el termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y desahuciarnos de la misma.

Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura en los precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y Potenciana Manio.

En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por cuadruplicado en Manila, hoy a 28 de noviembre de 1922.

(Fdo.) SEVERINO TOLENTINO

(Fda.) POTENCIANA MANIO

(Fdo.) BENITO GONZALEZ SY CHIAM

Firmado en presencia de:

(Fdos.) MOISES M. BUHAIN

B. S. BANAAG

An examination of said contract of sale with reference to the first question above, shows clearly that it is a pacto de retro and not a mortgage. There is no pretension on the part of the appellant that said contract, standing alone, is a mortgage. The pertinent language of the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don Benito Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos (P17,500) queda obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco (5) años sin ejercitar al derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e irrevocable.

Language cannot be clearer. The purpose of the contract is expressed clearly in said quotation that there can certainly be not doubt as to the purpose of the plaintiff to sell the property in question, reserving the right only to repurchase the same. The intention to sell with the right to repurchase cannot be more clearly expressed.

It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the absolute sale of the property, entered into a contract with the purchaser by virtue of which she became the "tenant" of the purchaser. That contract of rent appears in said quoted document above as follows:

Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375) moneda filipina, cada mes.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si le conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.

From the foregoing, we are driven to the following conclusions: First, that the contract of pacto de retro is an absolute sale of the property with the right to repurchase and not a mortgage; and, second, that by virtue of the said contract the vendor became the tenant of the purchaser, under the conditions mentioned in paragraph 3 of said contact quoted above.

It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to declare the same to be a mortgage and not a sale whenever the interpretation of such a contract justifies that conclusion. There must be something, however, in the language of the contract or in the conduct of the parties which shows clearly and beyond doubt that they intended the contract to be a "mortgage" and not a pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villavs. Santiago, 38 Phil., 157.)

We are not unmindful of the fact that sales with pacto de retro are not favored and that the court will not construe an instrument to one of sale with pacto de retro, with the stringent and onerous effect which follows, unless the terms of the document and the surrounding circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the terms of a contract, but when an issue is squarely presented that a contract does not express the intention of the parties, courts will, when a proper foundation is laid therefor, hear evidence for the purpose of ascertaining the true intention of the parties.

In the present case the plaintiffs allege in their complaint that the contract in question is a pacto de retro. They admit that they signed it. They admit they sold the property in question with the right to repurchase it. The terms of the contract quoted by the plaintiffs to the defendant was a "sale" with pacto de retro, and the plaintiffs have shown no circumstance whatever which would justify us in construing said contract to be a mere "loan" with guaranty. In every case in which this court has construed a contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done so, either because the terms of such contract were incompatible or inconsistent with the theory that said contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan,supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)

In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature of the conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs. Dy Puico, while the vendor used to the terms "sale and transfer with the right to repurchase," yet in said contract he described himself as a "debtor" the purchaser as a "creditor" and the contract as a "mortgage". In the case of Rodriguez vs. Pamintuan and De

Jesusthe person who executed the instrument, purporting on its face to be a deed of sale of certain parcels of land, had merely acted under a power of attorney from the owner of said land, "authorizing him to borrow money in such amount and upon such terms and conditions as he might deem proper, and to secure payment of the loan by a mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a deed of sale was executed, the supposed vendor remained in possession of the land and invested the money he had obtained from the supposed vendee in making improvements thereon, which fact justified the court in holding that the transaction was a mere loan and not a sale. In the case of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the vendor, and such acceptance of partial payments is absolutely incompatible with the idea of irrevocability of the title of ownership of the purchaser at the expiration of the term stipulated in the original contract for the exercise of the right of repurchase."

Referring again to the right of the parties to vary the terms of written contract, we quote from the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of the Philippine Islands vs. Philippine Sugar Estates Development Co., which case was appealed to the Supreme Court of the United States and the contention of the Chief Justice in his dissenting opinion was affirmed and the decision of the Supreme Court of the Philippine Islands was reversed. (See decision of the Supreme Court of the United States, June 3, 1918.)1 The Chief Justice said in discussing that question:

According to article 1282 of the Civil Code, in order to judge of the intention of the contracting parties, consideration must chiefly be paid to those acts executed by said parties which are contemporary with and subsequent to the contract. And according to article 1283, however general the terms of a contract may be, they must not be held to include things and cases different from those with regard to which the interested parties agreed to contract. "The Supreme Court of the Philippine Islands held the parol evidence was admissible in that case to vary the terms of the contract between the Government of the Philippine Islands and the Philippine Sugar Estates Development Co. In the course of the opinion of the Supreme Court of the United States Mr. Justice Brandeis, speaking for the court, said:

It is well settled that courts of equity will reform a written contract where, owing to mutual mistake, the language used therein did not fully or accurately express the agreement and intention of the parties. The fact that interpretation or construction of a contract presents a question of law and that, therefore, the mistake was one of law is not a bar to granting relief. . . . This court is always disposed to accept the construction which the highest court of a territory or possession has placed upon a local statute. But that disposition may not be yielded to where the lower court has clearly erred. Here the construction adopted was rested upon a clearly erroneous assumption as to an established rule of equity. . . . The burden of proof resting upon the appellant cannot be satisfied by mere preponderance of the evidence. It is settled that relief by way of reformation will not be granted unless the proof of mutual mistake be of the clearest and most satisfactory character.

The evidence introduced by the appellant in the present case does not meet with that stringent requirement. There is not a word, a phrase, a sentence or a paragraph in the entire record, which justifies this court in holding that the said contract of pacto de retro is a mortgage and not a sale with the right to repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are clear and leave no doubt as to the intention of the contracting

parties, the literal sense of its stipulations shall be followed." Article 1282 provides: "in order to judge as to the intention of the contracting parties, attention must be paid principally to their conduct at the time of making the contract and subsequently thereto."

We cannot thereto conclude this branch of our discussion of the question involved, without quoting from that very well reasoned decision of the late Chief Justice Arellano, one of the greatest jurists of his time. He said, in discussing the question whether or not the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12), was apacto de retro or a mortgage:

The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer declares and states that he is the proprietor in fee simple of two parcels of fallow unappropriated crown land situated within the district of his pueblo. The first has an area of 73 quiñones, 8 balitas and 8 loanes, located in the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of Panantaglay, barrio of Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc., etc."

In the executory part of the said instrument, it is stated:

'That under condition of right to repurchase (pacto de retro) he sells the said properties to the aforementioned Doña Cornelia Laochangco for P4,000 and upon the following conditions: First, the sale stipulated shall be for the period of two years, counting from this date, within which time the deponent shall be entitled to repurchase the land sold upon payment of its price; second, the lands sold shall, during the term of the present contract, be held in lease by the undersigned who shall pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in sugar at the option of the vendor; third, all the fruits of the said lands shall be deposited in the sugar depository of the vendee, situated in the district of Quiapo of this city, and the value of which shall be applied on account of the price of this sale; fourth, the deponent acknowledges that he has received from the vendor the purchase price of P4,000 already paid, and in legal tender currency of this country . . .; fifth, all the taxes which may be assessed against the lands surveyed by competent authority, shall be payable by and constitute a charge against the vendor; sixth, if, through any unusual event, such as flood, tempest, etc., the properties hereinbefore enumerated should be destroyed, wholly or in part, it shall be incumbent upon the vendor to repair the damage thereto at his own expense and to put them into a good state of cultivation, and should he fail to do so he binds himself to give to the vendee other lands of the same area, quality and value.'

x x x x x x x x x

The opponent maintained, and his theory was accepted by the trial court, that Berenguer's contract with Laochangco was not one of sale with right of repurchase, but merely one of loan secured by those properties, and, consequently, that the ownership of the lands in questions could not have been conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as well as their possession, which he had not ceased to enjoy.

Such a theory is, as argued by the appellant, erroneous. The instrument executed by Macario Berenguer, the text of which has been transcribed in this decision, is very clear. Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact expression of the consent of the contracting contained in the instrument, Exhibit C. Not because the lands may have continued in possession of the vendor, not because the latter may have assumed the payment of the taxes on such properties, nor yet because the same party may have bound himself to substitute by another any one of the properties which might be destroyed, does the contract cease to be what it is, as set forth in detail in the public instrument. The vendor continued in the possession of the lands, not as the owner thereof as before their sale, but as the lessee which he became after its consummation, by virtue of a contract executed in his favor by the vendee in the deed itself, Exhibit C. Right of ownership is not implied by the circumstance of the lessee's assuming the responsibility of the payment is of the taxes on the property leased, for their payment is not peculiarly incumbent upon the owner, nor is such right implied by the obligation to substitute the thing sold for another while in his possession under lease, since that obligation came from him and he continues under another character in its possession—a reason why he guarantees its integrity and obligates himself to return the thing even in a case of force majeure. Such liability, as a general rule, is foreign to contracts of lease and, if required, is exorbitant, but possible and lawful, if voluntarily agreed to and such agreement does not on this account involve any sign of ownership, nor other meaning than the will to impose upon oneself scrupulous diligence in the care of a thing belonging to another.

The purchase and sale, once consummated, is a contract which by its nature transfers the ownership and other rights in the thing sold. A pacto de retro, or sale with right to repurchase, is nothing but a personal right stipulated between the vendee and the vendor, to the end that the latter may again acquire the ownership of the thing alienated.

It is true, very true indeed, that the sale with right of repurchase is employed as a method of loan; it is likewise true that in practice many cases occur where the consummation of a pacto de retro sale means the financial ruin of a person; it is also, unquestionable that in pacto de retro sales very important interests often intervene, in the form of the price of the lease of the thing sold, which is stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)

But in the present case, unlike others heard by this court, there is no proof that the sale with right of repurchase, made by Berenguer in favor of Laonchangco is rather a mortgage to secure a loan.

We come now to a discussion of the second question presented above, and that is, stating the same in another form: May a tenant charge his landlord with a violation of the Usury Law upon the ground that the amount of rent he pays, based upon the real value of the property, amounts to a usurious rate of interest? When the vendor of property under a pacto de retro rents the property and agrees to pay a rental value for the property during the period of his right to repurchase, he thereby becomes a "tenant" and in all respects stands in the same relation with the purchaser as a tenant under any other contract of lease.

The appellant contends that the rental price paid during the period of the existence of the right to repurchase, or the sum of P375 per month, based upon the value of the property, amounted to usury. Usury, generally speaking, may be defined as contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money—the taking of more interest for the use of money than the law allows. It seems that

the taking of interest for the loan of money, at least the taking of excessive interest has been regarded with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the people of England, and especially the English Church, entertained the opinion, then, current in Europe, that the taking of any interest for the loan of money was a detestable vice, hateful to man and contrary to the laws of God. (3 Coke's Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon history, we shall find that there is scarcely any people, ancient or modern, that have not had usury laws. . . . The Romans, through the greater part of their history, had the deepest abhorrence of usury. . . . It will be deemed a little singular, that the same voice against usury should have been raised in the laws of China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether Greek or Barbarian."

The collection of a rate of interest higher than that allowed by law is condemned by the Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a property to enter into a contract with the tenant for the payment of a specific amount of rent for the use and occupation of said property, even though the amount paid as "rent," based upon the value of the property, might exceed the rate of interest allowed by law? That question has never been decided in this jurisdiction. It is one of first impression. No cases have been found in this jurisdiction answering that question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of receiving or taking usurious rates."

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any money, goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on "loans." A contract of "loan," is very different contract from that of "rent". A "loan," as that term is used in the statute, signifies the giving of a sum of money, goods or credits to another, with a promise to repay, but not a promise to return the same thing. To "loan," in general parlance, is to deliver to another for temporary use, on condition that the thing or its equivalent be returned; or to deliver for temporary use on condition that an equivalent in kind shall be returned with a compensation for its use. The word "loan," however, as used in the statute, has a technical meaning. It never means the return of the same thing. It means the return of an equivalent only, but never the same thing loaned. A "loan" has been properly defined as an advance payment of money, goods or credits upon a contract or stipulation to repay, not to return, the thing loaned at some future day in accordance with the terms of the contract. Under the contract of "loan," as used in said statute, the moment the contract is completed the money, goods or chattels given cease to be the property of the former owner and becomes the property of the obligor to be used according to his own will, unless the contract itself expressly provides for a special or specific use of the same. At all events, the money, goods or chattels, the moment the contract is executed, cease to be the property of the former owner and becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the owner of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract. In a contract of "loan" the thing loaned becomes the property of the obligor. In a contract of "rent" the thing still remains the property of the lessor. He simply loses control of the same in a limited way during the period of the contract of "rent" or lease. In a contract of "rent" the relation between the contractors is that of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits, the relation between the parties is that of obligor and obligee. "Rent" may be defined as the compensation either in money, provisions, chattels, or labor, received by the owner of the soil from the occupant thereof. It is defined as the return or compensation for the possession of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return for their use. It is that, which is to paid for the use of land, whether in money, labor or other thing agreed upon. A contract of "rent" is a contract by which one of the parties delivers to the other some nonconsumable thing, in order that the latter may use it during a certain period and return it to the former; whereas a contract of "loan", as that word is used in the statute, signifies the delivery of money or other consumable things upon condition of returning an equivalent amount of the same kind or quantity, in which cases it is called merely a "loan." In the case of a contract of "rent," under the civil law, it is called a "commodatum."

From the foregoing it will be seen that there is a while distinction between a contract of "loan," as that word is used in the statute, and a contract of "rent" even though those words are used in ordinary parlance as interchangeable terms.

The value of money, goods or credits is easily ascertained while the amount of rent to be paid for the use and occupation of the property may depend upon a thousand different conditions; as for example, farm lands of exactly equal productive capacity and of the same physical value may have a different rental value, depending upon location, prices of commodities, proximity to the market, etc. Houses may have a different rental value due to location, conditions of business, general prosperity or depression, adaptability to particular purposes, even though they have exactly the same original cost. A store on the Escolta, in the center of business, constructed exactly like a store located outside of the business center, will have a much higher rental value than the other. Two places of business located in different sections of the city may be constructed exactly on the same architectural plan and yet one, due to particular location or adaptability to a particular business which the lessor desires to conduct, may have a very much higher rental value than one not so located and not so well adapted to the particular business. A very cheap building on the carnival ground may rent for more money, due to the particular circumstances and surroundings, than a much more valuable property located elsewhere. It will thus be seen that the rent to be paid for the use and occupation of property is not necessarily fixed upon the value of the property. The amount of rent is fixed, based upon a thousand different conditions and may or may not have any direct reference to the value of the property rented. To hold that "usury" can be based upon the comparative actual rental value and the actual value of the property, is to subject every landlord to an annoyance not contemplated by the law, and would create a very great disturbance in every business or rural community. We cannot bring ourselves to believe that the Legislature contemplated any such disturbance in the equilibrium of the business of the country.

In the present case the property in question was sold. It was an absolute sale with the right only to repurchase. During the period of redemption the purchaser was the absolute owner of the property. During the period of redemption the vendor was not the owner of the property. During the period of redemption the vendor was a tenant of the purchaser. During the period of redemption the relation which existed between the vendor and the vendee was that of landlord and tenant. That relation can only be terminated by a repurchase of the property by the vendor in accordance with the terms of the said contract. The contract was one of rent. The contract was not a loan, as that word is used in Act No. 2655.

As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right to make contracts for parties. They made their own contract in the present case. There is not a word, a phrase, a sentence or paragraph, which in the slightest way indicates that the parties to the contract in question did not intend to sell the property in question absolutely, simply with the right to repurchase. People who make their own beds must lie thereon.

What has been said above with reference to the right to modify contracts by parol evidence, sufficiently answers the third questions presented above. The language of the contract is explicit, clear, unambiguous and beyond question. It expresses the exact intention of the parties at the time it was made. There is not a word, a phrase, a sentence or paragraph found in said contract which needs explanation. The parties thereto entered into said contract with the full understanding of its terms and should not now be permitted to change or modify it by parol evidence.

With reference to the improvements made upon said property by the plaintiffs during the life of the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a separate action the right guaranteed to them under article 361 of the Civil Code.

For all of the foregoing reasons, we are fully persuaded from the facts of the record, in relation with the law applicable thereto, that the judgment appealed from should be and is hereby affirmed, with costs. So ordered.

Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions

MALCOLM, J., dissenting:

I regret to have to dissent from the comprehensive majority decision. I stand squarely on the proposition that the contract executed by the parties was merely a clever device to cover up the payment of usurious interest. The fact that the document purports to be a true sale with right of repurchase means nothing. The fact that the instrument includes a contract of lease on the property whereby the lessees as vendors apparently bind themselves to pay rent at the rate of P375 per month and whereby "Default in the payment of the rent agreed for two consecutive months will terminate this lease and will forfeit our right of repurchase, as though the term had expired naturally" does mean something, and taken together with the oral testimony is indicative of a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655, sec. 7, as amended; Padilla vs. Linsangan [1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua [1919], 39 Phil., 552; Russel vs. Southard [1851], 53 U. S., 139 Monagas vs. Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa, Codigo Civil Español, 3rd ed., p. 318.) The transaction should be considered as in the nature of an equitable mortgage. My vote is for a modification of the judgment of the trial court.

Footnotes

162 Law. ed., 1177.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

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 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."

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 Kenafmill 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)

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.

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 utilizedexclusively 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.

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.

Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.

Makasiar, J., took no part.

Footnotes

1 8 Manresa, p. 294.

2 2 Castan, p. 560.

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 114398 October 24, 1997

CARMEN LIWANAG, petitioner,

vs. THE HON. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, represented by the Solicitor General, respondents.

ROMERO, J.:

Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch 93, Quezon City, in an information which reads as follows.

That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines and within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and feloniously defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and in the place aforementioned, said accused received in trust from the offended party cash money amounting toP536,650.00, Philippine Currency, with the express obligation involving the duty to act as complainant's agent in purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to resell them to several stores, to give her commission corresponding to 40% of the profits; and to return the aforesaid amount of offended party, but said accused, far from complying her aforesaid obligation, and once in possession thereof, misapplied, misappropriated and converted the same to her personal use and benefit, despite repeated demands made upon her, accused failed and refused and still fails and refuses to deliver and/or return the same to the damage and prejudice of the said ISIDORA ROSALES, in the aforementioned amount and in such other amount as may be awarded under the provision of the Civil Code.

CONTRARY TO LAW.

The antecedent facts are as follows:

Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying and selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed. Under their agreement, Rosales would give the money needed to buy the cigarettes while Liwanag and Tabligan would act as her agents, with a corresponding 40% commission to her if the goods are sold; otherwise the money would be returned to Rosales. Consequently, Rosales gave several cash advances to Liwanag and Tabligan amounting to P633,650.00.

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on the progress of the transactions. The visits, however, suddenly stopped, and all efforts by Rosales to obtain information regarding their business proved futile.

Alarmed by this development and believing that the amounts she advanced were being misappropriated, Rosales filed a case of estafa against Liwanag.

After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding Liwanag guilty as charged. The dispositive portion of the decision reads thus:

WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused, beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND

TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.

The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00, without subsidiary imprisonment, in case of insolvency.

SO ORDERED.

Said decision was affirmed with modification by the Court of Appeals in a decision dated November 29, 1993, the decretal portion of which reads:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8) MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other respects, the decision is AFFIRMED.

SO ORDERED.

Her motion for reconsideration having been denied in the resolution of March 16, 1994, Liwanag filed the instant petition, submitting the following assignment of errors:

1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN THE AFFIRMING THE CONVICTION OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE "EQUIPOISE RULE".

Liwanag advances the theory that the intention of the parties was to enter into a contract of partnership, wherein Rosales would contribute the funds while she would buy and sell the cigarettes, and later divide the profits between them. 1 She also argues that the transaction can also be interpreted as a simple loan, with Rosales lending to her the amount stated on an installment basis. 2

The Court of Appeals correctly rejected these pretenses.

While factual findings of the Court of Appeals are conclusive on the parties and not reviewable by the Supreme Court, and carry more weight when

these affirm the factual findings of the trial court, 3 we deem it more expedient to resolve the instant petition on its merits.

Estafa is a crime committed by a person who defrauds another causing him to suffer damages, by means of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts. 4

From the foregoing, the elements of estafa are present, as follows: (1) that the accused defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable of pecuniary estimation is caused to the offended party or third party, 5 and it is essential that there be a fiduciary relation between them either in the form of a trust, commission or administration. 6

The receipt signed by Liwanag states thus:

May 19, 1988 Quezon City

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip & Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not sold, the proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the said amount of P526,650.00 or the said items on or before August 30, 1988.

(SGD & Thumbedmarked) (sic) CARMEN LIWANAG 26 H. Kaliraya St. Quezon City

Signed in the presence of:

(Sgd) Illegible (Sgd) Doming Z. Baligad

The language of the receipt could not be any clearer. It indicates that the money delivered to Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the cigarettes cannot be sold, the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between the parties, we have ruled that when money or property have been received by a partner for a specific purpose (such as that obtaining in the instant case) and he later misappropriated it, such partner is guilty of estafa. 7

Neither can the transaction be considered a loan, since in a contract of loan once the money is received by the debtor, ownership over the same is

transferred. 8 Being the owner, the borrower can dispose of it for whatever purpose he may deem proper.

In the instant petition, however, it is evident that Liwanag could not dispose of the money as she pleased because it was only delivered to her for a single purpose, namely, for the purchase of cigarettes, and if this was not possible then to return the money to Rosales. Since in this case there was no transfer of ownership of the money delivered, Liwanag is liable for conversion under Art. 315, par. l(b) of the Revised Penal Code.

WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated November 29, 1993, is AFFIRMED. Costs against petitioner.

SO ORDERED.

Melo, Francisco and Panganiban, JJ., concur.

Narvasa, C.J., is on leave.

Footnotes

1 Rollo, p. 20.

2 Ibid., p. 22.

3 Meneses v. Court of Appeals, 246 SCRA 162 (1994).

4 Article 315, Revised Penal Code.

5 People v. Bautista, 241 SCRA 216 (1995).

6 Galvez v. Court of Appeals, 42 SCRA 278 (1971).

7 Reyes, The Revised Penal Code, 1993, p. 675, citing People v. De la Cruz, G.R. No. 21732, September 3, 1924.

8 Art. 1953, Civil Code.

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 127246 April 21, 1999

SPOUSES LUIS M. ERMITAÑO and MANUELITA C. ERMITAÑO, petitioners, vs. THE COURT OF APPEALS AND BPI EXPRESS CARD CORP., respondents.

QUISUMBING, J

This petition for review under Rule 45, of the Rules of Court, seeks to set aside the decision of the Court of Appeals in C.A.-G.R. CV No. 47888

reversing the trial court's 1 judgment in Civil Case No. 61357, as well as the resolution of the Court of Appeals denying petitioners' motion for

reconsideration.

In dispute is the validity of the stipulation embodied in the standard application form for credit cards furnished by private respondent. The stipulation makes the cardholder liable for purchases made through his lost or stolen credit card until (a) notice of such loss or theft has been given to private respondent and (b) the latter has communicated such loss or theft to its member-establishments.

The facts, as found by the trial court, are not disputed.

Petitioner Luis Ermitaño applied for a credit card from private respondent BPI Express Card Corp. (BECC) on October 8, 1986 with his wife, Manuelita, as extension cardholder. The spouses were given credit cards with a credit limit of P10,000.00. They often exceeded this credit limit without protest from BECC.

On August 29, 1989, Manuelita's bag was snatched from her as she was shopping at the Greenbelt Mall in Makati, Metro Manila. Among the items inside the bag was her BECC credit card. That same night she informed, by telephone, BECC of the loss. The call was received by BECC offices through a certain Gina Banzon. This was followed by a letter dated August 30, 1989. She also surrendered Luis' credit card and requested for replacement cards. In her letter, Manuelita stated that she "shall not be responsible for any and all charges incurred [through the use of the lost card] after August 29, 1989. 2

However, when Luis received his monthly billing statement from BECC dated September 20, 1989, the charges included amounts for purchases made on August 30, 1989 through Manuelita's lost card. Two purchases were made, one amounting to P2,350.05 and the other, P607.50. Manuelita received a billing statement dated October 20, 1989 which required her to immediately pay the total amount of P3,197.70 covering the same (unauthorized) purchases. Manuelita again wrote BECC disclaiming responsibility for those charges, which were made after she had served BECC with notice of the loss of her card.

Despite the spouses' refusal to pay and the fact that they repeatedly exceeded their monthly credit limit, BECC sent them a notice dated December 29, 1989 stating that their cards had been renewed until March 1991. Notwithstanding this, however, BECC continued to include in the spouses' billing statements those purchases made through Manuelita's lost card. Luis protested this billing in his letter dated June 20, 1990.

However, BECC, in a letter dated July 13, 1990, pointed out to Luis the following stipulation in their contract:

In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in writing to BECC . . . purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen BPI Express Card until after such notice has been given to BECC and the latter has communicated such loss/theft to its member establishments. 3

Pursuant to this stipulation, BECC held Luis liable for the amount of P3,197.70 incurred through the use of his wife's lost card, exclusive of interest and penalty charges.

In his reply dated July 18, 1990, Luis stressed that the contract BECC was referring to was a contract of adhesion and warned that if BECC insisted on charging him and his wife for the unauthorized purchases, they will sue BECC for damages. This warning notwithstanding, BECC continued to bill the spouses for said purchases. 4

On April 10, 1991, Luis used his credit card to purchase gasoline at a Caltex station. The latter, however, dishonored his card. In reply to Luis' demand for an explanation, BECC wrote that it transferred the balance of his old credit card to his new one, including the unauthorized charges. Consequently, his outstanding balance exceeded his credit limit of P10,00000. He was informed that his credit card had not been cancelled but, since he exceeded his credit limit, he could not avail of his credit privileges.

Once more, Luis pointed out that notice of the lost card was given to BECC before the purchases were made.

Subsequently, BECC cancelled the spouses' credit cards and advised them to settle the account immediately or risk being sued for collection of said account.

Constrained, petitioners sued BECC for damages. The trial court ruled in their favor, stating that there was a waiver on the part of BECC in enforcing the spouses' liability, as indicated by the following circumstances:

(1) Its failure to inform the spouses that the unauthorized charges on the lost card would be carried over to their replacement cards; and

(2) Its act of unqualifiedly replacing the lost card and Luis' card which were both surrendered by the spouses, even after the spouses unequivocally denied liability for the unauthorized purchases.

The trial court further noted that the suspension of the spouses' credit cards was based upon the "lame excuse" that the credit limit had been exceeded, despite the fact that BECC allowed the spouses previously to exceed their credit limit, even for almost two years after the loss of Manuelita's card. Moreover, the credit limit was exceeded only after BECC added the unauthorized purchases to the liability of the spouses. BECC continued to send the spouses separate billing statements that included the unauthorized purchases, with interest and penalty charges.

The trial court opined that the only purpose for the suspension of the spouses' credit privileges was to compel them to pay for the unauthorized purchases. The trial court ruled that the latter portion of the condition in the parties' contract, which states that liability for purchases made after a card is lost or stolen shall be for the account of the cardholder until after notice of the loss or theft has been given to BECC and after the latter has informed its member establishments, is void for being contrary to public policy and for being dependent upon the sole will of the debtor. 5

Moreover, the trial court observed that the contract between BECC and the Ermitaños was a contract of adhesion, whose terms must be construed strictly against BECC, the party that prepared it.

The dispositive portion of the trial court's decision reads:

WHEREFORE, and IN VIEW OF THE ALL THE FOREGOING CONSIDERATIONS, judgment is hereby rendered in favor of the plaintiffs, Spouses Luis M. Ermitaño and Manuelita C. Ermitaño and against defendant BPI Express Card Corporation:

1. Ordering the said defendant to pay the plaintiffs the sum of P100,000.00 as moral damages.

2. Ordering said defendant to pay the plaintiffs the sum of P50,000.00 as exemplary damages.

3. Ordering said defencant to pay the plaintiffs the sum equivalent to twenty per cent (20%) of the amounts abovementioned as and for attorney's fees and expenses of litigation, and

4. Ordering the said defendant to pay the costs of suit.

SO ORDERED

But, on appeal this decision was reversed. The Court of Appeals stated that the spouses should be bound by the contract, even though it was one of

adhesion. It also said that Luis, being a lawyer, had "all the tools to drive a hard bargain had he wanted to. 6 It cited the case of Serra v. Court of

Appeals 7 wherein this Court ruled that contracts of adhesion are as binding as ordinary contracts. The petitioner in Serra was a CPA-lawyer, "a highly

educated man . . . who should have been more cautious in (his) transactions. . . 8 The Court of Appeals therefore disposed of the appeal as follows:

THE FOREGOING CONSIDERED, the contested decision is REVERSED. Plaintiffs/appellees are hereby directed to pay the defendant/appellant the amount of P3,197.70 with 3% interest per month and an additional 3% penalty equivalent to the amount due every month until full payment. Without cost.

SO ORDERED. 9

Hence, this recourse by petitioners, in which they claim that the Court of Appeals gravely erred in:

(i) Ruling that petitioners should be bound by the stipulations contained in the credit card application — a document wholly prepared by private respondent itself — taking into consideration the professional credentials of petitioner Luis M. Ermitaño;

(ii) Relying on the case of Serra v. Court of Appeals, 229 SCRA 60, because unlike that case, petitioners have no chance at all to contest the stipulations appearing in the credit card application that was drafted entirely by private respondent, thus, a clear contract of adhesion;

(iii) Ruling that private respondent is not estopped by its subsequent acts after having been notified of the loss/theft of the credit card issued to petitioners, and

(iv) Holding that the onerous and unconscionable condition in the credit card application — that the cardholder continues to be liable for purchases made on lost or stolen credit cards not only after such notice has been given to appellant but also after the latter has communicated such loss/theft to its member establishments without any specific time or period — is valid. 10

At the outset, we note that the contract between the parties in this case is indeed a contract of adhesion, so-called because its terms are prepared by

only one party while the other party merely affixes his signature signifying his adhesion thereto. 11 Such contracts are not void in themselves. 12 They

are as binding as ordinary contracts. Parties who enter into such contracts are free to reject the stipulations entirely. This Court, however, will not hesitate to rule out blind adherence to such contracts if they prove to be too one-sided under the attendant facts and circumstances. 13

The resolution of this petition, in our view, hinges on the validity and fairness of the stipulation on notice required by private respondent in case of loss or theft of a BECC-issued credit card. Because of the peculiar nature of contracts of adhesion, the validity thereof must be determined in light of the circumstances under which the stipulation is intended to apply. 14

The stipulation in question reads:

In the event the card is lost or stolen, the cardholder agrees to immediately report its loss or theft in citing to BECC . . . purchases made/incurred arising from the use of the lost/stolen card shall be for the exclusive account of the cardholder and the cardholder continues to be liable for the purchases made through the use of the lost/stolen BPI Express Card until after such notice has been given to BECC and the latter has communicated such loss/theft to its member establishments.

For the cardholder to be absolved from liability for unauthorized purchases made through his lost or stolen card, two steps must be followed: (1) the cardholder must give written notice to BECC, and (2) BECC must notify its member establishments of such loss or theft, which, naturally, it may only do upon receipt of a notice from the cardholder. Both the cardholder and BECC, then, have a responsibility to perform, in order to free the cardholder from any liability arising from the use of a lost or stolen card.

In this case, the cardholder, Manuelita, has complied with what was required of her under the contract with BECC. She immediately notified BECC of the loss of her card on the same day it was lost and, the following day, she sent a written notice of the loss to BECC. That she gave such notices to BECC is admitted by BECC in the letter sent to Luis by Roberto L. Maniquiz, head of BECC's Collection Department. 15

Having thus performed her part of the notification procedure, it was reasonable for Manuelita — and Luis, for that matter — to expect that BECC would perform its part of the procedure, which is to forthwith notify its member-establishments. It is not unreasonable to assume that BECC would do this immediately, precisely to avoid any unauthorized charges.

Clearly, what happened in this case was that BECC failed to notify promptly the establishment in which the unauthorized purchases were made with the use of Manuelita's lost card. Thus, Manuelita was being liable for those purchases, even if there is no showing that Manuelita herself had signed for said purchases, and after notice by her concerning her card's loss was already given to BECC.

BECC asserts that the period that elapsed from the time of the loss of the card to the time of its unauthorized use was too short such that "it would be next to impossible for respondent to notify all its member-establishments regarding the fact of the loss. 16 Nothing, however, prevents said member-establishments from observing verification procedures including ascertaining the genuine signature and proper identification of the purported purchaser using the credit card.

BECC states that, "between two persons who are negligent, the one who made the wrong possible should bear the loss." We take this to be an admission that negligence had occurred. In effect, BECC is saying that the company, and the member-establishments or the petitioners could be negligent. However, according to BECC, petitioners should be the ones to bear the loss since it was they who made possible the commission of a wrong. This conclusion, however, is self-serving and obviously untenable.

From one perspective, it was not petitioners who made possible the commission of the wrong. It could be BECC for its failure to immediately notify its members-establishments, who appear lacking in care or instruction by BECC in proper procedures, regarding signatures and the identification of card users at the point of actual purchase of goods or services. For how else could an unauthorized person succeed to use Manuelita's lost card?

The cardholder was no longer in control of the procedure after it has notified BECC of the card's loss or theft. It was already BECC's responsibility to inform its member-establishments of the loss or theft of the card at the soonest possible time. We note that BECC is not a neophyte financial institution, unaware of the intricacies and risks of providing credit privileges to a large number of people. It should have anticipated an occurrence such as the one in this case and devised effective ways and means to prevent it, or otherwise insure itself against such risk.

Prompt notice by the cardholder to the credit card company of the loss or theft of his card should be enough to relieve the former of any liability occasioned by the unauthorized use of his lost or stolen card. The questioned stipulation in this case, which still requires the cardholder to wait until the credit card company has notified all its member-establishments, puts the cardholder at the mercy of the credit card company which may delay indefinitely the notification of its members to minimize if not to eliminate the possibility of incurring any loss from unauthorized purchases. Or, as in this case, the credit card company may for some reason fail to promptly notify its members through absolutely no fault of the cardholder. To require the cardholder to still pay for unauthorized purchases after he has given prompt notice of the loss or theft of his card to the credit card company would simply be unfair and unjust. The Court cannot give its assent to such a stipulation which could clearly run against public policy. 17

On the matter of the damages petitioners are seeking, we must delete the award of exemplary damages, absent any clear showing that BECC acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, as required by Article 2232 of the Civil Code. We likewise reduce the amount of moral damages to P50,000.00, considering the circumstances of the parties to the case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 47888 is hereby REVERSED and the decision of the Regional Trial Court, Branch 157, Pasig City in Civil Case No. 61375 is REINSTATED, with the MODIFICATION that the award of exemplary damages in the amount of P50,000.00 is hereby deleted; and the amount of moral damages is reduced to P50,000.00; but private respondent is further ordered to pay P25,000 as attorney's fees and litigation expenses.

Costs against private respondents.1âwphi1.nêt

SO ORDERED.

Bellosillo, Puno, Mendoza and Buena, JJ., concur.

Footnotes

1 Regional Trial Court, Branch 157, Pasig City.

2 Rollo, p. 204.

3 Id., p. 190.

4 Id., p. 205.

5 CIVIL CODE, ART. 1182.

6 Rollo, p. 48.

7 229 SCRA 60 (1994).

8 Serra v. Court of Appeals, supra, at 67.

9 Rollo, p. 51.

10 Id., pp. 24-25.

11 Phil. Commercial International Bank v. Courts of Appeals, 255 SCRA 299 (1996).

12 Palmares v. Court of Appeals, G.R. No. 126490, March 31, 1998.

13 See note 11, supra.

14 Supra.

15 Rollo, p. 68. In his letter, Maniquiz said:

Verification of our records showed that your wife lost her card on August 29, 1990, it was verbally reported to us on the same day, August 29, 1990 and was confirmed in writing on August 30, 1990, the following day. . . .

16 Rollo, p. 307.

17 CIVIL CODE, ARTICLE 1306.

Republic of the Philippines SUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-55397 February 29, 1988

TAI TONG CHUACHE & CO., petitioner, vs. THE INSURANCE COMMISSION and TRAVELLERS MULTI-INDEMNITY CORPORATION, respondents.

GANCAYCO, J.:

This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case #367 1dismissing the complaint 2 for recovery of the alleged unpaid balance of the proceeds of the Fire Insurance Policies issued by herein respondent insurance company in favor of petitioner-intervenor.

The facts of the case as found by respondent Insurance Commission are as follows:

Complainants acquired from a certain Rolando Gonzales a parcel of land and a building located at San Rafael Village, Davao City. Complainants assumed the mortgage of the building in favor of S.S.S., which building was insured with respondent S.S.S. Accredited Group of Insurers for P25,000.00.

On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in the amount of P100,000.00. To secure the payment of the loan, a mortgage was executed over the land and the building in favor of Tai Tong Chuache & Co. (Exhibit "1" and "1-A"). On April 25, 1975, Arsenio Chua, representative of Thai Tong Chuache & Co. insured the latter's interest with Travellers Multi-Indemnity Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").

On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500 (Exhibit "A"), covering the building for P50,000.00 with respondent Zenith Insurance Corporation. On July 16, 1975, another Fire Insurance Policy No. 8459 (Exhibit "B") was procured from respondent Philippine British Assurance Company, covering the same building for P50,000.00 and the contents thereof for P70,000.00.

On July 31, 1975, the building and the contents were totally razed by fire.

Adjustment Standard Corporation submitted a report as follow

xxx xxx xxx

... Thus the apportioned share of each company is as follows:

Policy No..

Company

Risk Insures

Pays

MIRO

Zenith

Building

P50,000

P17,610.93

F-02500

Insurance

Corp.

F-84590

Phil. Household

70,000

24,655.31

British

Assco. Co.

Inc. FFF & F5

50,000

39,186.10

Policy No.

Company

Risk Insures

Pays

FIC-15381

SSSAccre

dited Group

of Insurers

Building

P25,000

P8,805.47

Totals

P195,000

P90,257.81

We are showing hereunder another apportionment of the loss which includes the Travellers Multi-Indemnity policy for reference purposes.

Policy No.

Company

Risk Injures

Pays

MIRO/

Zenith

F-02500

Insurance

Corp.

Building

P50,000

P11,877.14

F-84590

Phil.

British

Assco. Co.

I-Building

70,000

16,628.00

II-Building

FFF & PE

50,000

24,918.79

PVC-15181

SSS

Accredited

Group of

Insurers

Building

25,000

5,938.50

F-599 DV

Insurers

I-Ref 30,000

14,467.31

Multi

II-Building

70,000

16,628.00

Totals

P295.000

P90,257.81

Based on the computation of the loss, including the Travellers Multi- Indemnity, respondents, Zenith Insurance, Phil. British Assurance and S.S.S. Accredited Group of Insurers, paid their corresponding shares of the loss. Complainants were paid the following: P41,546.79 by Philippine British Assurance Co., P11,877.14 by Zenith Insurance Corporation, and P5,936.57 by S.S.S. Group of Accredited Insurers (Par. 6. Amended Complaint). Demand was made from respondent Travellers Multi-Indemnity for its share in the loss but the same was refused. Hence, complainants demanded from the other three (3) respondents the balance of each share in the loss based on the computation of the Adjustment Standards Report excluding Travellers Multi-Indemnity in the amount of P30,894.31 (P5,732.79-Zenith Insurance: P22,294.62, Phil. British: and P2,866.90, SSS Accredited) but the same was refused, hence, this action.

In their answers, Philippine British Assurance and Zenith Insurance Corporation admitted the material allegations in the complaint, but denied liability on the ground that the claim of the complainants had already been waived, extinguished or paid. Both companies set up counterclaim in the total amount of P 91,546.79.

Instead of filing an answer, SSS Accredited Group of Insurers informed the Commission in its letter of July 22, 1977 that the herein claim of complainants for the balance had been paid in the amount of P 5,938.57 in full, based on the Adjustment Standards Corporation Report of September 22, 1975.

Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and alleged as its special and affirmative defenses the following, to wit: that Fire Policy No. 599 DV, covering the furniture and building of complainants was secured by a certain Arsenio Chua, mortgage creditor, for the purpose of protecting his mortgage credit against the complainants; that the said policy was issued in the name of Azucena Palomo, only to indicate that she owns the insured premises; that the policy contains an endorsement in favor of Arsenio Chua as his mortgage interest may appear to indicate that insured was Arsenio Chua and the complainants; that the premium due on said fire policy was paid by Arsenio Chua; that respondent Travellers is not liable to pay complainants.

On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming the proceeds of the fire Insurance Policy No. F-559 DV, issued by respondent Travellers Multi-Indemnity.

Travellers Insurance, in answer to the complaint in intervention, alleged that the Intervenor is not entitled to indemnity under its Fire Insurance Policy for lack of insurable interest before the loss of the insured premises and that the complainants, spouses Pedro and Azucena Palomo, had already paid in full their mortgage indebtedness to the intervenor. 3

As adverted to above respondent Insurance Commission dismissed spouses Palomos' complaint on the ground that the insurance policy subject of the complaint was taken out by Tai Tong Chuache & Company, petitioner herein, for its own interest only as mortgagee of the insured property and thus complainant as mortgagors of the insured property have no right of action against herein respondent. It likewise dismissed petitioner's complaint in intervention in the following words:

We move on the issue of liability of respondent Travellers Multi-Indemnity to the Intervenor-mortgagee. The complainant testified that she was still indebted to Intervenor in the amount of P100,000.00. Such allegation has not however, been sufficiently proven by documentary evidence. The certification (Exhibit 'E-e') issued by the Court of First Instance of Davao, Branch 11, indicate that the complainant was Antonio Lopez Chua and not Tai Tong Chuache & Company. 4

From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it was likewise denied hence, the present petition.

It is the contention of the petitioner that respondent Insurance Commission decided an issue not raised in the pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one entitled to the insurance proceeds and not Tai Tong Chuache & Company.

This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed from considering the manner it was written. 5 As

correctly pointed out by respondent insurance commission in their comment, the decision did not pronounce that it was Arsenio Lopez Chua who has insurable interest over the insured property. Perusal of the decision reveals however that it readily absolved respondent insurance company from liability on the basis of the commissioner's conclusion that at the time of the occurrence of the peril insured against petitioner as mortgagee had no more insurable interest over the insured property. It was based on the inference that the credit secured by the mortgaged property was already paid by the Palomos before the said property was gutted down by fire. The foregoing conclusion was arrived at on the basis of the certification issued by the then Court of First Instance of Davao, Branch II that in a certain civil action against the Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai Tong Chuache & Company.

We find the petition to be impressed with merit. It is a well known postulate that the case of a party is constituted by his own affirmative allegations.

Under Section 1, Rule 131 6 each party must prove his own affirmative allegations by the amount of evidence required by law which in civil cases as in

the present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such amount of evidence as required by law to obtain favorable judgment. 7 Thus, petitioner who is claiming a right over the insurance must prove its case. Likewise, respondent insurance company to avoid liability under the policy by setting up an affirmative defense of lack of insurable interest on the part of the petitioner must prove its own affirmative allegations.

It will be recalled that respondent insurance company did not assail the validity of the insurance policy taken out by petitioner over the mortgaged property. Neither did it deny that the said property was totally razed by fire within the period covered by the insurance. Respondent, as mentioned earlier advanced an affirmative defense of lack of insurable interest on the part of the petitioner that before the occurrence of the peril insured against the Palomos had already paid their credit due the petitioner. Respondent having admitted the material allegations in the complaint, has the burden of proof to show that petitioner has no insurable interest over the insured property at the time the contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted, exerted no effort to present any evidence to substantiate its claim, while petitioner did. For said respondent's failure, the decision must be adverse to it.

However, as adverted to earlier, respondent Insurance Commission absolved respondent insurance company from liability on the basis of the certification issued by the then Court of First Instance of Davao, Branch II, that in a certain civil action against the Palomos, Arsenio Lopez Chua stands as the complainant and not Tai Tong Chuache. From said evidence respondent commission inferred that the credit extended by herein petitioner to the Palomos secured by the insured property must have been paid. Such is a glaring error which this Court cannot sanction. Respondent Commission's findings are based upon a mere inference.

The record of the case shows that the petitioner to support its claim for the insurance proceeds offered as evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released. It has been held in a long line of cases that when the creditor is in possession of the document of credit, he

need not prove non-payment for it is presumed. 8 The validity of the insurance policy taken b petitioner was not assailed by private respondent.

Moreover, petitioner's claim that the loan extended to the Palomos has not yet been paid was corroborated by Azucena Palomo who testified that they are still indebted to herein petitioner. 9

Public respondent argues however, that if the civil case really stemmed from the loan granted to Azucena Palomo by petitioner the same should have been brought by Tai Tong Chuache or by its representative in its own behalf. From the above premise respondent concluded that the obligation secured by the insured property must have been paid.

The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 10 respondent pointed out that the action must be brought in the name of the

real party in interest. We agree. However, it should be borne in mind that petitioner being a partnership may sue and be sued in its name or by its duly authorized representative. The fact that Arsenio Lopez Chua is the representative of petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing partner of the partnership was corroborated by respondent insurance company. 11 Thus Chua as the managing

partner of the partnership may execute all acts of administration 12 including the right to sue debtors of the partnership in case of their failure to pay

their obligations when it became due and demandable. Or at the very least, Chua being a partner of petitioner Tai Tong Chuache & Company is an

agent of the partnership. Being an agent, it is understood that he acted for and in behalf of the firm. 13 Public respondent's allegation that the civil case

flied by Arsenio Chua was in his capacity as personal creditor of spouses Palomo has no basis.

The respondent insurance company having issued a policy in favor of herein petitioner which policy was of legal force and effect at the time of the fire, it is bound by its terms and conditions. Upon its failure to prove the allegation of lack of insurable interest on the part of the petitioner, respondent insurance company is and must be held liable.

IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER judgment is rendered order private respondent Travellers Multi-Indemnity Corporation to pay petitioner the face value of Insurance Policy No. 599-DV in the amount of P100,000.00. Costs against said private respondent.

SO ORDERED.

Teehankee, C.J., Narvasa, Cruz and Griño-Aquino, JJ., concur.

Footnotes

1 Penned by Commissioner Gregoria Cruz-Arnaldo

2 Filed by Pedro Palomo and Azucena Palomo.

3 Pages 30-34, Rollo.

4 Pages 35-36, Rollo.

5 See Supra.

6 Revised Rules of Court.

7 Vol. 6, Moran, Revised Rules of Court, Page 4,1980 Ed.

8 Veloso vs. Veloso, 8 Phil. 83; Merchant vs. International Banking Corporation, 9 Phil. 554; Miller vs. Jones, 9 Phil. 648; Chua vs. Vargas, 11 Phil. 219; Gana va. Sheriff of Laguna, et al., 32 Phil. 236.

9 Pages 4, 6, Decision, I.C. Case No. 367.

10 Revised Rules of Court.

11 Page 4, Decision, Supra. (Respondent referred to the petitioner and Arsenio Lopez Chua interchangeably).

12 Art. 1800 Civil Code.

13 Bachrach vs. a Protectors, 37 Phil. 441, 1918.

Republic of the Philippines SUPREME COURT

Manila

EN BANC

G.R. No. L-47878 July 24, 1942

GIL JARDENIL, plaintiff-appellant, vs. HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.

Eleuterio J. Gustilo for appellant. Jose C. Robles for appellee.

MORAN, J.:

This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is defendant-appellee bound to pay the stipulated interest only up to the date of maturity as fixed in the promissory note, or up to the date payment is effected? This question is, in our opinion controlled by the express stipulation of the parties.

Paragraph 4 of the mortgage deed recites:

Que en consideracion a dicha suma aun por pagar de DOS MIL CUATROCIENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de marzo de mil novecientos treintaicuarto (1934), con los intereses de dicha suma al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia de su vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de terreno descrita en el parrafo primero (1.º) de esta escritura.

Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in the event of non-payment, the debtor would continue to pay interest, we cannot in law, indulge in any presumption as to such interest; otherwise, we would be imposing upon the debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil Code provides that "interest shall be due only when it has been expressly stipulated." (Emphasis supplied.)

A writing must be interpreted according to the legal meaning of its language (section 286, Act No. 190, now section 58, Rule 123), and only when the wording of the written instrument appears to be contrary to the evident intention of the parties that such intention must prevail. (Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms employed by the parties thereto are at war with their evident intent. On the contrary the act of the mortgage of granting to the mortgagor on the same date of execution of the deed of mortgage, an extension of one year from the date of maturity within which to make payment, without making any mention of any interest which the mortgagor should pay during the additional period (see Exhibit B attached to the complaint), indicates that the true intention of the parties was that no interest should be paid during the period of grace. What reason the parties may have therefor, we need not here seek to explore.

Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails to express their agreement, for if such mistake existed, plaintiff would have undoubtedly adduced evidence to establish it and asked that the deed be reformed accordingly, under the parcel-evidence rule.

We hold therefore, that as the contract is clear and unmistakable and the terms employed therein have not been shown to belie or otherwise fail to express the true intention of the parties and that the deed has not been assailed on the ground of mutual mistake which would require its reformation, same should be given its full force and effect. When a party sues on a written contract and no attempt is made to show any vice therein, he cannot be allowed to lay any claim more than what its clear stipulations accord. His omission, to which the law attaches a definite warning as an in the instant case, cannot by the courts be arbitrarily supplied by what their own notions of justice or equity may dictate.

Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2, 400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial demands have been made which we may assume to have been so made on the expiration of the year of grace, he shall be entitled to legal interest upon the principal and the accrued interest from April 1, 1935, until full payment.

Thus modified judgment is affirmed, with costs against appellant.

Yulo, C.J., Ozaeta and Bocobo, JJ., concur.

Separate Opinions

PARAS, J., dissenting:

Under the facts stated in the decision of the majority, I come to the conclusion that interest at the rate of 12 per cent per annum should be paid up to the date of payment of the whole indebtedness is made. Payment of such interest is expressly stipulated. True, it is stated in the mortgage contract that interest was to be paid up to March 31, 1934, but this date was inserted merely because it was the date of maturity. The extension note is silent as regards interest, but its payment is clearly implied from the nature of the transaction which is only a renewal of the obligation. In my opinion, the ruling of the majority is anomalous and at war with common practice and everyday business usage.

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 79552 November 29, 1988

EVELYN J. SANGRADOR, joined by her husband RODRIGO SANGRADOR, SR., petitioners,

vs. SPOUSES FRANCISCO VALDERRAMA and TERESITA M. VALDERRAMA, respondents.

Enrique G. Arguelles for petitioners.

Rex Suiza Castillon for respondents.

PADILLA, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. CV No. 08813, dated 13 August 1987, which modified the decision 2 of the Regional Trial Court of Iloilo City, Branch XXIII, in Civil Case No. 16210, entitled "Evelyn J. Sangrador, joined by her husband, Rodrigo Sangrador, Plaintiffs, versus Spouses Francisco Valderrama and Teresita Valderrama, Defendants."

The factual background of the case is narrated in the decision of the Court of Appeals as follows:

On April 11, 1983 the defendants-spouses Francisco and Teresita Valderrama obtained a P500,000 loan from Manuel Asencio payable on or before April 12, 1984, and secured by a real estate mortgage on their house and lot (actually 3 lots) in front of the Jaro Plaza in Iloilo City (Exh. 9).

Foreseeing that they would not be able to pay the loan and redeem their property upon maturity of the loan, the defendants scouted around for money-lenders who would be willing to lend them money with which to pay off their mortgage to Asencio.

Through the help of a loan broker, Wilson Jesena, they were able to obtain on April 6, 1984 a P1,000,000 loan from the plaintiff Teresita Sangrador, who is an aunt of Jesena, on the security of the same property which they redeemed from Asencio. The loan is evidenced by the following promissory note (Exh. B) dated April 6, 1 984 providing for the payment of P1,400,000 to the creditor eight months after date'.

FOR VALUE RECEIVED, we jointly and severally promise to pay EVELYN J. SANGRADOR, or order, at her address at No. 2 Locsin Street, Molo, Iloilo City, Philippines, the sum of ONE MILLION FOUR HUNDRED THOUSAND PESOS (P1,400,000.00) Philippine Currency, EIGHT (8) MONTHS after date without need of demand.

Should we default in the payment of the obligation or in the manner of performance thereof and it shall become necessary to enforce and collect on this note by or through an attorney, the makers shall jointly and severally pay TWENTY (20) PER CENTUM of the amount due, principal and interest and charges then unpaid, which in no case shall be less than P1,000.00.

The makers hereby submit to the jurisdiction of the Municipal Trial Court of Iloilo or the Regional Trial Court of Iloilo, Sixth Judicial Region, Iloilo City, as the case may be, in the event of litigation arising from this note.

The makers of this note, jointly and severally undertake that in the event that an extraordinary inflation of the Philippine Peso should supervene between now and eight (8) months after date, then the value of the Philippine Peso at the time of the

establishment of this obligation, shall be the basis of payment pursuant to Art. 1250 of the Civil Code of the Philippines, and for this purpose, we hereby acknowledge the official exchange rate of the Philippine Peso to the US Dollar at P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be made in the event that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening inflation. We further agree that the official rate of exchange as set by the Central Bank of the Philippines for private transactions, shall be the basis of this adjustment.

This note is secured by a Real Estate Mortgage over three (3) parcels of residential land, Lots 700, 701 and 750, of the Cadastral Survey of Jaro, covered by TCT Nos. T-41719, T41721 and T-41720, respectively, of the Registry of Deeds for the City of Iloilo, together with the improvements thereon.

In case of judicial execution of this obligation or any part thereof, the debtors waive all their rights under the provisions of Rule 39, Sec. 12, of the Rules of Court.

EXECUTED in the City of Iloilo, Philippines, on this 6th day of April 1984.

(SGD) TERESITA MONTINOLA-VALDERRAMA Maker

(SGD) FRANCISCO VALDERRAMA Maker

Signed in the presence of.

(illegible) (illegible) (Exh. B)

The debtors allege that the amount actually received by them was only P1,000,000 the disposition of which was itemized by the broker, Wilson Jesena a, on a memo pad of "Jesena Realty" as follows:

From the desk of:

REALTOR WILSON G. Jesena, Jr. President & Gen. Manager

EXPENSES

P625,000.00—Manuel Asencio 50,000.00—Commission Boy 4,000.00—Atty. Arguelles 13,398.69—Transfer fees— Register of Deeds and B.I.R.

P692,398.69 P1,000,000.00 — 692,398.69 P307,601.40 — Balance (Exh. 1)

Accordingly, a Prudential Bank Cashier's check for P625,000 was issued by Sangrador to Asencio to redeem the defendants' property from him. A receipt for that check was issued by the Valderramas to the plaintiff as follows:

R E C E I P T

Date April 6, 1984

Received from EVELYN JESENA SANGRADOR the amount of SIX HUNDRED TWENTY FIVE THOUSAND PESOS (625,000.00) Bank Prudential Bank Cashier's Check No. 14937. The balance of THREE HUNDRED SEVENTY FIVE THOUSAND PESOS (P375,000.00) is to be paid to the undersigned after deducting all expenses incurred in payment of real estate taxes, attorney's fees, commission, Bureau of Internal Revenue fees and Register of Deeds fees. All expenses are to be supported by receipts.

(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA

(Exh. 2)

Plaintiff Evelyn Sangrador made a list of the expenses chargeable to the debtors (Exh. 5) and submitted it to them (22 t.s.n.,

May 7, 1985). Payment of Atty. Arguelles' attorney's fees was duly acknowledged by him (Exh. 8). Jesena issued the following receipt to the defendants for his 5% commission in procuring the loan for them;

R E C E I P T

Received from Spouses Francisco Valderrama and Teresita Montinola Valderrama the amount of FIFTY THOUSAND PESOS (P50,000.00) representing commission for my efforts and expertise in effecting the procurement of a loan from a financier for the amount of ONE MILLION PESOS (P1,000,000.00).

(SGD) REALTOR WILSON JESENA, JR. REB License No. 3441-R

(Exh. 3)

The balance of P307,601.40 was paid to the defendants by means of another Prudential Bank check for which the corresponding receipt (Exh. 4) was also signed by the mortgagors:

R E C E I P T

April 7, 1984

Received from EVELYN J. SANGRADOR the amount of THREE HUNDRED SEVEN THOUSAND SIX HUNDRED ONE PESOS AND FORTY CENTAVOS (P307,601.40) representing full payment per Promissory Note dated April 6,1984.

(SGD) FRANCISCO (SGD) TERESITA MONTINOLA- VALDERRAMA VALDERRAMA

Paid by—Prudential Bank Chk. #144358-2—April 7, 1984 P307,601.40 c/o #0033-00022-0 paid by—Evelyn J. Sangrador

(Exh. 4)

Evelyn Sangrador admitted that the receipts (Exhs. 2 and 4) were issued to her by the defendants (14, 21 t.s.n., May 7, 1985).

When the defendants failed to pay the sum of P1,400,000 stated in the promissory note on December 6, 1984 despite the plaintiffs' written demands (Exhs. C and D) a complaint for judicial foreclosure of the real estate mortgage was filed against them on December 21, 1984.

(Exh. G).

The defendants in their answer denied that the loan was P1,400,000. They alleged that it was only P1,000,000.00 and that the additional P400,000 represented usurious interest.

At the trial, the plaintiff testified that the sum of P1,400,000 was received by the defendants. She alleged that besides the expenses of P67,398.69 itemized in Jesena's and her lists (Exhs. 1 and 5), the check of P625,000 for Asencio and the check of P307,601.40 which she issued to the defendants for the balance of the loan, she gave to the defendants the amount of P400,000 in cash for which no receipt was issued by them.

On the other hand Francisco Valderrama testified that he thought all along that the promissory note (Exh. B) and deed of real estate mortgage (Exh. A) provided for a loan of only P1 million since that was the amount which they borrowed and received from the plaintiffs. He allegedly did not notice that both documents provided for a loan of P1,400,000.

After the trial, the court rendered judgment on November 7, 1985 binding the debtors to the terms of the promissory note and mortgage deed. 3

The dispositive part of the trial court's judgment reads as follows:

WHEREFORE, in the light of the foregoing, considerations and findings of this Court, judgment is hereby rendered:

1) Directing the foreclosure of the Deeds of Real Estate Mortgage (Exh. 'A');

2) Ordering the defendants to pay the mortgage obligation in the amount of P1,400,000.00 plus the sum of P569,718.61 pursuant to the escalation clause contained in paragraph 14 of the Deed of Real Estate Mortgage; to pay attorney's fees equivalent to twenty (20%) percentum of the total indebtedness including costs, plus 12% interest per annum from December 18,1984 until fully paid, all of which shall be paid into Court within 90 days from date of the service of the order;

3) In default of such payment, ordering the mortgaged properties to be sold at public auction to realize the mortgage debt and costs.

SO ORDERED. 4

Private respondents, defendants in the trial court, appealed to the Court of Appeals, where the appeal was docketed as CA G.R. CV No. 08813. On 12 August 1987, respondent Court of Appeals promulgated its decision 5modifying the decision of the trial court, the dispositive part of which reads, as follows:

WHEREFORE, the appealed decision is hereby modified by ordering the defendants, within (90) days from date of service of this decision, to pay to the plaintiffs the principal loan of P1,000,000 with 12% interest per annum from April 6,1984 until fully paid, P50,000 as attorney's fees, and the costs of this suit. In default of such payment, the mortgaged property shall be sold at public auction to realize the sums due to plaintiffs under this judgment.

SO ORDERED. 6

Hence, the present petition for review on certiorari of the decision of the Court of Appeals. Petitioners present the following—

ASSIGNMENT OF ERRORS

1. FIRST ASSIGNED ERROR:

THE HONORABLE COURT OF APPEALS ERRED IN NULLIFYING THE ESCALATION CLAUSE AS FOUND BY THE TRIAL COURT ORDERING THE PAYMENT BY RESPONDENTS OF THE SUM OF P569,718.61.

2. SECOND ASSIGNED ERROR:

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THE PRINCIPAL LOAN TO BE IN THE SUM OF P1,000,000.00 INSTEAD OF P1,400,000.00 AS FOUND BY THE LOWER COURT.

3. THIRD ASSIGNED ERROR:

THE HONORABLE COURT OF APPEALS ERRED IN REDUCING PETITIONER'S AWARD OF ATTORNEY'S FEES TO P50,000.00 INSTEAD OF 20% OF THE TOTAL INDEBTEDNESS AS FOUND BY THE TRIAL COURT. 7

The pivotal issue to be resolved in this case is whether or not the loan obtained by private respondents from petitioners was in the amount of P1,400,000.00 or P1,000,000.00 only.

In resolving this issue, the Court of Appeals in its decision under review, held:

After carefully reviewing the evidence, We are convinced that the trial court erred in finding that the loan was P1,400,000 as stated in the promissory note (Exh. B) and deed of mortgage. Like the trial court, We do not believe defendant Valderrama's allegation that he did not notice that the amount stated in the promissory note was P1,400,000, instead of only P1,000,000, until demands for payment were sent to him by the plaintiffs' counsel. But neither do We believe the plaintiff Evelyn Sangrador's allegation that besides the sum of P1,000,000 admittedly received by the defendants and evidenced by checks and receipts, she also gave them P400,000.00 in cash without receipt. This is a case, therefore, where both parties prevaricated.

The documentary evidence preponderantly proves that the loan was only P1,000,000, not P1,400,000. The checks and receipts and the broker's computations found in Exhibit 'l' show clearly that the loan was only P1,000,000. Even the broker's P50,000 commission was computed on the basis of 5% of P1 million. The circumstance that the alleged payment of P400,000 in cash to the debtors is not evidenced by a receipt, is conclusive proof that it was not a part of the loan. The loan was only P1 million.

Obviously, the P400,000 that was added to the principal represents a hidden interest charge for the promissory note contains no express provision fixing the rate of interest on the loan. 8

Petitioners assail the foregoing findings and conclusions of the Court of Appeals, contending that the amount of the loan as clearly and expressly stated in the Deed of Real Estate Mortgage 9 and the Promissory Note, 10 is P1,400,000.00 and not P1,000,000.00 only.

Because the findings of the trial court and the Court of Appeals differ on this crucial factual issue, we have carefully reviewed and examined the evidence. The finding of the Court of Appeals that the loan is in the amount of P1,000,000.00 only is supported by substantial evidence.

The Promissory Note (Exh- B) and the Deed of Real Estate Mortgage (Exh. A) executed by the respondents in favor of the petitioners indeed state that the loan is in the amount of P1,400,000.00. However, the other documents executed by the parties contemporaneously with said Promissory Note and Deed of Real Estate Mortgage clearly show that the actual loan, i.e. the amount received by respondents, was only P1,000,000.00. Thus, for the payment made by the petitioners for the account of the respondents to Manuel Asencio, thereby releasing the mortgage on the property, so that it could in turn be mortgaged to the petitioners, the respondents signed a receipt in favor of the petitioners in the amount of P625,000.00 (Exh. 2). The respondents executed another receipt in favor of the petitioners for the amount of P307,601.40," representing full payment per promissory note dated 6 April 1984" (Exh. 4). The broker who arranged for the loan signed a receipt in favor of the respondents for the amount of P50,000.00 representing his commission in effecting the loan "for the amount of P1,000,000.00" (Exh. 3).<äre||anº•1àw> The attorney who assisted in the transaction was paid attorney's fees in the amount of P4,000.00 (Exh. 8). The petitioners submitted a list of expenses chargeable to the respondents, totalling P13,398.69 covering transfer fees, expenses in the Register of Deeds and payments to the BIR (Exh. 5). All told, the loan of P1,000,000.00 obtained by the respondents from the petitioners was applied or used in the following manner at the time the loan was obtained:

P625,00.00 — to pay Manuel Asencio (first creditor) 50,000.00 — to pay Wilson Jesena (for broker's commission) 4,000.00 — to pay Atty. Enrique Arguelles (for attorney's fees) 13,398.69 — to pay transfer fees and other expenses in Register of Deeds and BIR

307,601.40 — to pay respondents as balance of the loan P1,000,000.09 TOTAL

The above itemization tallies with the breakdown of the proceeds of the loan, made by the loan broker Wilson Jesena (Exh. 1).

Petitioners contend that over and above the P1,000,000.00, the amount of P400,000.00 was delivered by them to the respondents in cash and that this delivery was not evidenced by a receipt because, anyway, said amount (P400,000.00) is already included in the statement of the loan amount in the promissory note and the deed of real estate mortgage, which is P1,400,000.00. We find this contention to be quite incredible, to say the least. It is contrary to ordinary human experience. Normally, in delivering a hefty sum like P400,000.00 in cash, one would require some sort of receipt or acknowledgment from the recipient.

Moreover, if petitioners were careful enough to require from the respondents the separate receipts above-mentioned, there was no reason why they would not require another receipt from the respondents for said amount of P400,000.00. And if, as petitioners now allege, they did not anymore require a receipt for the P400,000.00 allegedly delivered by them in cash to the respondents because the loan amount stated in the promissory note and the real estate mortgage already included said amount of P400,000.00, then, by the same reasoning, there was no need for requiring the other separate receipts abovementioned—as the amounts they referred to were already a part of the loan amount stated in the promissory note and real estate mortgage—and yet, said separate receipts were required by petitioners of the respondents.

In short, we agree with the finding of the Court of Appeals that the disputed amount of P400,000.00 was a hidden interest that the petitioners had required the respondents to pay at the maturity of the loan, but said amount of P400,000.00 was not received by or delivered to the respondents. This conclusion is strengthened by the fact that the promissory note and the deed of real estate mortgage (Exhs. B and A), strangely enough, do not contain any express stipulation on interest, or rate of interest, when the loan involved therein is in the substantial amount of allegedly P1,400,000.00.

Petitioners may conceivably argue that, granting that the disputed amount of P400,000.00 is interest on the loan of P1,000,000.00, yet, in line with this Court's decision in Liam Law vs. Oriental Sawmill Co., et al., 11 there is no longer any ceiling on interest or interest rates on loans. This may be so in a situation where the parties openly and expressly agree on a specific rate of interest to accrue on the loan but, as the Court of Appeals in its decision under review correctly pointed out, in the case at bar, no interest rate is expressly stipulated in the promissory note and deed of real estate mortgage. Circular No. 905 of the Central Bank dated 10 December 1982 provides:

Section 1. The rate of interest, including commissions, premiums, fees and other charges on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to the Usury law, as amended.

Section 2. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to be twelve per cent (1 2%) per annum. (Emphasis supplied)

The rate of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest, shall continue therefore to be twelve per cent (12%) per annum. 12

Accordingly, the loan of P1,000,000.00 in the instant case should earn a twelve per cent (12%) interest per annum computed from 6 April 1984 when the loan was obtained by the respondents from the petitioners until paid.

Petitioners also impugn the Court of Appeals in nullifying the escalation clause in the Deed of Real Estate Mortgage and Promissory Note. Under such escalation clause, sustained by the trial court, the amount of P569,718.61 was awarded to herein petitioners by way of adjustment of the loan of P1,400,000.00 after the eight (8) month period of the loan. 13

The Deed of Real Estate Mortgage provides, among others, as follows:

14. That in the event that an extra-ordinary inflation of the Philippine peso should supervene, it is hereby stipulated that the value of the currency at the time of the establishment of the obligation shall be the basis of payment pursuant to Art. 1250 of the New Civil Code of the Philippines. For this purpose, MORTGAGORS hereby recognize the official exchange rate of the Philippine Peso to the US dollar at 14.002 to one. The corresponding adjustment in the value of the Philippine Peso shall be made should at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the supervening inflation. It is further agreed that the official rate of exchange as set by the Central Bank for private transactions shall be the basis of this adjustment. (Emphasis supplied).

A cursory reading of the aforequoted provision of the Deed of Real Estate Mortgage (similar stipulation is contained in the Promissory Note) shows that the escalation clause takes effect "in the event that an extraordinary inflation of the Philippine Peso should supervene," between the date the loan was granted and the date of its maturity, in which case, the value of the (peso) currency at the time of the establishment of the obligation shall be the basis of payment. To give meaning to the "value of the currency at the time of the establishment of the obligation," the parties agreed that on 6 April 1984 (date of loan), the exchange rate of the peso to the US dollar was 14.002 to one.

Consequently, under the aforesaid escalation clause, "(t)he corresponding adjustment in the value of the Philippine Peso" at the maturity of the obligation crucially depends upon the supervening of an extraordinary inflation in the sense contemplated in Article 1250 of the Civil Code of the Philippines. 14

In Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority, 15 this Court held:

Extraordinary inflation exists when 'there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.)

An example of extraordinary inflation is the following description of what happened to the deutschmark in 1920:

More recently, in the 1920's Germany experience a case of hyper-inflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition].

As reported, "prices were going up every week, then every day, then every hour. Women were paid several times a day so that they could rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions," (Sidney Rutberg, "The Money Baloon" New York; Simon and Schuster, 1975, p. 19, cited in Economics, An Introduction by Villegas & Abola, 3rd Ed.)

While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a universal trend that has not spared our country. 16

Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984 and 7 December 1984—no proofs were presented on how much, for instance, the price index of goods and services had risen during the intervening period—an extraordinary inflation cannot be assumed; consequently, there is no reason or basis, legal or factual, for adjusting the value of the Philippine Peso in the settlement of respondents' obligation.

Finally, the Court of Appeals did not commit any error in reducing the award of attorney's fees to P50,000.00. The contractual provision for attorney's fees may be modified by the courts in the exercise of their sound judicial discretion. 17

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated 12 August 1987 is AFFIRMED. With costs against petitioners.

SO ORDERED.

Melencio-Herrera (Chairperson), Paras, and Regalado, JJ., concur.

Sarmiento, J., took no part.

Footnotes

1 Penned by Justice Carolina Griño-Aquino, and concurred in by Justices Manuel T. Reyes and Jaime M. Lantin.

2 Penned by Judge Tito G. Gustilo

3 Rollo, pp. 20-25.

4 Original Record, pp. 179-180.

5 Annex "A', Petition, p. 19, rollo.

6 Rollo p. 29.

7 Rollo, p. 6.

8 Rollo, pp. 25-26.

9 Exhibit "A", Original Record, p. 80.

10 Exhibit "B", Original Record, p. 86.

11 G.R. No. L-30771, 28 May 1984,129 SCRA 439,442.

12 Rollo, p. 27.

13 Petitioners contended that since on 6 April 1984, the peso official exchange rate to the U.S dollar was 14.002 to 1, whereas, on 7 December 1984, such official exchange rate was 19.70 to 1, there was an increase of 40.69418% in such official exchange rate and the amount of the loan of P1,400,000 had to be adjusted by the same percentage, hence, the additional claim of P669,718.61 (Petitioners' complaint, p. 4).

14 Article 1250 of the Civil Code provides: "In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary."

15 G.R. No. 1-43446, 3 May 1988.

16 Ibid., p. 4-5.

17 Soriano vs. Ubat, 1 SCRA 366; Francisco vs. GSIS, 7 SCRA 577 and Kalalo vs. Luz, 34 SCRA 337.

Republic of the Philippines SUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-60705 June 28, 1989

INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK, OVERSEAS BANK OF MANILA and THE HON. COURT OF APPEALS,respondents.

G.R. No. L-60907 June 28, 1989

OVERSEAS BANK OF MANILA, petitioner,

vs. COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and RAUL L. SANTOS, respondents.

REGALADO, J.:

In these petitions for review on certiorari, Integrated Realty Corporation and Raul Santos (G.R. No. 60705), and Overseas Bank of Manila (G.R. No.

60907) appeal from the decision of the Court of Appeals, 1 the decretal portion of which states:

WHEREFORE, with the modification that appellee Overseas Bank of Manila is ordered to pay to the appellant Raul Santos the sum of P 700,000.00 due under the time deposit certificates Nos. 2308 and 2367 with 6 1/2 (sic) interest per annum from date of issue until fully paid, the appealed decision is affirmed in all other respects.

In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC and Raul L. Santos (hereafter, Santos) seek the dismissal of the complaint filed by the Philippine National Bank (hereafter, PNB), or in the event that they be held liable thereunder, to revive and affirm that portion of the decision of the trial court ordering Overseas Bank of Manila (hereafter, OBM) to pay IRC and Santos whatever amounts the latter will pay to PNB, with interest from the date of payment. 2

On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court insofar as it holds OBM liable for interest on the time deposit with it of Santos corresponding to the period of its closure by order of the Central Bank. 3

In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower court, 4 narrated the antecedents of this case in this wise:

The facts of this case are not seriously disputed by any of the parties. They are set forth in the decision of the trial court as follows:

Under date 11 January 1967 defendant Raul L. Santos made a time deposit with defendant OBM in the amount of P 500,000.00. (Exhibit-10 OBM) and was issued a Certificate of Time Deposit No. 2308 (Exhibit 1 Santos, Exhibit D). Under date 6 February 1967 defendant Raul L. Santos also made a time deposit with defendant OBM in the amount of P 200,000.00 (Exhibit 11 OBM and was issued certificate of Time Deposit No. 2367 (Exhibit 2 Santos, Exhibit E).

Under date 9 February 1967 defendant IRC thru its President-defendant Raul L. Santos, applied for a loan and/or credit line (Exhibit A) in the amount of P 700,000.00 with plaintiff bank. To secure the said loan, defendant Raul L. Santos executed on August 11, 1967 a Deed of Assignment (Exhibit C) of the two time deposits (Exhibits 1-Santos and 2 Santos, also Exhibits D and E) in favor of plaintiff. Defendant OBM gave its conformity to the assignment thru letter dated 11 August 1967 (Exhibit F). On the same date, defendant IRC thru its President Raul L. Santos, also executed a Deed of Conformity to Loan Conditions (Exhibit G).

The defendant OBM after the due dates of the time deposit certificates, did not pay plaintiff PNB. Plaintiff demanded payment from defendants IRC and Raul L. Santos (Exhibit K) and from defendant OBM (Exhibit L). Defendants IRC and Raul L. Santos replied that the obligation (loan) of defendant IRC was deemed paid with the irrevocable assignment of the time deposit certificates (Exhibits 5 Santos, 6 Santos and 7 Santos).

On April 6, 1969 (sic), ** PNB filed a complaint to collect from IRC and Santos the loan of P 700,000.00 with interest as well as attomey's fees. It impleaded OBM as a defendant to compel it to redeem and pay to it Santos' time deposit certificates with interest, plus exemplary and corrective damages, attorney's fees, and cost.

In their answer to the complaint, IRC and Santos alleged that PNB has no cause of action against them because their obligation to PNB was fully paid or extinguished upon the' irrevocable' assignment of the time deposit certificates, and that they are not answerable for the insolvency of OBM They filed a counterclaim for damages against PNB and a cross-claim against OBM alleging that OBM acted fraudulently in refusing to pay the time deposit certificates to PNB resulting in the filing of the suit against them by PNB, and that, therefore, OBM should pay them whatever amount they may be ordered by the court to pay PNB with interest. They also asked that OBM be ordered to pay them compensatory, moral, exemplary and corrective damages.

In its answer to the complaint, OBM denied knowledge of the time deposit certificates because the alleged time deposit of Santos 'does not appear in its books of account.

Whereupon, IRC and Santos, with leave of court, filed a third-party complaint against Emerito B. Ramos, Jr., president of OBM and Rodolfo R. Sunico, treasurer of said bank, who allegedly received the time deposits of Santos and issued the certificates therefor.

Answering the third-party complaint, Ramos and Sunico alleged that IRC and Santos have no cause of action against them because they received and signed the time deposit certificates as officers of OBM that the time deposits are recorded in the subsidiary ledgers of the bank and are 'civil liabilities of the defendant OBM

On November 18, 1970, OBM filed an amended or supplemental answer to the complaint, acknowledging the certificates of time deposit that it issued to Santos, and admitting its failure to pay the same due to its distressed financial situation. As affirmative defenses, it alleged that by reason of its state of insolvency its operations have been suspended by the Central Bank since August 1, 1968; that the time deposits ceased to earn interest from that date; that it may not give preference to any depositor or creditor; and that payment of the plaintiffs claim is prohibited.

On January 30, 1976, the lower court rendered judgment for the plaintiff, the dispositive portion of which reads as foIlows

WHEREFORE, judgment is hereby rendered, ordering:

1. The defendant Integrated Realty Corporation and Raul L. Santos to pay the plaintiff, jointly and solidarily, the total amount of P 700,000.00 plus interest at the rate of 9% per annum from maturity dates of the two promissory notes on January 11 and February 6, 1968, respectively (Exhibits M and I), plus 1-1/ 2% additional interest effective February 28, 1968 and additional penalty interest of 1% per annum of the Id amount of P 700,000.00 from the time of maturity of Id loan up to the time the said amount of P 700,000.00 is actually paid to the plaintiff;

2. The defendants topay l0% of the amount of P 700,000.00 as and for attorney's fees;

3. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty Corporation and Raul L. Santos whatever amounts the latter will pay to the plaintiff with interest from date of payment;

4. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty Corporation and Raul L. Santos the amount of P 10,000.00 as and for attorney's fees;

5. The third-party complaint and cross-claim dismissed;

6. The defendant Overseas Bank of Manila to pay the costs.

SO ORDERED. 5

IRC Santos and OBM all appealed to the respondent Court of Appeals. As stated in limine, on March 16, 1982 respondent court promulgated its appealed decision, with a modification and the deletion of that portion of the judgment of the trial court ordering OBM to pay IRC and Santos whatever amounts they will pay to PNB with interest from the date of payment.

Therein defendants-appellants, through separate petitions, have brought the said decision to this Court for review.

1. The first issue posed before us for resolution is whether the liability of IRC and Santos with PNB should be deemed to have been paid by virtue of the deed of assignment made by the former in favor of PNB, which reads:

KNOW ALL MEN BY THESE PRESENTS;

I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address at 661 Richmond St., Mandaluyong, Rizal for and in consideration of certain loans, overdrafts and other credit accommodations granted or those that may hereafter be granted to me/us by the PHILIPPINE NATIONAL BANK, have assigned, transferred and conveyed and by these presents, do hereby assign, transfer and convey by way of security unto said PHILIPPINE NATIONAL BANK its successors and assigns the following Certificates of Time Deposit issued by the OVERSEAS BANK OF MANILA, its CONFORMITY issued on August 11, 1967, hereto enclosed as Annex ' A', in favor of RAUL L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN HUNDRED THOUSAND PESOS ONLY (P 700,000.00), Philippine Currency, ....

xxx xxx xxx

It is also understood that the herein Assignor/s shall remain hable for any outstanding balance of his/their obligation if the Bank is unable to actually receive or collect the above assigned sums , monies or properties resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. 6

xxx xxx xxx

Respondent Court of Appeals did not consider the aforesaid assignment as payment, thus:

The contention of IRC and Santos that the irrevocable assignment of the time deposit certificates to PNB constituted payment' of their obligation to the latter is not well taken.

Where a certificate of deposit in a bank, payable at a future day, was handed over by a debtor to his creditor, it was not payment, unless there was an express agreement on the part of the creditor to receive it as such, and the question whether there was or was not such an agreement, was one of facts to be decided by the jury. (Downey vs. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See also Michie, Vol. 5-B Banks and Banking, p. 200).7

We uphold respondent court on this score.

In Lopez vs. Court of appeals, et al., 8 petitioner Benito Lopez obtained a loan for P 20,000.00 from the Prudential Bank and Trust Company. On the same day, he executed a promissory note in favor of the bank and, in addition, he executed a surety bond in which he, as principal, and Philippine American General Insurance Co., Inc. (Philamgen), as surety, bound themselves jointly and severally in favor of the bank for the payment of the loan. On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed to indemnify the company against any damages which the latter may sustain in consequence of having become a surety upon the bond. At the same time, Lopez executed a deed of assignment of his shares of stock in the Baguio Military Institute, Inc. in favor of Philamgen. When Lopez' obligation matured without being settled, Philamgen caused the transfer of the shares of stocks to its name in order that it may sell the same and apply the proceeds thereof in payment of the loan to the bank. However, when no payment was still made by the principal debtor or surety, the bank filed a complaint which compelled Philamgen to pay the bank. Thereafter, Philamgen filed an action to recover the amount of the loan against Lopez. The trial court therein held that the obligation of Lopez was deemed paid when his shares of stocks were transferred in the name of Philamgen. On appeal, the Court of Appeals ruled that Lopez was still liable to Philamgen because, pending payment, Philamgen was merely holding the stock as security for the payment of Lopez' obligation.

In upholding the finding therein of the Court of Appeals, We held that:

Notwithstanding the express terms of the 'Stock Assignment Separate from Certificate', however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof.

It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P 20,000.00 from Prudential Bank, Lopez executed a promissory note for P 20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment.

The indemnity agreement and stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P l,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. ...

Along the same vein, in the case at bar it would not have been necessary on the part of IRC and Santos to execute promissory notes in favor of PNB if the assignment of the time deposits of Santos was really intended as an absolute conveyance.

There are cogent reasons to conclude that the parties intended said deed of assignment to complement the promissory notes. In declaring that the deed of assignment did not operate as payment of the loan so as to extinguish the obligations of IRC and Santos with PNB, the trial court advanced several valid bases, to wit:

a. It is clear from the Deed of Assignment that it was only by way of security;

xxx xxx xxx

b. The promissory notes (Exhibits H and I) were executed on August 16, 1967. If defendants IRC and Raul L. Santos, upon executing the Deed of Assignment on August 11, 1967 had already paid their loan of P 700,000.00 or otherwise extinguished the same, why were the promissory notes made on August 16, 1967 still executed by IRC and signed by Raul L. Santos as President?

c. In the application for a credit line (Exhibit A),the time deposits were offered as collateral. 9

For all intents and purposes, the deed of assignment in this case is actually a pledge. Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 10

The facts and circumstances leading to the execution of the deed of assignment, as found by the court a quo and the respondent court, yield said conclusion that it is in fact a pledge. The deed of assignment has satisfied the requirements of a contract of pledge (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the pledge have

the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. 11 The further requirement that the thing

pledged be placed in the possession of the creditor, or of a third person by common agreement 12 was complied with by the execution of the deed of

assignment in favor of PNB.

It must also be emphasized that Santos, as assignor, made an express undertaking that he would remain liable for any outstanding balance of his obligation should PNB be unable to actually receive or collect the assigned sums resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. The term "for any cause whatsoever" is broad enough to include the situation involved in the present case.

Under the foregoing circumstances and considerations, the unavoidable conclusion is that IRC and Santos should be held liable to PNB for the amount of the loan with the corresponding interest thereon.

2. We find nothing illegal in the interest of one and one-half percent (1-1/2%) imposed by PNB pursuant to the resolution of its Board which presumably was done in accordance with ordinary banking procedures. Not only did IRC and Santos fail to overcome the presumption of regularity of business transactions, but they are likewise estopped from questioning the validity thereof for the first time in this petition. There is nothing in the records to show that they raised this issue during the trial by presenting countervailing evidence. What was merely touched upon during the proceedings in the court below was the alleged lack of notice to them of the board resolution, but not the veracity or validity thereof.

3. On the issue of whether OBM should be held liable for interests on the time deposits of IRC and Santos from the time it ceased operations until it resumed its business, the answer is in the negative.

We have held in The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 13 that:

It is a matter of common knowledge, which We take judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictated; this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition petition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank.

We consider it of trivial consequence that the stoppage of the bank's operation by the Central Bank has been subsequently declared illegal by the Supreme Court, for before the Court's order, the bank had no alternative under the law than to obey the orders of the Central Bank. Whatever be the juridical significance of the subsequent action of the Supreme Court, the stubborn fact remained that the petitioner was totally crippled from then on from earning the income needed to meet its obligations to its depositors. If such a situation cannot, strictly speaking, be legally denominated as 'force majeure', as maintained by private respondent, We hold it is a matter of simple equity that it be treated as such.

The Court further adjured that:

Parenthetically, We may add for the guidance of those who might be concerned, and so that unnecessary litigations be avoided from further clogging the dockets of the courts, that in the light of the considerations expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure.

We cannot accept the holding of the respondent Court of Appeals that the above-cited decisions apply only where the bank is in a state of liquidation. In the very case aforecited, this issue was likewise raised and We resolved:

Thus, Our task is narrowed down to the resolution of the legal problem of whether or not, for purposes of the payment of the interest here in question, stoppage of the operations of a bank by a legal order of liquidation may be equated with actual cessation of the bank's operation, not different, factually speaking, in its effects, from legal liquidation the factual cessation having been ordered by the Central Bank.

In the case of Chinese Grocer's Association, et al. vs. American Apothecaries, 65 Phil. 395, this Court held:

As to the second assignment of error, this Court, in G.R. No. 43682, In re Liquidation of the Mercantile Bank of China, Tan Tiong Tick, claimant and appellant vs. American Apothecaries, C., et al., claimants and appellees, through Justice Imperial, held the following:

4. The court held that the appellant is not entitled to charge interest on the amounts of his claims, and this is the object of the second assignment of error, Upon this point a distinction must be made between the interest which the deposits should earn from their existence until the bank ceased to operate, and that which they may earn from the time the bank's operations were stopped until the date of payment of the deposits. As to the first-class, we hold that it should be paid because such interest has been earned in the ordinary course of the bank's businesses and before the latter has been declared in a state of liquidation. Moreover, the bank being authorized by law to make use of the deposits with the limitation stated, to invest the same in its business and other operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior to the dates of the Id claims. As to the interest which may be charged from the date the bank ceased to do business because it was declared in a state of liquidation, we hold that the said interest should not be paid.

The Court of Appeals considered this ruling inapplicable to the instant case, precisely because, as contended by private respondent, the said Apothecaries case had in fact in contemplation a valid order of liquidation of the bank concerned, whereas here, the order of the Central Bank of August 13, 1968 completely forbidding herein petitioner to do business preparatory to its liquidation was first restrained and then nullified by this Supreme Court. In other words, as far as private respondent is concerned, it is the legal reason for cessation of operations, not the actual cessation thereof, that matters and is decisive insofar as his right to the continued payment of the interest on his deposit during the period of cessation is concerned.

In the light of the peculiar circumstances of this particular case, We disagree. It is Our considered view, after mature deliberation, that it is utterly unfair to award private respondent his prayer for payment of interest on his deposit during the period that petitioner bank was not allowed by the Central Bank to operate.

4. Lastly, IRC and Santos claim that OBM should reimburse them for whatever amounts they may be adjudged to pay PNB by way of compensation for damages incurred, pursuant to Articles 1170 and 2201 of the Civil Code.

It appears that as early as April, 1967, the financial situation of OBM had already caused mounting concern in the Central Bank. 14 On December 5, 1967, new directors and officers drafted from the Central Bank (CB) itself, the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) were elected and installed and they took over the management and control of the Overseas Bank. 15 However, it was only on July 31, 1968 when OBM was excluded from clearing with the CB under Monetary Board Resolution No. 1263. Subsequently, on August 2, 1968, pursuant to Resolution No. 1290 of the CB OBM's operations were suspended. 16 These CB resolutions were eventually annulled and set aside by this Court on October 4, 1971 in the decision rendered in the herein cited case of Ramos.

Thus, when PNB demanded from OBM payment of the amounts due on the two time deposits which matured on January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to the faithful compliance by OBM of its liabilities thereunder. Consequently, for having incurred in delay in the performance of its obligation, OBM should be held liable for damages. 17 When respondent Santos invested his money in time deposits with OBM they entered into a contract of simple loan or mutuum, 18 not a contract of deposit.

While it is true that under Article 1956 of the Civil Code no interest shall be due unless it has been expressly stipulated in writing, this applies only to interest for the use of money. It does not comprehend interest paid as damages. 19 OBM contends that it had agreed to pay interest only up to the dates of maturity of the certificates of time deposit and that respondent Santos is not entitled to interest after the maturity dates had expired, unless the contracts are renewed. This is true with respect to the stipulated interest, but the obligations consisting as they did in the payment of money, under Article 1108 of the Civil Code he has the right to recover damages resulting from the default of OBM and the measure of such damages is interest at the legal rate of six percent (6%) per annum on the amounts due and unpaid at the expiration of the periods respectively provided in the contracts. In fine, OBM is being required to pay such interest, not as interest income stipulated in the certificates of time deposit, but as damages for failure and delay in the payment of its obligations which thereby compelled IRC and Santos to resort to the courts.

The applicable rule is that legal interest, in the nature of damages for non-compliance with an obligation to pay a sum of money, is recoverable from the date judicial or extra-judicial demand is made, 20 Which latter mode of demand was made by PNB, after the maturity of the certificates of time deposit, on March 1, 1968. 21 The measure of such damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon in the certificates of deposit 22 Which is six and onehalf percent (6-1/2%). Such interest due or accrued shall further earn legal interest from the time of judicial demand. 23

We reject the proposition of IRC and Santos that OBM should reimburse them the entire amount they may be adjudged to pay PNB. It must be noted that their liability to pay the various interests of nine percent (9%) on the principal obligation, one and one-half percent (1-1/2%) additional interest and one percent (1%) penalty interest is an offshoot of their failure to pay under the terms of the two promissory notes executed in favor of PNB. OBM was never a party to Id promissory notes. There is, therefore, no privity of contract between OBM and PNB which will justify the imposition of the aforesaid interests upon OBM whose liability should be strictly confined to and within the provisions of the certificates of time deposit involved in this case. In fact, as noted by respondent court, when OBM assigned as error that portion of the judgment of the court a quo requiring OBM to make the disputed reimbursement, IRC and Santos did not dispute that objection of OBM Besides, IRC and Santos are not without fault. They likewise acted in bad faith when they refuse to comply with their obligations under the promissory notes, thus incurring liability for all damages reasonably attributable to the non-payment of said obligations. 24

WHEREFORE, judgment is hereby rendered, ordering:

1. Integrated Realty Corporation and Raul L. Santos to pay Philippine National Bank, jointly and severally, the total amount of seven hundred thousand pesos (P 700,000.00), with interest thereon at the rate of nine percent (9%) per annum from the maturity dates of the two promissory notes on January 11 and February 6, 1968, respectively, plus one and one-half percent (1-1/2%) additional interest per annum effective February 28, 1968 and additional penalty interest of one percent (1%) per annum of the said amount of seven hundred thousand pesos (P 700,000.00) from the time of maturity of said loan up to the time the said amount of seven hundred thousand pesos (P 700,000.00) is fully paid to Philippine National Bank.

2. Integrated Realty Corporation and Raul L. Santos to pay solidarily Philippine National Bank ten percent (10%) of the amount of seven hundred thousand pesos (P 700,000.00) as and for attorney's fees.

3. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos the sum of seven hundred thousand pesos (P 700,000.00) due under Time Deposit Certificates Nos. 2308 and 2367, with interest thereon of six and one-half percent (6-1/2%) per annum from their dates of issue on January 11, 1967 and February 6, 1967, respectively, until the same are fully paid, except that no interest shall be paid during the entire period of actual cessation of operations by Overseas Bank of Manila;

4. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos six and one-half per cent (6-1/2%) interest in the concept of damages on the principal amounts of said certificates of time deposit from the date of extrajudicial demand by

PNB on March 1, 1968, plus legal interest of six percent (6%) on said interest from April 6, 1968, until fifth payment thereof, except during the entire period of actual cessation of operations of said bank.

5. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos ten thousand pesos (P l0,000.00) as and for attorney's fees.

SO ORDERED.

Melencio-Herrera, (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

Footnotes

1 CA-G.R. No. 60005, penned by Associate Justice Carolina C. Grino-Aquino, with the concurrence of Associate Justices Milagros A. German and Vicente V. Mendoza, Tenth Division; Annex A, Petition, G.R. No. 60705; Rollo, 36.

2 Petition, G.R. No. 60705, p. 24; Rollo, 32.

3 Petition, G.R. No. 60907, p. 1; Rollo, 8.

4 Civil Case No. 72557, Court of First Instance of Manila, Branch XIX, Judge Victorino A. Savellano, presiding.

** This should be April 6, 1968.

5 Annex A, Petition, G.R. No. 60705; Rollo, 36-39.

6 Record on Appeal, CA-G.R. No. 60005, 13-17.

7 Rollo, G.R. No. 60705, 42.

8 114 SCRA 671 (1982).

9 Record on Appeal, 267-268.

10 Footnote 8, at p. 683, citing Am. Jur. 2d, Secured Transactions, Sec. 50.

11 Art. 2085, Civil Code.

12 Art, 2093, Civil Code.

13 105 SCRA 49 (1981); See also The Overseas Bank of Manila vs. Court of Appeals, et al., 113 SCRA 778 (1982).

14 Ramos, et al., vs. Central Bank of the Philippines, 41 SCRA 565, ,573 (1971).

15 Id., 579.

16 Id., 572.

17 Art. 1170, Civil Code.

18 Art. 1980, Civil Code.

19 Civil Code of the Philippines Annotated, Paras, 10th Ed., Vol. V, 695.

20 Art. 1169. Civil Code.

21 Exhibit L, Original Record, 317.

22 Art. 2209, Civil Code.

23 Art. 2212 , Civil Code.

24 Art. 2201, Civil Code.

# Cross Reference: Volume 174 Page 295

Republic of the Philippines SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 123643 October 30, 1996

PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and DR. ERLINDA G. IBARROLA, respondents.

R E S O L U T I O N

FRANCISCO, J.:p

As payments for the purchase of medicines, the Province of Isabela issued several checks drawn against its account with petitioner Philippine National Bank (PNB) in favor of the seller, Lyndon Pharmaceuticals Laboratories, a business operated by private respondent Ibarrola. The checks were delivered to the seller's agents 1 who turned them over to Ibarrola, except 23 checks amounting to P98,691.90, which the agents appropriated after negotiating them with PNB. For her failure to receive the full payment for the medicines, Ibarrola filed on November 6, 1974 before the Regional Trial Court (RTC) an "action for a sum of money and damages," docketed as Civil Case 4226-p, 2 against the Province of Isabela, its Treasurer, the two agents and PNB.

In its decision dated September 29, 1987, the trial court ordered all the defendants in said civil case, except the treasurer who died in the meantime, to "jointly and solidarily" pay Ibarrola several amounts, among which is:

(1) P98,691.90 with interest thereon at the legal rate from the date of the filing of the complaint until the entire amount is fully paid; 3 (Emphasis supplied.)

PNB's appeal to the Court of Appeals (CA) 4 and later to the Supreme Court 5 were denied and dismissed, respectively. All the three courts, however, did not specify whether the legal rate of interest referred to in the judgment is 6% or 12%. The judgment in Civil Case 4226-P became final and executory on November 26, 1993. At the execution stage, the sheriff computed the interest mentioned in the judgment at the rate of 12% which PNB opposed insisting that the rate should only be 6%. Ibarrola sought clarification from the same RTC which promulgated the decision. On August 4, 1994 said court issued an order clarifying that the rate is 12%. PNB's direct appeal to this court from that order was referred to the CA which affirmed the RTC order. Hence, this petition for review under Rule 45 where two legal issues are raised: (1) whether in an action for damages, the legal rate of interest is 6% as provided by Article 2209 6 of the New Civil Code or 12% as provided by CB Circular 416 series of 1974, 7 and (2) whether such rate shall be computed from the filing of the complaint until fully paid?

The issues are not new. In the case of Estern Shipping Lines, Inc. v.

CA, 8 this Court had provided a rule "of thumb for future guidance," 9 to wit:

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may

be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 10 (Emphasis ours.)

The case at bench does not involve a loan, forbearance of money or judgment involving a loan or forbearance of money as it arose from a contract of sale whereby Ibarrola did not receive full payment for her merchandise. When an obligation arises "from a contract of purchase and sale and not from a contract of loan or mutuum," the applicable rate is "6% per annum as provided in Article 2209 of the NCC and not

the rate of 12% per annum as provided in (CB) Cir. No. 416." 11 Indeed, PNB's liability is based only on the RTC's judgment where it was

held solidarily liable with the other defendants due to its negligence when it "failed to assure itself" if the Provincial Treasurer was "properly authorized" by Ibarrola to "make endorsements" of said checks. 12

The rate of 12% interest referred to in Cir. 416 applies only to:

[L]oan or forbearance of money, or to cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not involve or which has nothing to do with loans or forbearance of any money, goods or credit does not fall within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank. When an obligation not constituting a loan or forbearance of money is breached then an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per cent. 13 (Emphasis ours.)

Applying the aforequoted rule, therefore, the proper rate of interest referred to in the judgment under execution is only 6%. This interest according to Eastern Shipping shall be computed from the time of the filing of the complaint considering that the amount adjudged (P98,691.90) can be established with reasonable certainty. Said amount being merely the uncollected balance of the purchase price covered by the 23 checks encashed and appropriated by Ibarrola's agents. However, once the judgment becomes final and executory, the "interim period from the finality of judgment awarding a monetary claim and until payment thereof, is deemed to be equivalent to a forbearance of credit." 14 Thus, in accordance with the pronouncement in Eastern Shipping the rate of 12% p.a. should be imposed, and to be computed from the time the judgment became final and executory until fully satisfied. The actual base for the computation of this 12% interest after the judgment in this damage suit became final shall be the amount adjudged (P98,691.90).

ACCORDINGLY, the appealed decision is REVERSED. The rate of interest shall be 6% p.a. computed from the time of the filing of the complaint until its full payment before finality of judgment. Thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% p.a. computed from the time the judgment became final and executory on November 26, 1993 until fully satisfied.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.

Footnotes

1 Manuel Flores and Demetrio Perez.

2 Rollo, p. 13.

3 RTC Decision, p. 6; Rollo, p. 39.

4 CA Decision promulgated June 25, 1993, Annex "C".

5 SC Resolution dated October 18, 1993, Annex "D".

6 "If the obligation consist in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum."

7 "By virtue of the authority granted to it under Section 1 of Act 2655, as amended, otherwise known as the "Usury Law" the 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 betwelve (12%) per cent per annum. This Circular shall take effect immediately."

8 234 SCRA 78.

9 Id., at p. 96.

10 Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 88.

11 Pilipinas Bank v. CA, 225 SCRA 268.

12 Rollo, p. 38.

13 Food Terminal, Inc. v. CA and TAO Development, Inc., G.R. 120097, September 23, 1996.

14 Ibid.