SPOUSES BARRERA vs. SPOUSES LORENZO (G.R. No. 130994. September 18, 2002, Third Division) On December 4, 1990, spouses Felimon and Maria Barrera, petitioners, borrowed P230,000.00 from spouses Miguel and Mary Lazaro. The loan was secured by a real estate mortgage[1] over petitioners residential lot consisting of 432 square meters located at Bunlo, Bocaue, Bulacan and registered in their names under Transfer Certificate of Title (TCT) T-42.373 (M)[2] of the Registry of Deeds of Bulacan. A month and a half later, the Lazaro spouses needed money and informed petitioners that they would transfer the loan to spouses Emiliano and Maria Concepcion Lorenzo, respondents. Consequently, on May 14, 1991, petitioners executed another real estate mortgage[3] over their lot, this time in favor of the respondents to secure the loan of P325,000.00, which the latter claimed as the amount they paid spouses Lazaro. The mortgage contract provides, among others, that the new loan shall be payable within three (3) months, or until August 14, 1991; that it shall earn interest at 5% per month; and that should petitioners fail to pay their loan within the said period, the mortgage shall be foreclosed. When petitioners failed to pay their loan in full on August 14, 1991, respondents allowed them to complete their payment until December 23, 1993. On this date, they made a total payment of P687,000.00. On January 17, 1994, respondents wrote petitioners demanding payment of P325,000.00, plus interest, otherwise they would foreclose the mortgage.[4] In turn, petitioners responded, claiming that they have overpaid their obligation and demanding the return of their land title and refund of their excess payment.[5] This prompted respondents to file a petition[6] for extrajudicial foreclosure of mortgage with the Office of the Ex-Officio Sheriff, Malolos, Bulacan, docketed therein as EJF 19-94. For their part, petitioners filed with the Regional Trial Court (RTC), Branch 17, Malolos, Bulacan, a complaint for the return of their TCT No. T-42.373 (M), sum of money and damages, with application for a temporary restraining order and preliminary injunction, docketed as Civil Case No. 156-M-94.[7] In their opposition[8] to the application for a preliminary injunction, respondents alleged that petitioners loan has been restructured three times and that their unpaid balance as of March 14, 1994 was P543,622.00. After hearing petitioners application for a preliminary injunction, the RTC issued an order,[9] enjoining the sheriff from proceeding with the foreclosure of mortgage, upon their posting of a bond in the amount of P543,622.00. Thereafter, trial on the merits ensued. On July 31, 1995, the RTC rendered judgment,[10] the dispositive portion of which reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs (now petitioners) and against the defendants (now respondents), ordering the latter: 1. to return to the plaintiffs the amount of P215,750.00 representing the overpaid amount; 2. to return to the plaintiffs the owners copy of TCT No. T-42.373 (M) offered as security; 3. to pay P20,000.000 as attorneys fees; 4. to pay the costs of the suit. The writ of preliminary injunction issued on March 21, 1994 is hereby made permanent. SO ORDERED."[11] The trial court held that the stipulated 5% monthly interest to be paid by petitioners corresponds only to the period from May 14, 1991 up to August 14, 1991, the term of the loan.Thereafter, the monthly interest should be 12% per annum. The trial court concluded that petitioners made an overpayment of P214,750.00. Upon appeal, docketed as CA GR-CV No. 51095, the Court of Appeals, in a Decision[12] dated June 18, 1997, held: We reverse. The law and jurisprudence clearly provide that if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (Article 1253, New Civil Code; Gobonseng, Jr. vs. Court of Appeals, 246 SCRA 472). Once it is admitted that an obligation bears interest, partial payments are to be applied first on account of the interest and then to reduce the principal. (San Jose vs. Ortega, 11 Phil. 442; Sunico vs. Ramirez, 14 Phil. 500). We thus find no support, whether in law or in jurisprudence, for the Decision of the court a quo to apply the bigger amounts of P40,000.00, P37,000.00, P50,000.00 among others, given several times by the Barrera spouses x x x for the payment of the principal loan when the interests due on the loan that have accumulated through the years have not been fully satisfied.

We also do not agree that the stipulated monthly interest of 5% was to apply only to the 3-month effectivity period of the loan. This is a flawed and a grossly unfair interpretation of the terms and conditions of the agreement of the parties. To rule in this wise is to sanction the irregular performance of ones obligation. The Barrera spouses will be emboldened not to pay their loan within the agreed period of 3-months since on the fourth month and thereafter, they do not have to pay anymore the 5% monthly interest, but only the 12% legal interest per annum, or a measly 1% interest per month. Such an interpretation is totally unfair and unjust to the creditors who could have used their money in some other ways. Until such time that the Barreras have fully paid their total indebtedness, the 5% monthly interest subsists, there being no stipulation to the contrary. While we commiserate with the plight of the Barrera spouses, we cannot change the terms of the loan agreement between them and the Lorenzos as the courts have no right to make contracts for (the) parties.(Tolentino and Manio vs. Gonzales Sy Chian, 5 Phil. 577). A contract is the law between the parties which not even this Court can interfere with. The only requirement is that the same be not contrary to law, morals and good customs x x x (Article 1306, New Civil Code). We find the agreement to pay a 5% monthly interest until the loan is fully paid to be reasonable and sanctioned by regular usage and practice. The Barreras should, therefore, be required to pay the balance of their indebtedness, including the interests thereof. Failure to pay the same should warrant the foreclosure of their mortgaged property to satisfy their obligation to the Lorenzo spouses.[13] Petitioners filed a motion for reconsideration but was denied.[14] Hence this petition. The sole issue for our resolution is whether the 5% monthly interest on the loan was only for three (3) months, or from May 14, 1991 up to August 14, 1991, as maintained by petitioners, or until the loan was fully paid, as claimed by respondents. When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations governs.[15] In such cases, courts have no authority to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain.[16] It is only when the contract is vague and ambiguous that courts are permitted to resort to construction of its terms and determine the intention of the parties therein. The salient provisions of the mortgage contract read: a) Ang sanglaang ito ay sa loob lamang ng tatlong (3) buwan, o hanggang sa Agosto 14, 1991. b) Ang tubo na aming napagkasunduan ay 5%, o cinco por ciento isang buwan. c) Na sakaling mabayaran ko ang aming pagkakautang sa mag-asawa na P325,000.00 ang kasulatang ito ay wala ng lakas at kabuluhan, subalit kung hindi ko mabayaran ang aming pinagkakautangan sa takdang panahong 3 buwan sila ay binibigyan ko nang laya at kapangyarihan na masubasta nila ang lupang aming ipinanagot sa labas ng hukuman sa bisa ng Batas Blg. 3135 at susog nito at akong may utang ang siyang sagot sa lahat ng gastos at pati bayad sa abogado sa nasabing subasta sa labas ng hukuman.[17] (emphasis supplied) It is clear from the above stipulations that the loan shall be payable within three (3) months, or from May 14, 1991 up to August 14, 1991. During such period, the loan shall earn an interest of 5% per month. Furthermore, the contract shall have no force and effect once the loan shall have been fully paid within the three-month period, otherwise, the mortgage shall be foreclosed extrajudicially under Act No. 3135. Records show that upon maturity of the loan on August 14, 1991, petitioners failed to pay their entire obligation. Instead of exercising their right to have the mortgage foreclosed, respondents allowed petitioners to pay the loan on a monthly installment basis until December, 1993. It bears emphasis that there is no written agreement between the parties that the loan will continue to bear 5% monthly interest beyond the agreed three-month period. Respondent Ma. Concepcion Lorenzo testified as follows: Atty. Marcos: Q Now, based on this document which was marked as Exh. 1, there is no dispute that the monthly interest for the three month period that is from May 14, 1991 to August 14, 1991 is 5% monthly interest, there is no dispute about that. Now, Miss Witness, my question is, could you go over the entire document that Exh. 1 and please tell this Hon. Court whether there is a provision in clear and unequivocal terms providing for that monthly interest after August 14, 1991? A No, sir, there is none. Q Are you sure of that? A Yes, sir.

Q You mean to say there is no stipulation in that document providing for the 5% monthly interest to the loan after August 14, 1991? A Yes, sir, they are supposed to return my money. Court: Q After they failed to comply with that provision, was there any subsequent agreement between you and the plaintiffs? x x x Q Was there an agreement? A There was, your Honor. Q What was that agreement about? A Verbal agreement, your Honor? Q Why was that agreement not reduced into writing? A It was not reduced into writing, your Honor. Q Why? A I am in good faith, your Honor.[18] Article 1956 of the Civil Code mandates that (n)o interest shall be due unless it has been expressly stipulated in writing. Applying this provision, the trial court correctly held that the monthly interest of 5% corresponds only to the three-month period of the loan, or from May 14, 1991 to August 14, 1991, as agreed upon by the parties in writing. Thereafter, the interest rate for the loan is 12% per annum. In Eastern Shipping Lines, Inc. vs. Court of Appeals,[19] this Court laid down the following doctrine: When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. (emphasis supplied) The above ruling was reiterated in Sulit vs. Court of Appeals,[20] Crismina Garments vs. Court of Appeals,[21] Eastern Assurance and Surety Corporation vs. Court of Appeals,[22]Catungal vs. Hao,[23] and Yong et al. vs. Tiu et al..[24] Thus, the Court of Appeals erred in reversing the RTC Decision and holding that the 5% monthly interest should be paid by petitioners even beyond August 14, 1991. WHEREFORE, the assailed Decision of the Court of Appeals dated June 18, 1997 and its Resolution dated October 17, 1997 are REVERSED and SET ASIDE. The Decision of the Regional Trial Court, Branch 17, Malolos, Bulacan dated July 31, 1995 is REINSTATED. SO ORDERED.

SEBASTIAN SIGA-AN VS. ALICIA VILLANUEVA G.R. No. 173227, January 20, 2009

Before Us is a Petition[1] for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision,[2] dated 16 December 2005, and Resolution,[3]dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,[4] dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.

The facts gathered from the records are as follows: On 30 March 1998, respondent Alicia Villanueva filed a complaint[5] for sum of money against petitioner Sebastian

Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from 1991 to 1996.

Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and offered to loan her the

amount of P540,000.00. Since she needed capital for her business transactions with the PNO, she accepted petitioners proposal. The loan agreement was not reduced in writing. Also, there was no stipulation as to the payment of interest for the loan.[6]

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial payment of the loan. On

31 October 1993, she issued another check in the amount of P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told her that since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered her to pay additional interest. Petitioner threatened to block or disapprove her transactions with the PNO if she would not comply with his demand. As all her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash and checks as interests for the loan. She asked petitioner for receipt for the payments but petitioner told her that it was not necessary as there was mutual trust and confidence between them. According to her computation, the total amount she paid to petitioner for the loan and interest accumulated to P1,200,000.00.[7]

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the loan despite absence

of agreement to that effect. Her lawyer told her that petitioner could not validly collect interest on the loan because there was no agreement between her and petitioner regarding payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement.[8]

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1) P660,000.00 plus legal

interest from the time of demand; (2) P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as attorneys fees.[9]

In his answer[10] to the complaint, petitioner denied that he offered a loan to respondent. He averred that in 1992,

respondent approached and asked him if he could grant her a loan, as she needed money to finance her business venture with the PNO. At first, he was reluctant to deal with respondent, because the latter had a spotty record as a supplier of the PNO. However, since respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the loan in full.[11]

Subsequently, respondent again asked him to give her a loan. As respondent had been able to pay the previous

loan in full, he agreed to grant her another loan. Later, respondent requested him to restructure the payment of the loan because she could not give full payment on the due date. He acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue several postdated checks to guarantee the payment of her obligation. Upon his approval of respondents request for restructuring of the loan, respondent executed a promissory note dated 12 September 1994 wherein she admitted having borrowed an amount ofP1,240,000.00, inclusive of interest, from petitioner and that she would pay said amount in March 1995. Respondent also issued to him six postdated checks amounting toP1,240,000.00 as guarantee of compliance with her obligation. Subsequently, he presented the six checks for encashment but only one check was honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he filed criminal cases for Violation of the Bouncing

Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC).[12]

Petitioner insisted that there was no overpayment because respondent admitted in the latters promissory note that

her monetary obligation as of 12 September 1994 amounted to P1,240,000.00 inclusive of interests. He argued that respondent was already estopped from complaining that she should not have paid any interest, because she was given several times to settle her obligation but failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the loan was given interest-free.Based on the foregoing averments, he asked the RTC to dismiss respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an overpayment of her

loan obligation to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that respondents obligation was only to pay the loaned amount of P540,000.00, and that the alleged interests due should not be included in the computation of respondents total monetary debt because there was no agreement between them regarding payment of interest. It concluded that since respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake, petitioner should return the said amount to respondent pursuant to the principle of solutio indebiti.[13]

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and wounded feelings

experienced by respondent. Further, petitioner should pay exemplary damages by way of example or correction for the public good, plus attorneys fees and costs of suit.

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as follows:

(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of

12% per annum computed from 3 March 1998 until the amount is paid in full; (2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages; (3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages; (4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys

fees; and (5) Ordering defendant to pay the costs of suit.[14]

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court promulgated its Decision affirming in toto the RTC Decision, thus:

WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed

decision [is] AFFIRMED in toto.[15]

Petitioner filed a motion for reconsideration of the appellate courts decision but this was denied.[16] Hence, petitioner lodged the instant petition before us assigning the following errors:

I. THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE TO PETITIONER;

II. THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO INDEBITI.[17] Interest is a compensation fixed by the parties for the use or forbearance of money. This is referred to as monetary

interest. Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is called compensatory

interest.[18] The right to interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which interest is demanded.[19]

Article 1956 of the Civil Code, which refers to monetary interest,[20] specifically mandates that no interest shall be

due unless it has been expressly stipulated in writing.As can be gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is required for the payment of monetary interest. Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited by law.[21]

It appears that petitioner and respondent did not agree on the payment of interest for the loan. Neither was there

convincing proof of written agreement between the two regarding the payment of interest. Respondent testified that although she accepted petitioners offer of loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on the loan.[22]

Petitioner presented a handwritten promissory note dated 12 September 1994[23] wherein respondent purportedly

admitted owing petitioner capital and interest.Respondent, however, explained that it was petitioner who made a promissory note and she was told to copy it in her own handwriting; that all her transactions with the PNO were subject to the approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she would not pay interest; that being unaware of the law on interest and fearing that petitioner would make good of his threats if she would not obey his instruction to copy the promissory note, she copied the promissory note in her own handwriting; and that such was the same promissory note presented by petitioner as alleged proof of their written agreement on interest.[24] Petitioner did not rebut the foregoing testimony. It is evident that respondent did not really consent to the payment of interest for the loan and that she was merely tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that such promissory note pertains to an express stipulation of interest or written agreement of interest on the loan between petitioner and respondent.

Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and respondent agreed

on the payment of 7% rate of interest on the loan; that the agreed 7% rate of interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission by respondent, the RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil Code should not be absolute, and an exception to the application of such provision should be made when the borrower admits that a specific rate of interest was agreed upon as in the present case; and that it would be unfair to allow respondent to pay only the loan when the latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan.[25]

We have carefully examined the RTC Decision and found that the RTC did not make a ruling therein that petitioner

and respondent agreed on the payment of interest at the rate of 7% for the loan. The RTC clearly stated that although petitioner and respondent entered into a valid oral contract of loan amounting to P540,000.00, they, nonetheless, never intended the payment of interest thereon.[26] While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling that petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider this as merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to the payment of interest on the loan. The rule is that factual findings of the trial court deserve great weight and respect especially when affirmed by the appellate court.[27] We found no compelling reason to disturb the ruling of both courts.

Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases that they had agreed

on the payment of interest at the rate of 7% deserves scant consideration. In the said case, respondent merely testified that after paying the total amount of loan, petitioner ordered her to pay interest.[28] Respondent did not categorically declare in the same case that she and respondent made an express stipulation in writing as regards payment of interest at the rate of 7%. As earlier discussed, monetary interest is due only if there was an express stipulation in writing for the payment of interest.

There are instances in which an interest may be imposed even in the absence of express stipulation, verbal or

written, regarding payment of interest. Article 2209 of the Civil Code states that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent on this point.

All the same, the interest under these two instances may be imposed only as a penalty or damages for breach of

contractual obligations. It cannot be charged as a compensation for the use or forbearance of money. In other words, the

two instances apply only to compensatory interest and not to monetary interest.[29] The case at bar involves petitioners claim for monetary interest.

Further, said compensatory interest is not chargeable in the instant case because it was not duly proven that

respondent defaulted in paying the loan. Also, as earlier found, no interest was due on the loan because there was no written agreement as regards payment of interest.

Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does not apply to the

instant case. Thus, he cannot be compelled to return the alleged excess amount paid by respondent as interest.[30] Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation

therefor, the provisions of the Civil Code concerning solutioindebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another.[31] The principle of solutio indebiti applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause.[32] We have held that the principle of solutio indebiti applies in case of erroneous payment of undue interest.[33]

It was duly established that respondent paid interest to petitioner. Respondent was under no duty to make such

payment because there was no express stipulation in writing to that effect. There was no binding relation between petitioner and respondent as regards the payment of interest. The payment was clearly a mistake. Since petitioner received something when there was no right to demand it, he has an obligation to return it.

We shall now determine the propriety of the monetary award and damages imposed by the RTC and the Court of

Appeals. Records show that respondent received a loan amounting to P540,000.00 from petitioner.[34] Respondent issued

two checks with a total worth of P700,000.00 in favor of petitioner as payment of the loan.[35] These checks were subsequently encashed by petitioner.[36] Obviously, there was an excess of P160,000.00 in the payment for the loan.Petitioner claims that the excess of P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two checks, respondent also paid cash in the total amount of P175,000.00 to petitioner as interest.[37] Although no receipts reflecting the same were presented because petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his Reply-Affidavit[38] in the Batas Pambansa Blg. 22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two checks. Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a relevant fact may be given in evidence against him. Aside from the amounts of P160,000.00 and P175,000.00 paid as interest, no other proof of additional payment as interest was presented by respondent. Since we have previously found that petitioner is not entitled to payment of interest and that the principle of solutio indebiti applies to the instant case, petitioner should return to respondent the excess amount ofP160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable amount to respondent fixed by the RTC and the Court of Appeals should be reduced from P660,000.00 to P335,000.00.

As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg. 22 against

respondent. In the said cases, the MeTC found respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondents conviction therein does not affect our ruling in the instant case. The two checks, subject matter of this case, totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of loan, were not among the five checks found to be dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest which the latter paid to petitioner.[39]

Article 2217 of the Civil Code provides that moral damages may be recovered if the party underwent physical

suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Respondent testified that she experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid as interest despite her repeated demands. Hence, the award of moral damages is justified. However, its corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment of damages is left to the discretion of the court according to the circumstances of each case. This discretion is limited by the principle that the amount awarded should not be palpably excessive as to indicate that it was the result of prejudice or corruption on the part of the trial

court.[40] To our mind, the amount of P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury suffered by respondent.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti, exemplary damages may be

imposed if the defendant acted in an oppressive manner.Petitioner acted oppressively when he pestered respondent to pay interest and threatened to block her transactions with the PNO if she would not pay interest. This forced respondent to pay interest despite lack of agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00 imposed as exemplary damages by the RTC and the Court is fitting so as to deter petitioner and other lenders from committing similar and other serious wrongdoings.[41]

Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual, legal or equitable

justification for awarding the same.[42] In the case under consideration, the RTC stated in its Decision that the award of attorneys fees equivalent to 25% of the amount paid as interest by respondent to petitioner is reasonable and moderate considering the extent of work rendered by respondents lawyer in the instant case and the fact that it dragged on for several years.[43] Further, respondent testified that she agreed to compensate her lawyer handling the instant case such amount.[44] The award, therefore, of attorneys fees and its amount equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.

Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount refundable to

respondent computed from 3 March 1998 until its full payment. This is erroneous. We held in Eastern Shipping Lines, Inc. v. Court of Appeals,[45] that 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 rate of 6% per annum. We further declared that when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed equivalent to a forbearance of credit.

In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and not from a loan or

forbearance of money. Thus, an interest of 6% per annum should be imposed on the amount to be refunded as well as on the damages awarded and on the attorneys fees, to be computed from the time of the extra-judicial demand on 3 March 1998,[46] up to the finality of this Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up to its satisfaction.

WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16 December 2005, is

hereby AFFIRMED with the followingMODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up to its satisfaction. Costs against petitioner.

SO ORDERED.

SPOUSES IGNACIO F. JUICO and ALICE P. JUICO vs. CHINA BANKING CORPORATION G.R. No. 187678, April 10, 2013

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the February 20, 2009 Decision1 and April 27, 2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 147.

The factual antecedents:

Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation (respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507-001051-34and 507-001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-412086 of the Register of Deeds of Quezon City.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the outstanding balance with accrued monthly interests. On September 5, 2000, petitioners received respondent’s last demand letter7 dated August 29, 2000.

As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63 representing the principal, interests, penalties and attorney’s fees. On the same day, the mortgaged property was sold at public auction, with respondent as highest bidder for the amount of P10,300,000.

On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the payment ofP8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent filed a collection suit in the trial court. In its Complaint,10respondent prayed that judgment be rendered ordering the petitioners to pay jointly and severally: (1)P8,901,776.63 representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of suit.

In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and affirmative defense, that the complaint states no cause of action considering that the principal of the loan was already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000. Petitioners contended that should they be held liable for any deficiency, it should be only for P55,000 representing the difference between the total outstanding obligation of P10,355,000 and the bid price of P10,300,000. Petitioners also argued that even assuming there is a cause of action, such deficiency cannot be enforced by respondent because it consists only of the penalty and/or compounded interest on the accrued interest which is generally not favored under the Civil Code. By way of counterclaim, petitioners prayed that respondent be ordered to pay P100,000 in attorney’s fees and costs of suit.

At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She testified that she handled the account of petitioners and assisted them in processing their loan application. She called them monthly to inform them of the prevailing rates to be used in computing interest due on their loan. As of the date of the public auction, petitioners’ outstanding balance was P19,201,776.6312 based on the following statement of account which she prepared:

STATEMENT OF ACCOUNT As of FEBRUARY 23, 2001

IGNACIO F. JUICO

PN# 507-0010520 due on 04-07-2004

1âwphi1

Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on P4,139,000.00 fr. 04-Nov-99

04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96

Interest on P4,139,000.00 fr. 04-Nov-2000

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99

Interest on P4,139,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27

Interest on P4,139,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64

Interest on P4,139,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86

Penalty charge @ 1/10 of 1% of the total amount due (P4,139,000.00 from 11-04-99 to 02-23-2001 @ 1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00

Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73

PN# 507-0010513 due on 04-07-2004 Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00

Interest on P6,216,000.00 fr. 06-Oct-99 04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62

Interest on P6,216,000.00 fr. 04-Nov-2000 04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51

Interest on P6,216,000.00 fr. 04-Dec-2000 04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86

Interest on P6,216,000.00 fr. 04-Jan-2001 04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18

Interest on P6,216,000.00 fr. 04-Feb-2001 23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07

Penalty charge @ 1/10 of 1% of the total amount due (P6,216,000.00 from 10-06-99 to 02-23-2001 @ 1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00

Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.2

3

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.9

6

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39) 17,456,160.5

7

Add: 10% Attorney’s Fee 1,745,616.06

Total amount due 19,201,776.6

3

Less: Bid Price 10,300,000.0

0

TOTAL DEFICIENCY AMOUNT AS OF FEB. 23, 2001 8,901,776.63 13

Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondent’s counsel for the deficiency amount of P8,901,776.63. Ms. Yu further testified that based on the Statement of Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners was P15,190,961.48.16

On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly before their account becomes past due. When asked if there was any written authority from petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing rate.17

Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank promissory note and was informed that the interest rate on the loan will be based on prevailing market rates. Every month, respondent informs him by telephone of the prevailing interest rate. At first, he was able to pay his monthly amortizations but when he started to incur delay in his payments due to the financial crisis, respondent pressured him to pay in full, including charges and interests for the delay. His property was eventually foreclosed and was sold at public auction.18

On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the business of distributing medical supplies. He admitted having read the promissory notes and that he is aware of his obligation under them before he signed the same.19

In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:

WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered ordering herein defendants to pay jointly and severally to plaintiff, the following:

1. P8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest thereon at the legal rate after February 23, 2001;

2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there being stipulation therefor in the promissory notes;

3. Costs of suit.

SO ORDERED.20

The trial court agreed with respondent that when the mortgaged property was sold at public auction on February 23, 2001 for P10,300,000 there remained a balance of P8,901,776.63 since before foreclosure, the total amount due on the two promissory notes aggregated to P19,201,776.63 inclusive of principal, interests, penalties and attorney’s fees. It ruled that the amount realized at the auction sale was applied to the interest, conformably with Article 1253 of the Civil Code which provides that if the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. This being the case, petitioners’ principal obligation subsists but at a reduced amount of P8,901,776.63.

The trial court further held that Ignacio’s claim that he signed the promissory notes in blank cannot negate or mitigate his liability since he admitted reading the promissory notes before signing them. It also ruled that considering the substantial amount involved, it is unbelievable that petitioners threw all caution to the wind and simply signed the documents without reading and understanding the contents thereof. It noted that the promissory notes, including the terms and conditions, are pro forma and what appears to have been left in blank were the promissory note number, date of the instrument, due date, amount of loan, and condition that interest will be at the prevailing rates. All of these details, the trial court added, were within the knowledge of the petitioners.

When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA recognized respondent’s right to claim the deficiency from the debtor where the proceeds of the sale in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it found as valid the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that the parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered daily by all commercial banks as approved by the Monetary Board. Having signed the promissory notes, the CA ruled that petitioners are bound by the stipulations contained therein.

Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon them by respondent are valid. Petitioners contend that the interest rates imposed by respondent are not valid as they were not by

virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any regulation that was passed by an appropriate government entity. They insist that the interest rates were unilaterally imposed by the bank and thus violate the principle of mutuality of contracts. They argue that the escalation clause in the promissory notes does not give respondent the unbridled authority to increase the interest rate unilaterally. Any change must be mutually agreed upon.

Respondent, for its part, points out that petitioners failed to show that their case falls under any of the exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that an inquiry as to whether the interest rates imposed on the loans of petitioners were supported by appropriate regulations from a government agency or the Central Bank requires a reevaluation of the evidence on records. Thus, the Court would in effect, be confronted with a factual and not a legal issue.

The appeal is partly meritorious.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless it has been expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.21

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts.22 Hence, such stipulations are not void per se.23

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts.24 Thus, this Court has previously nullified the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in loan contracts.25

In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause stated: "I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan." While escalation clauses in general are considered valid, we ruled that Banco Filipino may not increase the interest on respondent borrower’s loan, pursuant to Circular No. 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law although it has the force and effect of law and the escalation clause has no provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board" (de-escalation clause).

Subsequently, in Insular Bank of Asia and America v. Spouses Salazar27 we reiterated that escalation clauses are valid stipulations but their enforceability are subject to certain conditions. The increase of interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks and non-banks performing quasi-banking functions.

In the 1991 case of Philippine National Bank v. Court of Appeals,28 the promissory notes authorized PNB to increase the stipulated interest per annum "within the limits allowed by law at any time depending on whatever policy PNB may adopt in the future; Provided, that, the interest rate on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts.29

A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided that "PNB reserves the right to increase the interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the Monetary Board x x x".

Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest rate at any time without notice, within the limits allowed by law. The Court observed that there was no attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the interest rate. The borrower’s assent to the increases cannot be implied from their lack of response to the letters sent by PNB, informing them of the increases.31

In the more recent case of Philippine Savings Bank v. Castillo,32 we sustained the CA in declaring as unreasonable the following escalation clause: "The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its extensions, renewals or other modifications, may be increased, decreased or otherwise changed from time to time within the rate of interest and charges allowed under present or future law(s) and/or government regulation(s) as the PSBank may prescribe for its debtors." Clearly, the increase or decrease of interest rates under such clause hinges solely on the discretion of petitioner as it does not require the conformity of the maker before a new interest rate could be enforced. We also said that respondents’ assent to the modifications in the interest rates cannot be implied from their lack of response to the memos sent by petitioner, informing them of the amendments, nor from the letters requesting for reduction of the rates. Thus:

… the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates. The adjustment should have still been subjected to the mutual agreement of the contracting parties. In light of the absence of consent on the part of respondents to the modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan agreement.33

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly would completely take away from the debtors the right to assent to an important modification in their agreement and would also negate the element of mutuality in their contracts.34 While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets."35

The two promissory notes signed by petitioners provide:

I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest rate/service charge presently stipulated in this note without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by the Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service charge.36

Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust Company37 where this Court ruled:

The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the contract.38

More recently in Solidbank Corporation v. Permanent Homes, Incorporated,39 we upheld as valid an escalation clause which required a written notice to and conformity by the borrower to the increased interest rate. Thus:

The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the borrower should agree on the imposed rate, and such imposed rate should be in writing.

The three promissory notes between Solidbank and Permanent all contain the following provisions:

"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with Solidbank belonging to any one of us. The adjustment

of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.

6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment."

The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of the interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent," emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates. (Emphasis supplied.)

In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored the fact that there was actually no fixed rate of interest stipulated in the promissory notes as this was made dependent on prevailing rates in the market. The subject promissory notes contained the following condition written after the first paragraph:

With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on the second year. Interest at the prevailing rates payable quarterly in arrears.40

In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in ruling for the validity of the escalation clause in the Cardholder’s Agreement. On petitioner’s contention that the interest rate was unilaterally imposed and based on the standards and rate formulated solely by respondent credit card company, we held:

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

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

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

Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market rates is beyond the control of private respondent.42 (Emphasis supplied.)

In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in their entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.43

Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should be read together with the statement after the first paragraph where no rate of interest was fixed as it would be based on prevailing market rates. While the latter is not strictly an escalation clause, its clear import was that interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the interest on petitioners’ loan, including any upward or downward adjustment, to be determined by the prevailing market rates and not dictated by respondent’s policy. It may also be mentioned that since the deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy.44

There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted having understood his obligations before signing them. At no time did petitioners protest the new rates imposed on their loan even when their property was foreclosed by respondent.

This notwithstanding, we hold that the escalation clause is still void because it grants respondent the power to impose an increased rate of interest without a written notice to petitioners and their written consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the new imposed interest with corresponding computation of the total debt should have been provided by the respondent to enable petitioners to make an informed decision. An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality.45

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding effect.46 In the absence of consent on the part of the petitioners to the modifications in the interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the rate charged for the first year.

Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligation under the two promissory notes which they failed to settle is P10,355,000. However, due to China Bank’s unilateral increases in the interest rates from 15% to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to P19,201,776.63. Note that the original amount of principal loan almost doubled in only 16 months. The Court also finds the penalty charges imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum.1âwphi1

Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings, should thus be modified as follows:

Principal P10,355,000.00

Interest at 15% per annum P10,355,000 x .15 x 477 days/365 days 2,029,863.70

Penalty at 12% per annum 1,623 ,890. 96

P10,355,000 x .12 x 477days/365 days

Sub-Total 14,008,754.66

Less: A/P applied to balance of principal (55,000.00)

Less: Accounts payable L & D (261,149.39)

13,692,605.27

Add: Attorney's Fees 1,369,260.53

Total Amount Due 15,061,865.79

Less: Bid Price 10,300,000.00

TOTAL DEFICIENCY AMOUNT

4,761,865.79

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 · Decision and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338 are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent China Banking Corporation P4, 7 61 ,865. 79 representing the amount of deficiency inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12% per annum, reckoned from the time of the filing of the complaint until its full satisfaction.

No pronouncement as to costs.

SO ORDERED.

EASTERN SHIPPING LINES, INC. vs. HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., (G.R. No. 97412 July 12, 1994, EN BANC)

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey." Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all the rights of action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

Defendants filed their respective answers, traversing the material allegations of the complaint contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in good order from the vessel unto the custody of Metro Port Service so that any damage/losses incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already in damage and bad order condition when received by it, but nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two drums were shipped in good order and condition, as clearly shown by the Bill of Lading and Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact. Net unrecovered spillages was 15 kgs. The report went on to state that when the drums reached the consignee, one drum was found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred before the shipment reached the consignee while under the successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded and stored in transit in the warehouse of the carrier at the place of destination, until the consignee has been advised and has had reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

1. The amount of P19,032.95, with the present legal interest of 12% per annum from October 1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is correct. As there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its failure to observe that diligence, and there need not be an express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article 1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum,thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between the consignee and the common carrier is similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and to deliver them in good condition to the consignee, such responsibility also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28 December 1962 until full payment thereof. The appellants then assailed,inter alia, the award of legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29, 1956, if the suit were for damages, "unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v. Guzman, 38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate court's decision became final, the case was remanded to the lower court for execution, and this was when the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank Circular No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular shall take effect immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court 6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with, nor

involving loans or forbearance of any money, goods or credits does not fall within the coverage of the said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action for Damages for injury to persons and loss of property and does not involve any loan, much less forbearances of any money, goods or credits. As correctly argued by the private respondents, the law applicable to the said case is Article 2209 of the New Civil Code which reads —

Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The case was for damages occasioned by an injury to person and loss of property. The trial court awarded private respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court 8 modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully paid.

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from the collapse of a building, ordered, inter alia, the "defendant United Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, we deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%) per cent per annum imposed on the total amount of the monetary award was in contravention of law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit; and (3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum, from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing the right of the private respondent to recover damages, held the award, however, for moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory damages, with interest at the legal rate from the date of the filing of the complaint until fully paid(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial court, and an entry of judgment was made. The writ of execution issued by the trial court directed that only compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said order. This Court said:

. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate"from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but expropriation of certain parcels of land for a public purpose, the payment of which is without stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity for damages. The legal interest required to be paid on the amount of just compensation for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court sought to be enforced in this case is interest by way of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz(1986), Florendo v. Ruiz (1989) and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v.Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a consistent holding

that the Central Bank Circular imposing the 12% interest per annum applies only to loans or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6% interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.

The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second group" varied on the commencement of the running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment amount is paid.

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

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment thereof.

SO ORDERED.

Footnotes:

1 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

16 Black's Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth, 22 Wash. 2d 378, 156 P.2d 408, 411 defines the word forbearance, within the context of usury law, as a contractual obligation of lender or creditor to refrain, during given period of time, from requiring borrower or debtor to repay loan or debt then due and payable.

17 In the case of Malayan Insurance, the application of the 6% and 12% interest per annum has no bearing considering that this case was decided upon before the issuance of Circular No. 416 by the Central Bank.

18 Art. 1157. Obligations arise from.

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Qausi-delicts."

19 Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.

20 Art. 2195. The provisions of this Title (on Damages) shall be respectively applicable to all obligations mentioned in article 1157.

21 Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.

22 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.

23 Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

"However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

"In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins."

24 Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract.

Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be adjudicated in the discretion of the court.

25 Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per centper annum.

26 Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the demand can be established with reasonable certainty.

JOCELYN M. TOLEDO vs. MARILOU M. HYDEN (G.R. No. 172139, December 8, 2010, First Division)

It is true that the imposition of an unconscionable rate of interest on a money debt is immoral and unjust and the court may come to the aid of the aggrieved party to that contract. However, before doing so, courts have to consider the settled principle that the law will not relieve a party from the effects of an unwise, foolish or disastrous contract if such party had full awareness of what she was doing.

This Petition for Review on Certiorari1 assails the Decision2 dated August 24, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 79805, which affirmed the Decision dated March 10, 20033 of the Regional Trial Court (RTC), Branch 22, Cebu City in Civil Case No. CEB-22867. Also assailed is the

Resolution dated March 8, 2006 denying the motion for reconsideration.

Factual Antecedents

Petitioner Jocelyn M. Toledo (Jocelyn), who was then the Vice-President of the College Assurance Plan (CAP) Phils., Inc., obtained several loans from respondent Marilou M. Hyden (Marilou). The transactions are briefly summarized below:

1) August 15, 1993 ……… P 30,000.00

with 6% monthly interest 2) April 21, 1994 ……… 100,000.00

3) October 2, 1995 ……… 30,000.00

4) October 9, 1995 ……… 30,000.00

5) May 22, 1997 ……… 100,000.00 with 7% monthly interest

TOTAL AMOUNT OF LOAN ……… P 290,000.00 4

From August 15, 1993 up to December 31, 1997, Jocelyn had been religiously paying Marilou the stipulated monthly interest by issuing checks and depositing sums of money in the bank account of the latter. However, the total principal amount of P290,000.00 remained unpaid. Thus, in April 1998, Marilou visited Jocelyn in her office at CAP in Cebu City and asked Jocelyn and the other employees who were likewise indebted to her to acknowledge their debts. A document entitled "Acknowledgment of Debt"5 for the amount of P290,000.00 was signed by Jocelyn with two of her subordinates as witnesses. The said amount represents the principal consolidated amount of the aforementioned previous debts due on December 25, 1998. Also on said occasion, Jocelyn issued five checks to Marilou representing renewal payment of her five previous loans, viz:

Check No. 0010761 dated September 2, 1998 . . . . . . . . . P 30,000.00

Check No. 0010762 dated September 9, 1998 . . . . . . . . . 30,000.00

Check No. 0010763 dated September 15, 1998 . . . . . . . . . 30,000.00

Check No. 0010764 dated September 22, 1998 . . . . . . . . . 100,000.00

Check No. 0010765 dated September 25, 1998 . . . . . . . . . 100,000.00

TOTAL P 290,000.00

In June 1998, Jocelyn asked Marilou for the recall of Check No. 0010761 in the amount of P30,000.00 and replaced the same with six checks, in staggered amounts, namely:

Check No. 0010494 dated July 2, 1998 . . . . . . . . . P 6,625.00

Check No. 0010495 dated August 2, 1998 . . . . . . . . . 6,300.00

Check No. 0010496 dated September 2, 1998 . . . . . . . . . 5,975.00

Check No. 0010497 dated October 2, 1998 . . . . . . . . . 6,500.00

Check No. 0010498 dated November 2, 1998 . . . . . . . . . 5,325.00

Check No. 0010499 dated December 2, 1998 . . . . . . . . . 5,000.00

TOTAL P 35,725.00

After honoring Check Nos. 0010494, 0010495 and 0010496, Jocelyn ordered the stop payment on the remaining checks and on October 27, 1998, filed with the RTC of Cebu City a complaint6 against Marilou for Declaration of Nullity and Payment, Annulment, Sum of Money, Injunction and Damages.

Jocelyn averred that Marilou forced, threatened and intimidated her into signing the "Acknowledgment of Debt" and at the same time forced her to issue the seven postdated checks. She claimed that Marilou even threatened to sue her for violation of Batas Pambansa (BP) Blg. 22 or the Bouncing Checks Law if she will not sign the said document and draw the above-mentioned checks. Jocelyn further claimed that the application of her total payment of P528,550.00 to interest alone is illegal, unfounded, unjust, oppressive and contrary to law because there was no written agreement to pay interest.

On November 23, 1998, Marilou filed an Answer7 with Special Affirmative Defenses and Counterclaim alleging that Jocelyn voluntarily obtained the said loans knowing fully well that the interest rate was at 6% to 7% per month. In fact, a 6% to 7% advance interest was already deducted from the loan amount given to Jocelyn.

Ruling of the Regional Trial Court

The court a quo did not find any showing that Jocelyn was forced, threatened, or intimidated in signing the document referred to as "Acknowledgment of Debt" and in issuing the postdated checks. Thus, in its March 10, 2003 Decision the trial court ruled in favor of Marilou, viz:

WHEREFORE, premised on the foregoing, the Court hereby declares the document "Acknowledgment of Debt" valid and binding. PLAINTIFF is indebted to DEFENDANT [for] the amount of TWO HUNDRED NINETY THOUSAND (P290,000.00) PESOS since December 25, 1998 less the amount of EIGHTEEN THOUSAND NINE HUNDRED (P18,900.00) PESOS, equivalent to the three checks made good (P6,625.00 dated 07-02-1998;P6,300.00 dated 08-02-1998; and P5,975.00 dated 09-02-1998).

Consequently, PLAINTIFF is hereby ordered to pay DEFENDANT the amount of TWO HUNDRED SEVENTY ONE THOUSAND ONE HUNDRED (P271,100.00) PESOS due on December 25, 1998 with a 12% interest per annum or 1% interest per month until such time that the said amount shall have been fully paid.

No pronouncement as to costs.

SO ORDERED.8

On March 26, 2003, Jocelyn filed an Earnest Motion for Reconsideration,9 which was denied by the trial court in its Order10 dated April 29, 2003 stating that it finds no sufficient reason to disturb its March 10, 2003 Decision.

Ruling of the Court of Appeals

On appeal, Jocelyn asserts that she had made payments in the total amount of P778,000.00 for a principal amount of loan of only P290,000.00. What is appalling, according to Jocelyn, was that such payments covered only the interest because of the excessive, iniquitous, unconscionable and exorbitant imposition of the 6% to 7% monthly interest.

On August 24, 2005, the CA issued its Decision which provides:

WHEREFORE, premises considered, the Decision dated March 10, 2003 and the Order dated April 29, 2003, of the Regional Trial Court, 7th Judicial Region, Branch 22, Cebu City, in Civil Case No. CEB-22867 are herebyAFFIRMED. No pronouncement as to costs.

SO ORDERED.11

The Motion for Reconsideration12 filed by Jocelyn was denied by the CA through its Resolution13 dated March 8, 2006.

Issues

Hence, this petition raising the following issues:

I.

Whether the CA gravely erred when it held that the imposition of interest at the rate of six percent (6%) to seven percent (7%) is not contrary to law, morals, good customs, public order or public policy.

II.

Whether the CA gravely erred when it failed to declare that the "Acknowledgment of Debt" is an inexistent contract that is void from the very beginning pursuant to Article 1409 of the New Civil Code.

Petitioner’s Arguments

Jocelyn posits that the CA erred when it held that the imposition of interest at the rates of 6% to 7% per month is not contrary to law, not unconscionable and not contrary to morals. She likewise contends that the CA erred in ruling that the "Acknowledgment of Debt" is valid and binding. According to Jocelyn, even assuming that the execution of said document was not attended with force, threat and intimidation, the same must nevertheless be declared null and void for being contrary to law and public policy. This is borne out by the fact that the payments in the total amount of P778,000.00 was applied to interest payment alone. This only proves that the transaction was iniquitous, excessive, oppressive and unconscionable.

Respondent’s Arguments

On the other hand, Marilou would like this Court to consider the fact that the document referred to as "Acknowledgment of Debt" was executed in the safe surroundings of the office of Jocelyn and it was witnessed by two of her staff. If at all there had been coercion, then Jocelyn could have easily prevented her staff from affixing their signatures to said document. In fact, petitioner had admitted that she was the one who went to the tables of her staff to let them sign the said document.

Our Ruling

The petition is without merit.

The 6% to 7% interest per month paid by Jocelyn is not excessive under the circumstances of this case.

In view of Central Bank Circular No. 905 s. 1982, which suspended the Usury Law ceiling on interest effective January 1, 1983, parties to a loan agreement have wide latitude to stipulate interest rates. Nevertheless, such stipulated interest rates may be declared as illegal if the same is unconscionable.14 There is certainly nothing in said circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.15 In fact, in Medel v. Court of Appeals,16 we annulled a stipulated 5.5% per month or 66% per annum interest with additional service charge of 2% per annum and penalty charge of 1% per month on a P500,000.00 loan for being excessive, iniquitous, unconscionable and exorbitant.

In this case, however, we cannot consider the disputed 6% to 7% monthly interest rate to be iniquitous or unconscionable vis-à-vis the principle laid down in Medel. Noteworthy is the fact that in Medel, the defendant-spouses were never able to pay their indebtedness from the very beginning and when their obligations ballooned into a staggering sum, the creditors filed a collection case against them. In this case, there was no urgency of the need for money on the part of Jocelyn, the debtor, which compelled her to enter into said loan transactions. She used the money from the loans to make advance payments for prospective clients of educational plans offered by her employer. In this way, her sales production would increase, thereby entitling her to 50% rebate on her sales. This is the reason why she did not mind the 6% to 7% monthly interest. Notably too, a business transaction of this nature between Jocelyn and Marilou continued for more than five years. Jocelyn religiously paid the agreed amount of interest until she ordered for stop payment on some of the checks issued to Marilou. The checks were in fact sufficiently funded when she ordered the stop payment and then filed a case questioning the imposition of a 6% to 7% interest rate for being allegedly iniquitous or unconscionable and, hence, contrary to morals.

It was clearly shown that before Jocelyn availed of said loans, she knew fully well that the same carried with it an interest rate of 6% to 7% per month, yet she did not complain. In fact, when she availed of said loans, an advance interest of 6% to 7% was already deducted from the loan amount, yet she never uttered a word of protest.

After years of benefiting from the proceeds of the loans bearing an interest rate of 6% to 7% per month and paying for the same, Jocelyn cannot now go to court to have the said interest rate annulled on the ground that it is excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the conscience of man. "This is so because among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he who has done inequity shall not have equity. It signifies that a litigant may be denied relief by a court of equity on the ground that his conduct has been inequitable, unfair and dishonest, or fraudulent, or deceitful as to the controversy in issue." 17

We are convinced that Jocelyn did not come to court for equitable relief with equity or with clean hands. It is patently clear from the above summary of the facts that the conduct of Jocelyn can by no means be characterized as nobly fair, just, and reasonable. This Court likewise notes certain acts of Jocelyn before filing the case with the RTC. In September 1998, she requested Marilou not to deposit her checks as she can cover the checks only the following month. On the next month, Jocelyn again requested for another extension of one month. It turned out that she was only sweet-talking Marilou into believing that she had no money at that time. But as testified by Serapio Romarate,18 an employee of the Bank of Commerce where Jocelyn is one of their clients, there was an available balance of P276,203.03 in the latter’s account and yet she ordered for the stop payments of the seven checks which can actually be covered by the available funds in said account. She then caught Marilou by surprise when she surreptitiously filed a case for declaration of nullity of the document and for damages.

The document "Acknowledgment of Debt" is valid and binding.

Jocelyn seeks for the nullification of the document entitled "Acknowledgment of Debt" and wants this Court to declare that she is no longer indebted to Marilou in the amount of P290,000.00 as she had already paid a total amount of P778,000.00. She claims that said document is an inexistent contract that is void from the very beginning as clearly provided for by Article 140919 of the New Civil Code.

Jocelyn further claims that she signed the said document and issued the seven postdated checks because Marilou threatened to sue her for violation of BP Blg. 22.

Jocelyn is misguided. Even if there was indeed such threat made by Marilou, the same is not considered as threat that would vitiate consent. Article 1335 of the New Civil Code is very specific on this matter. It provides:

Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed.

x x x x

A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. (Emphasis supplied.)

Clearly, we cannot grant Jocelyn the relief she seeks.

As can be seen from the records of the case, Jocelyn has failed to prove her claim that she was made to sign the document "Acknowledgment of Debt" and draw the seven Bank of Commerce checks through force, threat and intimidation. As earlier stressed, said document was signed in the office of Jocelyn, a high ranking executive of CAP, and it was Jocelyn herself who went to the table of her two subordinates to procure their signatures as witnesses to the execution of said document. If indeed, she was forced to sign said document, then Jocelyn should have immediately taken the proper legal remedy. But she did not. Furthermore, it must be noted that after the execution of said document, Jocelyn honored the first three checks before filing the complaint with the RTC. If indeed she was forced she would never have made good on the first three checks.

It is provided, as one of the conclusive presumptions under Rule 131, Section 2(a), of the Rules of Court that, "Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing to be true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it." This is known as the principle of estoppel.

"The essential elements of estoppel are: (1) conduct amounting to false representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation, that this conduct shall be acted upon by, or at least influence, the other party; and, (3) knowledge, actual or constructive, of the real facts."20

Here, it is uncontested that Jocelyn had in fact signed the "Acknowledgment of Debt" in April 1998 and two of her subordinates served as witnesses to its execution, knowing fully well the nature of the contract she was entering into. Next, Jocelyn issued five checks in favor of Marilou representing renewal payment of her loans amounting toP290,000.00. In June 1998, she asked to recall Check No. 0010761 in the amount of P30,000.00 and replaced the same with six checks, in staggered amounts. All these are indicia that Jocelyn treated the "Acknowledgment of Debt" as a valid and binding contract.1avvphi1

More significantly, Jocelyn already availed herself of the benefits of the "Acknowledgment of Debt," the validity of which she now impugns. As aptly found by the RTC and the CA, Jocelyn was making a business out of the loaned amounts. She was actually using the money to make advance payments for her prospective clients so that her sales production would increase. Accordingly, she did not mind the 6% to 7% interest per month as she was getting a 50% rebate on her sales.

Clearly, by her own acts, Jocelyn is estopped from impugning the validity of the "Acknowledgment of Debt." "[A] party to a contract cannot deny the validity thereof after enjoying its benefits without outrage to one’s sense of justice and fairness."21 "It is a long established doctrine that the law does not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with all the required formalities and with full awareness of what she was doing. Courts have no power to relieve parties from obligations voluntarily assumed, simply because their contracts turned out to be disastrous or unwise investments."22

WHEREFORE, the instant petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 79805 dated August 24, 2005 affirming the Decision dated March 10, 2003 of the Regional Trial Court, Branch 22, Cebu City, in Civil Case No. CEB-22867 is AFFIRMED.

SO ORDERED.

SPOUSES MALLARI vs. PRUDENTIAL BANK (now BANK OF THE PHILIPPINE ISLANDS) G.R. No. 197861, June 5, 2013, Third Division

Before us is a Petition for Review on Certiorari under Rule 45, assailing the Decision1 dated June 17, 2010 and the Resolution2 dated July 20, 2011 of the Court of Appeals (CA) in CA-G.R. CV No. 65993.

The antecedent facts are as follows:

On December 11, 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent Prudential Bank-Tarlac Branch (respondent bank), a loan in the amount of P300,000.00 as evidenced by Promissory Note (PN) No. BD 84-055.3 Under the promissory note, the loan was subject to an interest rate of 21% per annum (p.a.), attorney's fees equivalent to 15% of the total amount due but not less than P200.00 and, in case of default, a penalty and collection charges of 12% p.a. of the total amount due. The loan had a maturity date of January 10, 1985, but was renewed up to February 17, 1985. Petitioner Florentino executed a Deed of Assignment4 wherein he authorized the respondent bank to pay his loan with his time deposit with the latter in the amount ofP300,000.00.

On December 22, 1989, petitioners spouses Florentino and Aurea Mallari (petitioners) obtained again from respondent bank another loan of P1.7 million as evidenced by PN No. BDS 606-895 with a maturity date of March 22, 1990. They stipulated that the loan will bear 23% interest p.a., attorney's fees equivalent to 15% p.a. of the total amount due, but not less than P200.00, and penalty and collection charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage6 in favor of respondent bank covering petitioners' property under Transfer Certificate of Title (TCT) No. T-215175 of the Register of Deeds of Tarlac to answer for the said loan.

Petitioners failed to settle their loan obligations with respondent bank, thus, the latter, through its lawyer, sent a demand letter to the former for them to pay their obligations, which when computed up to January 31, 1992, amounted to P571,218.54 for PN No. BD 84-055 and P2,991,294.82 for PN No. BDS 606-89.

On February 25, 1992, respondent bank filed with the Regional Trial Court (RTC) of Tarlac, a petition for the extrajudicial foreclosure of petitioners' mortgaged property for the satisfaction of the latter's obligation ofP1,700,000.00 secured by such mortgage, thus, the auction sale was set by the Provincial Sheriff on April 23, 1992.7

On April 10, 1992, respondent bank's Assistant Manager sent petitioners two (2) separate Statements of Account as of April 23, 1992, i.e., the loan of P300,000.00 was increased to P594,043.54, while the P1,700,000.00 loan was already P3,171,836.18.

On April 20, 1992, petitioners filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction, temporary restraining order and damages claiming, among others, that: (1) the P300,000.00 loan obligation should have been considered paid, because the time deposit with the same amount under Certificate of Time Deposit No. 284051 had already been assigned to respondent bank; (2) respondent bank still added theP300,000.00 loan to the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale; and (3) they realized that there were onerous terms and conditions imposed by respondent bank when it tried to unilaterally increase the charges and interest over and above those stipulated. Petitioners asked the court to restrain respondent bank from proceeding with the scheduled foreclosure sale.

Respondent bank filed its Answer with counterclaim arguing that: (1) the interest rates were clearly provided in the promissory notes, which were used in computing for interest charges; (2) as early as January 1986, petitioners' time deposit was made to apply for the payment of interest of their P300,000.00 loan; and (3) the statement of account as of April 10, 1992 provided for a computation of interest and penalty charges only from May 26, 1989, since the proceeds of petitioners' time deposit was applied to the payment of interest and penalty charges for the preceding period. Respondent bank also claimed that petitioners were fully apprised of the bank's terms and conditions; and that the extrajudicial foreclosure was sought for the satisfaction of the second loan in the amount of P1.7 million covered by PN No. BDS 606-89 and the real estate mortgage, and not the P300,000.00 loan covered by another PN No. 84-055.

In an Order8 dated November 10, 1992, the RTC denied the Application for a Writ of Preliminary Injunction. However, in petitioners' Supplemental Motion for Issuance of a Restraining Order and/or Preliminary Injunction to enjoin respondent bank and the Provincial Sheriff from effecting or conducting the auction sale, the RTC reversed itself and issued the restraining order in its Order9 dated January 14, 1993.

Respondent bank filed its Motion to Lift Restraining Order, which the RTC granted in its Order10 dated March 9, 1993. Respondent bank then proceeded with the extrajudicial foreclosure of the mortgaged property. On July 7, 1993, a Certificate of Sale was issued to respondent bank being the highest bidder in the amount ofP3,500,000.00.

Subsequently, respondent bank filed a Motion to Dismiss Complaint11 for failure to prosecute action for unreasonable length of time to which petitioners filed their Opposition.12 On November 19, 1998, the RTC issued its Order13 denying respondent bank's Motion to Dismiss Complaint.

Trial thereafter ensued. Petitioner Florentino was presented as the lone witness for the plaintiffs. Subsequently, respondent bank filed a Demurrer to Evidence.

On November 15, 1999, the RTC issued its Order14 granting respondent's demurrer to evidence, the dispositive portion of which reads:

WHEREFORE, this case is hereby ordered DISMISSED. Considering there is no evidence of bad faith, the Court need not order the plaintiffs to pay damages under the general concept that there should be no premium on the right to litigate.

NO COSTS.

SO ORDERED.15

The RTC found that as to the P300,000.00 loan, petitioners had assigned petitioner Florentino's time deposit in the amount of P300,000.00 in favor of respondent bank, which maturity coincided with petitioners' loan maturity. Thus, if the loan was unpaid, which was later extended to February 17, 1985, respondent bank should had just applied the time deposit to the loan. However, respondent bank did not, and allowed the loan interest to accumulate reaching the amount of P594,043.54 as of April 10, 1992, hence, the amount of P292,600.00 as penalty charges was unjust and without basis.

As to the P1.7 million loan which petitioners obtained from respondent bank after the P300,000.00 loan, it had reached the amount of P3,171,836.18 per Statement of Account dated April 27, 1993, which was computed based on the 23% interest rate and 12% penalty charge agreed upon by the parties; and that contrary to petitioners' claim, respondent bank did not add the P300,000.00 loan to the P1.7 million loan obligation for purposes of applying the proceeds of the auction sale.

The RTC found no legal basis for petitioners' claim that since the total obligation was P1.7 million and respondent bank's bid price was P3.5 million, the latter should return to petitioners the difference of P1.8 million. It found that since petitioners' obligation had reached P2,991,294.82 as of January 31, 1992, but the certificate of sale was executed by the sheriff only on July 7, 1993, after the restraining order was lifted, the stipulated interest and penalty charges from January 31, 1992 to July 7, 1993 added to the loan already amounted to P3.5 million as of the auction sale.

The RTC found that the 23% interest rate p.a., which was then the prevailing loan rate of interest could not be considered unconscionable, since banks are not hospitable or equitable institutions but are entities formed primarily for profit. It also found that Article 1229 of the Civil Code invoked by petitioners for the reduction of the interest was not applicable, since petitioners had not paid any single centavo of the P1.7 million loan which showed they had not complied with any part of the obligation.

Petitioners appealed the RTC decision to the CA. A Comment was filed by respondent bank and petitioners filed their Reply thereto.

On June 17, 2010, the CA issued its assailed Decision, the dispositive portion of which reads:

WHEREFORE, the instant appeal is hereby DENIED. The Order dated November 15, 1999 issued by the Regional Trial Court (RTC), Branch 64, Tarlac City, in Civil Case No. 7550 is hereby AFFIRMED.16

The CA found that the time deposit of P300,000.00 was equivalent only to the principal amount of the loan ofP300,000.00 and would not be sufficient to cover the interest, penalty, collection charges and attorney's fees agreed upon, thus, in the Statement of Account dated April 10, 1992, the outstanding balance of petitioners' loan was P594,043.54. It also found not persuasive petitioners' claim that the P300,000.00 loan was added to the P1.7 million loan. The CA, likewise, found that the interest rates and penalty charges imposed were not unconscionable and adopted in toto the findings of the RTC on the matter.

Petitioners filed their Motion for Reconsideration, which the CA denied in a Resolution dated July 20, 2011.

Hence, petitioners filed this petition for review arguing that:

THE HON. COURT OF APPEALS ERRED IN AFFIRMING THE ORDER OF THE RTC-BRANCH 64, TARLAC CITY, DATED NOVEMBER 15, 1999, DESPITE THE FACT THAT THE SAME IS CONTRARY TO SETTLED JURISPRUDENCE ON THE MATTER.17

The issue for resolution is whether the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners'P1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the circumstances.

Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such freedom is not absolute. As Article 1306 of the Civil Code provides, "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." Hence, if the stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties. In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on the P1.7 million loan. However, petitioners now contend that the interest rate of 23% p.a. imposed by respondent bank is excessive or unconscionable, invoking our ruling in Medel v. Court of Appeals,18 Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.20

We are not persuaded.

In Medel v. Court of Appeals,21 we found the stipulated interest rate of 66% p.a. or a 5.5% per month on aP500,000.00 loan excessive, unconscionable and exorbitant, hence, contrary to morals if not against the law and declared such stipulation void. In Toring v. Spouses Ganzon-Olan,22 the stipulated interest rates involved were 3% and 3.81% per month on a P10 million loan, which we find under the circumstances excessive and reduced the same to 1% per month. While in Chua v. Timan,23 where the stipulated interest rates were 7% and 5% a month, which are equivalent to 84% and 60% p.a., respectively, we had reduced the same to 1% per month or 12% p.a. We said that we need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable and exorbitant, hence, the stipulation was void for being contrary to morals.24

In this case, the interest rate agreed upon by the parties was only 23% p.a., or less than 2% per month, which are much lower than those interest rates agreed upon by the parties in the above-mentioned cases. Thus, there is no similarity of factual milieu for the application of those cases.

We do not consider the interest rate of 23% p.a. agreed upon by petitioners and respondent bank to be unconscionable.

In Villanueva v. Court of Appeals,25 where the issue raised was whether the 24% p.a. stipulated interest rate is unreasonable under the circumstances, we answered in the negative and held:

In Spouses Zacarias Bacolor and Catherine Bacolor v. Banco Filipino Savings and Mortgage Bank, Dagupan City Branch, this Court held that the interest rate of 24% per annum on a loan of P244,000.00, agreed upon by the parties, may not be considered as unconscionable and excessive. As such, the Court ruled that the borrowers cannot renege on their obligation to comply with what is incumbent upon them under the contract of loan as the said contract is the law between the parties and they are bound by its stipulations.

Also, in Garcia v. Court of Appeals, this Court sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan finding the same to be reasonable and clearly evidenced by the amended credit line agreement entered into by the parties as well as two promissory notes executed by the borrower in favor of the lender.

Based on the above jurisprudence, the Court finds that the 24% per annum interest rate, provided for in the subject mortgage contracts for a loan of P225,000.00, may not be considered unconscionable. Moreover, considering that the mortgage agreement was freely entered into by both parties, the same is the law between them and they are bound to comply with the provisions contained therein.26

Clearly, jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan in this case can by no means be considered excessive or unconscionable.

We also do not find the stipulated 12% p.a. penalty charge excessive or unconscionable.

In Ruiz v. CA,27 we held:

The 1% surcharge on the principal loan for every month of default is valid.1âwphi1 This surcharge or penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest payment. Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the part of an obligor in case of breach of an obligation. The obligor would then be bound to pay the stipulated amount of indemnity without the necessity of proof on the existence and on the measure of damages caused by the breach. x x x28 And in Development Bank of the Philippines v. Family Foods Manufacturing Co., Ltd.,29 we held that:

x x x The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to avoid the payment of the penalty, the debtor has the burden of proving an excuse - the failure of the performance was due to either force majeure or the acts of the creditor himself.30

Here, petitioners defaulted in the payment of their loan obligation with respondent bank and their contract provided for the payment of 12% p.a. penalty charge, and since there was no showing that petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners cannot now back out on their obligation to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations therein.

WHEREFORE, the petition for review is DENIED. The Decision dated June 17, 2010 and the Resolution dated July 20, 2011 of the Court of Appeals are hereby AFFIRMED.

SO ORDERED.

SPOUSES AGNER vs. BPI FAMILY SAVINGS BANK, INC. (G.R. No. 182963, June 3, 2013, Third Division)

This is a petition for review on certiorari assailing the April 30, 2007 Decision1 and May 19, 2008 Resolution2of the Court of Appeals in CAG.R. CV No. 86021, which affirmed the August 11, 2005 Decision3 of the Regional Trial Court, Branch 33, Manila City.

On February 15, 2001, petitioners spouses Deo Agner and Maricon Agner executed a Promissory Note with Chattel Mortgage in favor of Citimotors, Inc. The contract provides, among others, that: for receiving the amount of Php834, 768.00, petitioners shall pay Php 17,391.00 every 15th day of each succeeding month until fully paid; the loan is secured by a 2001 Mitsubishi Adventure Super Sport; and an interest of 6% per month shall be imposed for failure to pay each installment on or before the stated due date.4

On the same day, Citimotors, Inc. assigned all its rights, title and interests in the Promissory Note with Chattel Mortgage to ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31, 2002, likewise assigned the same to respondent BPI Family Savings Bank, Inc.5

For failure to pay four successive installments from May 15, 2002 to August 15, 2002, respondent, through counsel, sent to petitioners a demand letter dated August 29, 2002, declaring the entire obligation as due and demandable and requiring to pay Php576,664.04, or surrender the mortgaged vehicle immediately upon receiving the letter.6 As the demand was left unheeded, respondent filed on October 4, 2002 an action for Replevin and Damages before the Manila Regional Trial Court (RTC).

A writ of replevin was issued.7 Despite this, the subject vehicle was not seized.8 Trial on the merits ensued. On August 11, 2005, the Manila RTC Br. 33 ruled for the respondent and ordered petitioners to jointly and severally pay the amount of Php576,664.04 plus interest at the rate of 72% per annum from August 20, 2002 until fully paid, and the costs of suit.

Petitioners appealed the decision to the Court of Appeals (CA), but the CA affirmed the lower court’s decision and, subsequently, denied the motion for reconsideration; hence, this petition.

Before this Court, petitioners argue that: (1) respondent has no cause of action, because the Deed of Assignment executed in its favor did not specifically mention ABN AMRO’s account receivable from petitioners; (2) petitioners cannot be considered to have defaulted in payment for lack of competent proof that they received the demand letter; and (3) respondent’s remedy of resorting to both actions of replevin and collection of sum of money is contrary to the provision of Article 14849 of the Civil Code and the Elisco Tool Manufacturing Corporation v. Court of Appeals10 ruling.

The contentions are untenable.

With respect to the first issue, it would be sufficient to state that the matter surrounding the Deed of Assignment had already been considered by the trial court and the CA. Likewise, it is an issue of fact that is not a proper subject of a petition for review under Rule 45. An issue is factual when the doubt or difference arises as to the truth or falsehood of alleged facts, or when the query invites calibration of the whole evidence, considering mainly the credibility of witnesses, existence and relevancy of specific surrounding circumstances, their relation to each other and to the whole, and the probabilities of the situation.11 Time and again, We stress that this Court is not a trier of facts and generally does not weigh anew evidence which lower courts have passed upon.

As to the second issue, records bear that both verbal and written demands were in fact made by respondent prior to the institution of the case against petitioners.12 Even assuming, for argument’s sake, that no demand letter was sent by respondent, there is really no need for it because petitioners legally waived the necessity of notice or demand in the Promissory Note with Chattel Mortgage, which they voluntarily and knowingly signed in favor of respondent’s predecessor-in-interest. Said contract expressly stipulates:

In case of my/our failure to pay when due and payable, any sum which I/We are obliged to pay under this note and/or any other obligation which I/We or any of us may now or in the future owe to the holder of this note or to any other party whether as principal or guarantor x x x then the entire sum outstanding under this note shall, without prior notice or demand, immediately become due and payable. (Emphasis and underscoring supplied)

A provision on waiver of notice or demand has been recognized as legal and valid in Bank of the Philippine Islands v. Court of Appeals,13 wherein We held:

The Civil Code in Article 1169 provides that one incurs in delay or is in default from the time the obligor demands the fulfillment of the obligation from the obligee. However, the law expressly provides that demand is not necessary under certain circumstances, and one of these circumstances is when the parties expressly waive demand. Hence, since the co-signors expressly waived demand in the promissory notes, demand was unnecessary for them to be in default.14

Further, the Court even ruled in Navarro v. Escobido15 that prior demand is not a condition precedent to an action for a writ of replevin, since there is nothing in Section 2, Rule 60 of the Rules of Court that requires the applicant to make a demand on the possessor of the property before an action for a writ of replevin could be filed.

Also, petitioners’ representation that they have not received a demand letter is completely inconsequential as the mere act of sending it would suffice. Again, We look into the Promissory Note with Chattel Mortgage, which provides:

All correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or notifications of any judicial or extrajudicial action shall be sent to the MORTGAGOR at the address indicated on this promissory note with chattel mortgage or at the address that may hereafter be given in writing by the MORTGAGOR to the MORTGAGEE or his/its assignee. The mere act of sending any correspondence by mail or by personal delivery to the said address shall be valid and effective notice to the mortgagor for all legal purposes and the fact that any communication is not actually received by the MORTGAGOR or that it has been returned unclaimed to the MORTGAGEE or that no person was found at the address given, or that the address is fictitious or cannot be located shall not excuse or relieve the MORTGAGOR from the effects of such notice.16 (Emphasis and underscoring supplied)

The Court cannot yield to petitioners’ denial in receiving respondent’s demand letter. To note, their postal address evidently remained unchanged from the time they executed the Promissory Note with Chattel Mortgage up to time the case was filed against them. Thus, the presumption that "a letter duly directed and mailed was received in the regular course of the mail"17 stands in the absence of satisfactory proof to the contrary.

Petitioners cannot find succour from Ting v. Court of Appeals18 simply because it pertained to violation of Batas Pambansa Blg. 22 or the Bouncing Checks Law. As a higher quantum of proof – that is, proof beyond reasonable doubt – is required in view of the criminal nature of the case, We found insufficient the mere presentation of a copy of the demand letter allegedly sent through registered mail and its corresponding registry receipt as proof of receiving the notice of dishonor.

Perusing over the records, what is clear is that petitioners did not take advantage of all the opportunities to present their evidence in the proceedings before the courts below. They miserably failed to produce the original cash deposit slips proving payment of the monthly amortizations in question. Not even a photocopy of the alleged proof of payment was appended to their Answer or shown during the trial. Neither have they demonstrated any written requests to respondent to furnish them with official receipts or a statement of account. Worse, petitioners were not able to make a formal offer of evidence considering that they have not marked any documentary evidence during the presentation of Deo Agner’s testimony.19

Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of proving it; the burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment.20 When the creditor is in possession of the document of credit, proof of non-payment is not needed for it is presumed.21 Respondent's possession of the Promissory Note with Chattel Mortgage strongly buttresses its claim that the obligation has not been extinguished. As held in Bank of the Philippine Islands v. Spouses Royeca:22

x x x The creditor's possession of the evidence of debt is proof that the debt has not been discharged by payment. A promissory note in the hands of the creditor is a proof of indebtedness rather than proof of payment. In an action for replevin by a mortgagee, it is prima facie evidence that the promissory note has not been paid. Likewise, an uncanceled mortgage in the possession of the mortgagee gives rise to the presumption that the mortgage debt is unpaid.23

Indeed, when the existence of a debt is fully established by the evidence contained in the record, the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such defense to the claim of the creditor.24 The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment.25

Lastly, there is no violation of Article 1484 of the Civil Code and the Court’s decision in Elisco Tool Manufacturing Corporation v. Court of Appeals.26

In Elisco, petitioner's complaint contained the following prayer:

WHEREFORE, plaintiffs pray that judgment be rendered as follows:

ON THE FIRST CAUSE OF ACTION

Ordering defendant Rolando Lantan to pay the plaintiff the sum of P39,054.86 plus legal interest from the date of demand until the whole obligation is fully paid;

ON THE SECOND CAUSE OF ACTION

To forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle more particularly described in paragraph 3 of the Complaint, from defendant Rolando Lantan and/or defendants Rina Lantan, John Doe, Susan Doe and other person or persons in whose possession the said motor vehicle may be found, complete with accessories and equipment, and direct deliver thereof to plaintiff in accordance with law, and after due hearing to confirm said seizure and plaintiff's possession over the same;

PRAYER COMMON TO ALL CAUSES OF ACTION

1. Ordering the defendant Rolando Lantan to pay the plaintiff an amount equivalent to twenty-five percent (25%) of his outstanding obligation, for and as attorney's fees;

2. Ordering defendants to pay the cost or expenses of collection, repossession, bonding fees and other incidental expenses to be proved during the trial; and

3. Ordering defendants to pay the costs of suit.

Plaintiff also prays for such further reliefs as this Honorable Court may deem just and equitable under the premises.27

The Court therein ruled:

The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise of the others. This limitation applies to contracts purporting to be leases of personal property with option to buy by virtue of Art. 1485. The condition that the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of applying Art. 1485 was fulfilled in this case by the filing by petitioner of the complaint for replevin to recover possession of movable property. By virtue of the writ of seizure issued by the trial court, the deputy sheriff seized the vehicle on August 6, 1986 and thereby deprived private respondents of its use. The car was not returned to private respondent until April 16, 1989, after two (2) years and eight (8) months, upon issuance by the Court of Appeals of a writ of execution.

Petitioner prayed that private respondents be made to pay the sum of P39,054.86, the amount that they were supposed to pay as of May 1986, plus interest at the legal rate. At the same time, it prayed for the issuance of a writ of replevin or the delivery to it of the motor vehicle "complete

with accessories and equipment." In the event the car could not be delivered to petitioner, it was prayed that private respondent Rolando Lantan be made to pay petitioner the amount of P60,000.00, the "estimated actual value" of the car, "plus accrued monthly rentals thereof with interests at the rate of fourteen percent (14%) per annum until fully paid." This prayer of course cannot be granted, even assuming that private respondents have defaulted in the payment of their obligation. This led the trial court to say that petitioner wanted to eat its cake and have it too.28

In contrast, respondent in this case prayed:

(a) Before trial, and upon filing and approval of the bond, to forthwith issue a Writ of Replevin ordering the seizure of the motor vehicle above-described, complete with all its accessories and equipments, together with the Registration Certificate thereof, and direct the delivery thereof to plaintiff in accordance with law and after due hearing, to confirm the said seizure;

(b) Or, in the event that manual delivery of the said motor vehicle cannot be effected to render judgment in favor of plaintiff and against defendant(s) ordering them to pay to plaintiff, jointly and severally, the sum ofP576,664.04 plus interest and/or late payment charges thereon at the rate of 72% per annum from August 20, 2002 until fully paid;

(c) In either case, to order defendant(s) to pay jointly and severally:

(1) the sum of P297,857.54 as attorney’s fees, liquidated damages, bonding fees and other expenses incurred in the seizure of the said motor vehicle; and

(2) the costs of suit.

Plaintiff further prays for such other relief as this Honorable Court may deem just and equitable in the premises.29

Compared with Elisco, the vehicle subject matter of this case was never recovered and delivered to respondent despite the issuance of a writ of replevin. As there was no seizure that transpired, it cannot be said that petitioners were deprived of the use and enjoyment of the mortgaged vehicle or that respondent pursued, commenced or concluded its actual foreclosure. The trial court, therefore, rightfully granted the alternative prayer for sum of money, which is equivalent to the remedy of "exacting fulfillment of the obligation." Certainly, there is no double recovery or unjust enrichment30 to speak of.1âwphi1

All the foregoing notwithstanding, We are of the opinion that the interest of 6% per month should be equitably reduced to one percent (1%) per month or twelve percent (12%) per annum, to be reckoned from May 16, 2002 until full payment and with the remaining outstanding balance of their car loan as of May 15, 2002 as the base amount.

Settled is the principle which this Court has affirmed in a number of cases that stipulated interest rates of three percent (3%) per month and higher are excessive, iniquitous, unconscionable, and exorbitant.31 While Central Bank Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.32 Since the stipulation on the interest rate is void for being contrary to morals, if not against the law, it is as if there was no express contract on said interest rate; thus, the interest rate may be reduced as reason and equity demand.33

WHEREFORE, the petition is DENIED and the Court AFFIRMS WITH MODIFICATION the April 30, 2007 Decision and May 19, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 86021. Petitioners spouses Deo Agner and Maricon Agner are ORDERED to pay, jointly and severally, respondent BPI Family Savings Bank, Inc. ( 1) the remaining outstanding balance of their auto loan obligation as of May 15, 2002 with interest at one percent ( 1 o/o) per month from May 16, 2002 until fully paid; and (2) costs of suit.

SO ORDERED.

*Footnotes:

9 ART. 1484. In a contract of sale of personal property, the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

30 In Cabrera v. Ameco Contractors Rental, Inc. (G.R. No. 201560, June 20, 2012 Second Division Minute Resolution), We held:

The principle of unjust enrichment is provided under Article 22 of the Civil Code which provides: Article 22. Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.

There is unjust enrichment "when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good conscience." The principle of unjust enrichment requires two conditions: (1) that a person is benefited without a valid basis or justification, and (2) that such benefit is derived at the expense of another.

SPOUSES ANDAL vs. PNB (G.R. No. 194201, November 27, 2013, Second Division)

Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to partially set aside the Decision,2 dated 30 March 2010, and the Resolution,3 dated 13 October 2010, of the Court of Appeals (CA) in CA-G.R. CV No. 91250. The challenged Decision dismissed the appeal of herein respondent Philippine National Bank (respondent bank) and affirmed the decision of the Regional Trial Court (RTC), Branch 84, Batangas City with the modification that the interest rate to be applied by respondent bank on the principal loan obligation of petitioners Spouses

ult.

As found by the CA, the facts of this case are as follows:

x x x on September 7, 1995, [petitioners-spouses] obtained a loan from [respondent bank] in the amount ofP21,805,000.00, for which they executed twelve (12) promissory notes x x x [undertaking] to pay [respondent bank] the principal loan with varying interest rates of 17.5% to 27% per interest period. It was agreed upon by the parties that the rate of interest may be increased or decreased for the subsequent interest periods, with prior notice to [petitioners-spouses], in the event of changes in interest rates prescribed by law or the Monetary Board x x x, or in the bank’s overall cost of funds.

To secure the payment of the said loan, [petitioners-spouses] executed in favor of [respondent bank] a real estate mortgage using as collateral five (5) parcels of land including all improvements therein, all situated in Batangas City and covered by Transfer Certificate of Title (TCT) Nos. T-641, T-32037, T-16730, T-31193 and RT 363 (3351) of the Registry of Deeds of Batangas City, in the name of [petitioners-spouses].

Subsequently, [respondent bank] advised [petitioners-spouses] to pay their loan obligation, otherwise the former will declare the latter’s loan due and demandable. On July 17, 2001, [petitioners-spouses] paid P14,800,000.00 to [respondent bank] to avoid foreclosure of the properties subject of the real estate mortgage. Accordingly, [respondent bank] executed a release of real estate mortgage over the parcels of land covered by TCT Nos. T-31193 and RT-363 (3351). However, despite payment x x x, [respondent bank] proceeded to foreclose the real estate mortgage, particularly with respect to the three (3) parcels of land covered by TCT Nos. T-641, T-32037 and T-16730 x x x.

x x x [A] public auction sale of the properties proceeded, with the [respondent bank] emerging as the highest and winning bidder. Accordingly, on August 30, 2002, a certificate of sale of the properties involved was issued. [Respondent bank] consolidated its ownership over the said properties and TCT Nos. T-52889, T-52890, and T-52891 were issued in lieu of the cancelled TCT[s] x x x. This prompted [petitioners-spouses] to file x x x a complaint for annulment of mortgage, sheriff’s certificate of sale, declaration of nullity of the increased interest rates and penalty charges plus damages, with the RTC of Batangas City.

In their amended complaint, [petitioners-spouses] alleged that they tried to religiously pay their loan obligation to [respondent bank], but the exorbitant rate of interest unilaterally determined and imposed by the latter prevented the former from paying their obligation. [Petitioners-spouses] also alleged that they signed the promissory notes in blank, relying on the representation of [respondent bank] that they were merely proforma [sic] bank requirements. Further, [petitioners-spouses] alleged that the unilateral increase of interest rates and exorbitant penalty charges are akin to unjust enrichment at their expense, giving [respondent bank] no right to foreclose their mortgaged properties. x x x.

x x x x

On August 27, 2004 [respondent bank] filed its answer, denying the allegations in the complaint. x x x [respondent bank] alleged that: the penalty charges imposed on the loan was expressly stipulated under the credit agreements and in the promissory notes; although [petitioners-spouses] paid to [respondent bank]P14,800,000.00 on July 10, 2001, the former was still indebted to the latter in the amount of P33,960,633.87; assuming arguendo that the imposition was improper, the foreclosure of the mortgaged properties is in order since [respondent bank’s] bid in the amount of P28,965,100.00 was based on the aggregate appraised rates of the foreclosed properties. x x x4

After trial, the RTC rendered judgment5 in favor of petitioners-spouses and against respondent bank, ordering that:

1. The rate of interest should be reduced as it is hereby reduced to 6% in accordance with Article 2209 of the Civil Code effective the next 30, 31 and 180 days respectively from the date of the twelve (12) promissory notes x x x covered by the real estate x x x mortgages, to be applied on a declining balance of the principal after the partial payments of P14,800,00.00 (paid July 17, 2001) and P2,000,000.006 (payments of P300,000.00 on October 1, 1999, P1,800,000.00 as [of] December 1, 1999, P700,000.00 [on] January 31, 2000) per certification of [respondent bank] to be reckoned at

(sic) the dates the said payments were made, thus the corrected amounts of the liability for principal balance and the said 6% charges per annum shall be the new basis for the [petitioners-spouses] to make payments to the [respondent bank] x x x which shall automatically extinguish and release the mortgage contracts and the outstanding liabilities of the [petitioners-spouses]; [respondent bank] shall then surrender the new transfer certificates of title x x x in its name to the [c]ourt x x x, [c]anceling the penalty charges.

x x x x

3. Declaring as illegal and void the foreclosure sales x x x, the Certificates of Sales and the consolidation of titles of the subject real properties, including the cancellation of the new Transfer Certificates of Title x x x in the name of the [respondent] bank and reinstating Transfer Certificates of Title Nos. T-641, T-32037 and T-16730 in the names of the [petitioners-spouses]; the latter acts to be executed by the Register of Deeds of Batangas City.7

The foregoing disposition of the RTC was based on the following findings of fact:

As of this writing the [respondent] bank have (sic) not complied with the said orders as to the interest rates it had been using on the loan of [petitioners-spouses] and the monthly computation of interest vis a vis (sic) the total shown in the statement of account as of Aug 30, 2002. Such refusal amounts to suppression of evidence thus tending to show that the interest used by the bank was unilaterally increased without the written consent of the [petitioners-spouses]/borrower as required by law and Central Bank Circular No. 1171. The latter circular provides that any increase of interest in a given interest period will have to be expressly agreed to in writing by the borrower. The mortgaged properties were subject of foreclosure and were sold on August 30, 2002 and the [respondent] bank’s statement of account as of August 30, 2002 x x x shows unpaid interest up to July 17, 2001 of P12,695,718.99 without specifying the rate of interest for each interest period of thirty days. Another statement of account of [respondent bank] x x x as [of] the date of foreclosure on August 30, 2002 shows account balance ofP20,505,916.51 with a bid price of P28,965,100.00 and showing an interest of P16,163,281.65. Again, there are no details of the interest used for each interest period from the time these loans were incurred up to the date of foreclosure. These statements of account together with the stated interest and expenses after foreclosure were furnished by the [respondent] bank during the court hearings. The central legal question is that there is no agreement in writing from the [petitioners-spouses]/borrowers for the interest rate for each interest period neither from the data coming from the Central Bank or the cost of money which is understood to mean the interest cost of the bank deposits form the public. Such imposition of the increased interest without the consent of the borrower is null and void pursuant to Article 1956 of the Civil Code and as held in the pronouncement of the Supreme Court in several cases and C.B. Circular No. 1191 that the interest rate for each re-pricing period under the floating rate of interest is subject to mutual agreement in writing. Art. 1956 states that no interest is due unless it has been expressly stipulated and agreed to in writing.

Any stipulation where the fixing of interest rate is the sole prerogative of the creditor/mortgagee, belongs to the class of potestative condition which is null and void under Art. 1308 of the New Civil Code. The fulfillment of a condition cannot be left to the sole will of [one of] the contracting parties.

x x x x

In the instant case, if the interest is declared null and void, the foreclosure sale for a higher amount than what is legally due is likewise null and void because under the Civil Code, a mortgage may be foreclosed only to enforce the fulfillment of the obligation for whose security it was constituted (Art. 2126, Civil Code).

x x x x

Following the declaration of nullity of the stipulation on floating rate of interest since no interest may be collected based on the stipulation that is null and void and legally inexistent and unenforceable. x x x. Since the interest imposed is illegal and void only the rate of 6% interest per month shall be imposed as liquidated damages under Art. 2209 of the Civil Code.

It is worth mentioning that these forms used by the bank are pre- printed forms and therefore contracts of adhesion and x x x any dispute or doubt concerning them shall be resolved in favor of the x x x borrower. This (sic) circumstances tend to support the contention of the [petitioners-spouses] that they were made to sign the real estate mortgages/promissory notes in blank with respect to the interest rates.

x x x x

[Respondent bank has] no right to foreclose [petitioners-spouses’] property and any foreclosure thereof is illegal, unreasonable and void, since [petitioners-spouses] are not and cannot be considered in default for their inability to pay the arbitrarily, illegally, and unconscionably adjusted interest rates and penalty charges unilaterally made and imposed by [respondent] bank.

The [petitioners-spouses] submitted to the court certified copies of the weighted average of Selected Domestic Interest Rates of the local banks obtained from the Bangko Sentral ng Pilipinas Statistical Center and it shows a declining balance of interest rates x x x.

x x x x

There is no showing by the [respondent bank] that any of the foregoing rate was ever used to increase or decrease the interest rates charged upon the [petitioners-spouses’] mortgage loan for the 30 day re- pricing period subsequent to the first 30 days from [the] dates of the promissory notes. These documents submitted being certified public documents are entitled to being taken cognizance of by the court as an aid to its decision making. x x x.8

Respondent bank appealed the above judgment of the trial court to the CA. Its main contention is that the lower court erred in ordering the re-computation of petitioners-spouses’ loans and applying the interest rate of 6% per annum. According to respondent bank, the stipulation on the interest rates of 17.5% to 27%, subject to periodic adjustments, was voluntarily agreed upon by the parties; hence, it was not left to the sole will of respondent bank. Thus, the lower court erred in reducing the interest rate to 6% and in setting aside the penalty charges, as such is contrary to the principle of the obligatory force of contracts under Articles 1315 and 1159 of the Civil Code.9

The CA disposed of the issue in the following manner:

We partly agree with [respondent bank’s] contention.

Settled is the rule that the contracting parties are free to enter into stipulations, clauses, terms and conditions as they may deem convenient, as long as these are not contrary to law, morals, good customs, public order or public policy. Pursuant to Article 1159 of the Civil Code, these obligations arising from such contracts have the force of law between the parties and should be complied with in good faith. x x x.

x x x x

In the case at bar, [respondent bank] and [petitioners-spouses] expressly stipulated in the promissory notes the rate of interest to be applied to the loan obtained by the latter from the former, x x x.

x x x x

[Respondent bank] insists that [petitioner-spouses] agreed to the interest rates stated in the promissory notes since the latter voluntarily signed the same. However, we find more credible and believable the version of [petitioners-spouses] that they were made to sign the said promissory notes in blank with respect to the rate of interest and penalty charges, and subsequently, [respondent] bank filled in the blanks, imposing high interest rate beyond which they were made to understand at the time of the signing of the promissory notes.

x x x x

The signing by [petitioners-spouses] of the promissory notes in blank enabled [respondent] bank to impose interest rates on the loan obligation without prior notice to [petitioners-spouses]. The unilateral determination and imposition of interest rates by [respondent] bank without [petitioners-spouses’] assent is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code x x x.

x x x x

[Respondent bank’s] act converted the loan agreement into a contract of adhesion where the parties do not bargain on equal footing, the weaker party’s participation, herein [petitioners-spouses], being reduced to the alternative to take it or leave it. [Respondent] bank tried to sidestep this issue by averring that [petitioners-spouses], as businessmen, were on equal footing with [respondent bank] as far as the subject loan agreements are concerned. That may be true insofar as

entering into the original loan agreements and mortgage contracts are concerned. However, that does not hold true when it comes to the unilateral determination and imposition of the escalated interest rates imposed by [respondent] bank.

x x x x

The Court further notes that in the case at bar, [respondent] bank imposed different rates in the twelve (12) promissory notes: interest rate of 18% in five (5) promissory notes; 17.5% in two (2) promissory notes; 23% in one (1) promissory note; and 27% in three (3) promissory notes. Obviously, the interest rates are excessive and arbitrary. Thus, the foregoing interest rates imposed on [petitioners-spouses’] loan obligation without their knowledge and consent should be disregarded, not only for being iniquitous and exorbitant, but also for being violative of the principle of mutuality of contracts.

However, we do not agree with the trial court in fixing the rate of interest of 6%. It is well-settled that when an obligation is breached and consists in the payment of a sum of money, i.e., loan or forbearance of money, the interest due shall be that which may have been stipulated in writing. In the absence of stipulation, the rate of interest shall be 12% interest per annum to be computed from default, i.e., from judicial or extra-judicial demand and subject to the provisions of Article 1169 of the Civil Code. Since the interest rates printed in the promissory notes are void for the reasons above-stated, the rate of interest to be applied to the loan should be 12% per annum only.10

The CA, consequently, dismissed respondent bank’s appeal and affirmed the decision of the trial court with the modification that the rate of interest shall be 12% per annum instead of 6%. Respondent bank filed a Motion for Reconsideration of the CA decision. Petitioners-spouses, on the other hand, filed a comment praying for the denial of respondent bank’s motion for reconsideration. They also filed an "Urgent Manifestation"11 calling the attention of the CA to its respective decisions in the cases of Spouses Enrique and Epifania Mercado v. China Banking Corporation, et. al. (CA-GR CV No. 75303)12 and Spouses Bonifacio Caraig and Ligaya Caraig v. The Ex-Officio Sheriff of RTC, Batangas City, et. al. (CA-G.R. CV No. 76029).13

According to petitioners-spouses, in Spouses Mercado v. China Banking, the Special Seventh Division of the CA held that where the interest rate is potestative, the entire interest is null and void and no interest is due.

On the other hand, in the case of Spouses Caraig v. The Ex-Officio Sheriff of RTC, Batangas City, the then Ninth Division of the CA ruled that under the doctrine of operative facts, no interest is due after the auction sale because the loan is paid in kind by the auction sale, and interest shall commence to run again upon finality of the judgment declaring the auction sale null and void.14

The CA denied respondent bank’s Motion for Reconsideration for lack of merit. It likewise found no merit in petitioners-spouses’ contention that no interest is due on their principal loan obligation from the time of foreclosure until finality of the judgment annulling the foreclosure sale. According to the CA:

x x x Notably, this Court disregarded the stipulated rate[s] of interest on the subject promissory notes after finding that the same are iniquitous and exorbitant, and for being violative of the principle of mutuality of contracts. Nevertheless, in Equitable PCI Bank v. Ng Sheung Ngor, the Supreme Court ruled that because the escalation clause was annulled, the principal amount of the loan was subject to the original or stipulated interest rate of interest, and that upon maturity, the amount due was subject to legal interest at the rate of 12% per annum. In this case, while we similarly annulled the escalation clause contained in the promissory notes, this Court opted not to impose the original rates of interest stipulated therein for being excessive, the same being 17.5% to 27% per interest period.

Relevantly, the High Court held in Asian Cathay Finance and Leasing Corporation v. Spouses Cesario Gravador and Norma De Vera, et. al. that stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. x x x. The nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal of the loan. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.

Following the foregoing rulings of the Supreme Court, it is clear that the imposition by this Court of a 12% rate of interest per annum on the principal loan obligation of [petitioners-spouses], computed from the time of default, is proper as it is consistent with prevailing jurisprudence.

While the decisions of the Special Seventh Division and the Ninth Division of this Court in CA-G.R. CV No. 75303 and in CA-G.R. No. 76029 are final and executory, the same merely have persuasive effect but do not outweigh the decisions of the Supreme Court which we are duty-bound to follow, conformably with the principle of stare decisis.

The doctrine of stare decisis enjoins adherence to judicial precedents.1âwphi1 It requires courts in a country to follow the rule established in a decision of the Supreme Court thereof. That decision becomes a judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare decisis is based on the principle that once a question of law has been examined and decided, it should be deemed settled and closed to further argument.15 (Emphasis supplied.)

Petitioners-spouses are now before us, reiterating their position that no interest should be imposed on their loan, following the respective pronouncements of the CA in the Caraig and Mercado Cases. Petitioners-spouses insist that "if the application of the doctrine of operative facts is upheld, as applied in Caraig vs. Alday, x x x, interest in the instant case would be computed only from the finality of judgment declaring the foreclosure sale null and void. If Mercado vs. China Banking Corporation x x x, applying by analogy the rule on void usurious interest to void potestative interest rate, is further sustained, no interest is due when the potestative interest rate stipulation is declared null and void, as in the instant case.16

Our Ruling

We dismiss the appeal.

We cannot subscribe to the contention of petitioners-spouses that no interest should be due on the loan they obtained from respondent bank, or that, at the very least, interest should be computed only from the finality of the judgment declaring the foreclosure sale null and void, on account of the exorbitant rate of interest imposed on their loan.

It is clear from the contract of loan between petitioners-spouses and respondent bank that petitioners-spouses, as borrowers, agreed to the payment of interest on their loan obligation. That the rate of interest was subsequently declared illegal and unconscionable does not entitle petitioners-spouses to stop payment of interest.1âwphi1 It should be emphasized that only the rate of interest was declared void. The stipulation requiring petitioners-spouses to pay interest on their loan remains valid and binding. They are, therefore, liable to pay interest from the time they defaulted in payment until their loan is fully paid.

It is worth mentioning that both the RTC and the CA are one in saying that "[petitioners-spouses] cannot be considered in default for their inability to pay the arbitrary, illegal and unconscionable interest rates and penalty charges unilaterally imposed by [respondent] bank."17 This is precisely the reason why the foreclosure proceedings involving petitioners-spouses’ properties were invalidated. As pointed out by the CA, "since the interest rates are null and void, [respondent] bank has no right to foreclose [petitioners-spouses’] properties and any foreclosure thereof is illegal. x x x. Since there was no default yet, it is premature for [respondent] bank to foreclose the properties subject of the real estate mortgage contract."18

Thus, for the purpose of computing the amount of liability of petitioners-spouses, they are considered in default from the date the Resolution of the Court in G.R. No. 194164 (Philippine National Bank v. Spouses Bayani H. Andal and Gracia G. Andal) – which is the appeal interposed by respondent bank to the Supreme Court from the judgment of the CA – became final and executory. Based on the records of G.R. No. 194164, the Court denied herein respondent bank’s appeal in a Resolution dated 10 January 2011. The Resolution became final and executory on 20 May 2011.19

In addition, pursuant to Circular No. 799, series of 2013, issued by the Office of the Governor of the Bangko Sentral ng Pilipinas on 21 June 2013, and in accordance with the ruling of the Supreme Court in the recent case of Dario Nacar v. Gallery Frames and/or Felipe Bordey, Jr.,20 effective 1 July 2013, 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 an express contract as to such rate of interest, shall be six percent (6%) per annum. Accordingly, the rate of interest of 12% per annum on petitioners-spouses’ obligation shall apply from 20 May 2011 – the date of default – until 30 June 2013 only. From 1 July 2013 until fully paid, the legal rate of 6% per annum shall be applied to petitioners-spouses’ unpaid obligation.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Judgment of the Court of Appeals in CA-G.R. CV No. 91250 is AFFIRMED with the MODIFICATION that the 12% interest per annum shall be applied from the date of default until 30 June 2013 only, after which date and until fully paid, the outstanding obligation of petitioners-spouses shall earn interest at 6% per annum. Let the records of this case be remanded to the trial court for the proper computation of the amount of liability of petitioners Spouses Bayani H. Andal and Gracia G. Andal, in accordance with the pronouncements of the Court herein and with due regard to the payments previously made by petitioners-spouses.

SO ORDERED.

LAND BANK OF THE PHILIPPINES vs. EMMANUEL OÑATE (G.R. No. 192371, January 15, 2014)

This Petition for Review on Certiorari1 assails the December 18, 2009 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 89346, which affirmed with modification the May 31, 2006 Decision3 of the Regional Trial Court (RTC), Branch 141 Makati City. The RTC dismissed the Complaint4 for Sum of Money, which petitioner Land Bank of the Philippines (Land Bank) filed against respondent Emmanuel C. Oñate (Oñate), and ordered Land Bank to return the amount of P1,471,416.52 it unilaterally debited from his accounts. On separate appeals by both parties, the CA affirmed the RTC Decision with modification that Land Bank was further ordered to pay Oñate the sums ofP60,663,488.11 and US$3,210,222.85 representing the undocumented withdrawals and drawings from his trust accounts with 12% per annum interest compounded annually from June 21, 1991 until fully paid.

Also assailed is the CA’s May 27, 2010 Resolution5 denying Land Bank’s Motion for Reconsideration.6

Factual Antecedents

Land Bank is a government financial institution created under Republic Act No. 3844.7 From 1978 to 1980, Oñate opened and maintained seven trust accounts with Land Bank, more particularly described as follows:

Trust Account No. Date Opened Beginning Balance

01-014 09.07.78 P250,000.008

01-017 11.16.78 1,312,896.009

01-024 02.23.79 900,000.0010

01-075 10.08.79 500,000.0011

01-082 10.25.79 200,001.0012

01-089 03.18.80 43.9813

01-125 03.13.80 188,161.0014

Each trust account was covered by an Investment Management Account (IMA) with Full Discretion15 and has a corresponding passbook where deposits and withdrawals were recorded. Pertinent portions common to the IMAs read:

You [Land Bank] are appointed as my agent with full powers and discretion, subject only to the following provisions:

1. You are authorized to hold, invest and reinvest the Fund and keep the same invested, in your sole discretion, without distinction between principal and income, in any assets which you deem advisable, without being restricted to those of the character authorized for fiduciaries under any present or future law.

2. You shall have full power and authority:

(a) to treat all the Fund as one aggregate amount for purposes of investment, and to deposit all or any part thereof with a reputable bank including your own commercial banking department;

(b) to pay all costs, expenses and charges incurred in connection with the administration, preservation, maintenance and protection of the Fund and to charge the same to the Fund;

(c) to vote in person or by proxy on any stocks, bonds or other securities held by you, for my/our account;

(d) to borrow money for the Fund (from your banking department or from others) with or without giving securities from the Fund;

(e) to cause any asset of the Fund to be issued, held or registered in your name or in the name of your nominee, or in such form that title will pass by delivery, provided your records shall indicate the true ownership of such assets;

(f) to hold the Fund in cash and to invest the same in fixed income placements traded and sold by your own Money Market Division; and

(g) to sign all documents pertinent to the transaction which you will make in behalf of this Account.

3. All actions taken by you hereunder shall be for my account and risk. Except for willful default or gross misconduct, you shall not be liable for any loss or depreciation in the value of the assets of the Fund arising from any cause whatsoever.

4. You shall maintain accurate records of all investments, receipts, disbursements and other transactions of the Account. Records relating thereto shall be open at all reasonable times to inspection and audit by me either personally or through duly authorized representatives. Statements consisting of a balance sheet, portfolio analysis, statement of income and expenses, and summary of investment changes are to be sent to me/us quarterly.

I/We shall approve such accounting by delivering in writing to you a statement to that effect or by failure to express objection to such accounting in writing delivered to you within thirty (30) days from my receipt of the accounting.

Upon your receipt of a written approval of the accounting, or upon the passage of said period of time within which objections may be filed, without written objections having been delivered to you, such accounting shall be deemed to be approved, and you shall be released and discharged as to all items, matters and things set forth in such accounting as if such accounting had been settled and allowed by a decree of a court of competent jurisdiction, in an action or proceeding in which you and I were parties.16 (Emphasis supplied)

In a letter17 dated October 8, 1981, however, Land Bank demanded from Oñate the return ofP4 million it claimed to have been inadvertently deposited to Trust Account No. 01-125 as his additional funds but actually represents the total amount of the checks issued to Land Bank by its corporate borrowers as payment for their pre-terminated loans. Oñate refused. To settle the matter, a meeting was held, but the parties failed to reach an agreement. Since then, the issue of "miscrediting" remained unsettled. Then on June 21, 1991, Land Bank unilaterally applied the outstanding balance in all of Oñate’s trust accounts against his resulting indebtedness by reason of the "miscrediting" of funds. Although it exhausted the funds in all of Oñate’s trust accounts, Land Bank was able to debit the amount of P1,528,583.48 only.18

Proceedings before the Regional Trial Court

To recoup the remaining balance of Oñate’s indebtedness, Land Bank filed a Complaint19 for Sum of Money seeking to recover the amount of P8,222,687.8920 plus interest at the legal rate of 12% per annum computed from May 15, 1992 until fully paid. Pertinent portions of Land Bank’s Complaint reads:

5. By virtue of the Deeds of Revocable Trust executed on January 9, 198921 [sic] and February 5, 198922[sic] by Philippine Virginia Tobacco Administration (PVTA) and Philippine Virginia Tobacco Board (PVTB), LANDBANK likewise became a Trustee of certain funds belonging to PVTA and PVTB.

6. As authorized under the [Deeds] of Revocable Trust, on October 10, 1980, LANDBANK invested P4 Million of the trust accounts of PVTA and PVTB, through a direct lending scheme to the following companies:

(a) Republic Telephone Company, Inc. (RETELCO), under Promissory Note No. 1145 dated October 10, 1980, for P1,021,250.00 with maturity date on November 24, 1980, subject to automatic roll-over up to October 10, 1981 at 17% interest per annum.

(b) Philippine Blooming Mills Company, Inc. (PBM), under Promissory Note (unnumbered) dated October 10, 1980, for P1,021,250.00, with maturity date on November 24, 1980, subject to automatic roll-over up to October 10, 1981, at 17% interest per annum;

(c) Cheng Ban Yek (CBY), under Promissory Note (unnumbered) dated October 10, 1980, forP1,023,138.89, with maturity date on November 28, 1980, subject to automatic roll-over up to October 10, 1981, at 17% interest per annum;

(d) Philippine Tobacco Filters Corporation (PHILTOFIL), under Promissory Note (unnumbered) dated October 10, 1980, for P1,021,250.00, with maturity date on November 24, 1980, subject to automatic roll-over up to October 10, 1981, at 17% interest per annum.

x x x x

7. Pursuant to such direct loan transactions granted to the aforementioned companies, LANDBANK issued four (4) cashier’s checks for P1 Million each payable to RETELCO, PBM, CBY, and PHILTOFIL x x x

8. On or about November 24 and 28, 1980, the aforesaid borrowers (RETELCO, PBM, CBY, AND PHILTOFIL), pre-terminated their corresponding loans and paid their respective obligations in the form of checks payable to LANDBANK and delivered by [Oñate’s] representative, Mr. Eduardo Polonio.

9. When the checks were delivered, [Oñate] fraudulently misrepresented to LANDBANK that they were [Oñate’s] additional capital contribution to his personal trust account. On the basis of this misrepresentation, LANDBANK credited the payments made by the aforementioned corporate borrowers to [Oñate’s] Trust Account No. 01-125.

10. After the payments were credited to his personal trust account, Oñate proceeded to withdraw the same, to the damage and prejudice of LANDBANK as the owner thereof.23

In his Answer (With Compulsory Counterclaim),24 Oñate asserted that the setoff was without legal and factual bases. He specifically denied any knowledge or involvement in the transaction between Land Bank and its clients Philippine Virginia Tobacco Administration (PVTA) and Philippine Virginia Tobacco Board (PVTB). He also denied that he made fraudulent misrepresentation to induce the bank to deposit to his Trust Account No. 01-125 as his additional capital the payments allegedly tendered by the bank’s corporate borrowers. He maintained that all the funds in his accounts came from legitimate sources and that he was totally unaware of and had nothing to do with the alleged "miscrediting." While Oñate admitted having received the October 8, 1981 demand letter, he argued that he did not acquiesce thereto and, in fact, disputed the same during a meeting with an officer of Land Bank. He also refuted Land Bank’s claim that it formally demanded for the return of the disputed amount as the September 3, 1991 letter25 it alluded to is not a demand letter. It was sent in response to his counsel’s letter requesting for an accounting of his trust accounts.

By way of compulsory counterclaim, Oñate pointed out that per Balance Sheets26 as of June 30, 1982 the funds in his trust accounts already totaled P35,555,464.78. And as of January 1993, the accumulated balance of his accounts reached P229,222,160.25 and $3,472,683.94 computed as follows:

With interest at the rate of eighteen percent (18%) compounded every ninety (90) days from the third quarter of 1982 to January, 1993, the trustor’s equity of P35,555,464.78 has earned interest in the amount ofP193,666,695.47. Adding the trustor’s equity to the aforesaid accrued interest thereon, [Oñate’s] peso deposits [in] his trust accounts with plaintiff bank have an accumulated balance of P229,222,160.25 as of January 1993 .

But that is not all. [Oñate’s] dollar deposits to Trust Account No. 01-014 (which is for an "Undisclosed Principal") from the period July-September, 1980 alone, already amounted to $1,690,943.78. x x x

With interest at the rate of six percent (6%) compounded every ninety (90) days from the first quarter of 1981, the said dollar deposits have earned interest of $1,781,740.16 up to January, 1993. Thus, [Oñate’s] dollar deposits [in] Trust Account No. 01-014 have an aggregate balance of $3,472,683.94 as of January 1993.27

Hence, even if the amount of P8,222,687.89 as of May 15, 1992 is deducted from the outstanding balance of his trust accounts as of January 1993, the bank still owes him P220,999,472.36 on top of his dollar deposits amounting to $3,472,683.94.

Oñate prayed that a judgment be issued dismissing the Complaint and ordering Land Bank to pay him:

i) The sum of P220,999,472.36, representing the outstanding balance on the peso deposits [of Oñate’s] various trust accounts as of January 1993, with interest thereon from said date at the rate of eighteen percent (18%) compounded every ninety (90) days, until the said amount is fully paid;

ii) The sum of $3,472,683.94, representing the aggregate balance as of January 1993 on [Oñate’s] dollar deposits [in] Trust Account No. 01-014, with interest thereon from said date at the rate of six percent (6%) compounded every ninety (90) days, until the said amount is fully paid;

iii) The sum of P100,000,000.00 as and by way of moral damages;

iv) The sum of P50,000,000.00 as and by way of exemplary damages; and

v) The sum of P15,000,000.00, or 20% of all sums collected, whichever is higher, as and for attorney's fees, the further sum of P3,000.00 as appearance fee for each hearing attended, and such other sums that may be proved during the trial as litigation expenses.28

Upon Oñate’s motion, the RTC issued an Order29 dated May 27, 1994, creating a Board of Commissioners (the Board) for the purpose of examining the records of Oñate’s seven trust accounts, as well as to determine the total amount of deposits, withdrawals, funds invested, earnings, and expenses incurred. It was composed of Atty. Engracio M. Escasinas, the Clerk of Court of the RTC of Makati City, as the Chairman; and, Atty. Ma. Cristina C. Malab and Ms. Adeliza M. Jaranilla representing Land Bank and Oñate, respectively, as members.

Initially, the Board submitted three reports.30 But for clarity, the trial court ordered31 the Board to reconvene and to submit a consolidated report furnishing copies of the same to both parties, who were given 10 days from receipt thereof to file their respective comments thereto. The Board complied and on August 16, 2004 submitted its consolidated report.32 As summarized by the RTC, the said consolidated report revealed that there were undocumented and over withdrawals and drawings33 from Oñate’s trust accounts:

Thus, the Commissioners’ Report showed that the total amount of drawings and withdrawals from each account without withdrawal slips are as follows:

In Trust Account No. 01-014, there was a total withdrawals [sic] without withdrawal slips but reflected in the passbook in the amount of P45,103,297.33 and this account showed a negative balance of P40,367,342.34. On the dollar deposit under the same trust account, there was a total [withdrawal] without withdrawal slips but reflected in the passbook in the amount of $3,210,222.85.

In Trust Account No. 01-017, there was a total withdrawal without withdrawal slips in the amount of P2,682,088.58 and there was an over withdrawal of P11,738,470.53 and $30,000.00.

In Trust Account No. 01-024, there was a total withdrawal without withdrawal slips of P900,000.00 and over withdrawal of P13,310,328.01.

In Trust Account No. 01-075, there was a total withdrawal of P500,000.00 without withdrawal slips and there was a negative balance of P33,342,132.64 and $286,399.34 on the dollar account.

In Trust Account No. 01-082, the total amount of withdrawal without withdrawal slips but reflected in the passbook was P1,782,741.86 and there was an over withdrawal of P14,031.63.

In Trust Account No. 01-089, there was a total withdrawal without withdrawal slips in the amount of P5,054,809.00 but the report indicated that there was a negative balance of P1,296,441.92.

In Trust Account No. 01-125, there was a total withdrawal without withdrawal slips in the amount of P4,640,551.34 and there was a negative balance of P58,327,459.23.34

On even date, the Board also submitted a Manifestation35 informing the RTC that its findings as to the outstanding balance of each trust account may not be accurate considering that it was not given ample opportunity to collate and sort out the documents related to each trust account and that there may have been double take up of accounts since the documents previously reviewed may have been considered again in subsequent reports.

In his Comment,36 Oñate asserted that the undocumented withdrawals mentioned in the consolidated report should not be considered as cash outflows. Rather, they should be treated as unauthorized transactions and the amounts subject thereof must be credited back to his accounts.

Land Bank did not file any comment or objection to the Board’s consolidated comment.

During the pre-trial conference, the parties agreed that they would submit the case for decision based on the reports of the Board after they have submitted their respective memoranda. They also stipulated on the following issues for resolution of the RTC:

1. Whether x x x Oñate could claim on Trust Account Nos. 01-014 and 01-017 which were opened for an undisclosed principal;

2. Whether x x x the undocumented withdrawals and drawings are considered valid and regular and, conversely, if in the negative, whether x x x such amounts shall be credited [back] to the accounts.37

In his Memorandum38 filed on July 12, 2005, Oñate reiterated that Land Bank should be held liable for the undocumented withdrawals and drawings. For its part, Land Bank posited, inter alia, that Trust Account Nos. 01-014 and 01-017 should be excluded from the computation of Oñate’s counterclaim considering his allegation that said accounts are owned by an undisclosed principal whom/which he failed to join as indispensable party. Land Bank further theorized that Oñate must answer for the negative balances as revealed by the Board’s reports.39

Thereafter, the case was submitted for decision.

Ruling of the Regional Trial Court

On May 31, 2006, the RTC rendered a Decision40 dismissing Land Bank’s Complaint for its failure to establish that the amount of P4,086,888.89 allegedly "miscredited" to Oñate’s Trust Account No. 01-125 actually came from the investments of PVTA and PVTB. Hence, the RTC ordered Land Bank to restore the total amount ofP1,471,416.52 which the bank unilaterally debited from Oñate’s five trust accounts.41

With regard to Oñate’s counterclaim for the recovery of P220,999,472.36, as well as the alleged US$3,472,683.94 balance of his dollar deposits in Trust Account No. 01-014, the RTC ruled that under the IMAs, Land Bank had the authority to withdraw funds (as in fact it was at all times in possession of the passbooks) from Oñate’s accounts even without a letter of instruction or withdrawal slip coming from Oñate. It thus gave weight to the entries in the passbooks since the same were made in the ordinary course of business. The RTC also ruled that Oñate is deemed to have approved the entries in the statements of account that were sent to him as he never interposed any objection thereto within the period given him to do so.

Anent Land Bank’s claim for the negative balances, the RTC likewise denied the same for Land Bank never sought them in its Complaint. Moreover, being the manager of the funds and keeper of the records, the RTC held that Land Bank should not have allowed further withdrawals if there were no more funds.

The RTC likewise debunked Land Bank’s argument that Oñate’s counterclaim with respect to Trust Account Nos. 01-014 and 01-017 should be dismissed for his failure to join his undisclosed principal. According to the RTC, Land Bank should have earlier invoked such defense when it filed its answer to the counterclaim. Also, if it is true that said accounts are not owned by Oñate, then the bank had no right to apply the funds in said accounts as payment for the alleged personal indebtedness of Oñate.

The dispositive portion of the RTC’s Decision reads:

WHEREFORE, in view of all the foregoing, decision is hereby rendered dismissing the complaint and ordering [Land Bank] to pay [Oñate] the total amount of P1,471,416.52 representing the total amount of funds debited from the five (5) trust accounts of the defendant with legal rate of interest of 12% per annum, compounded yearly, effective on 21 June 1991 until fully paid.

No pronouncement as to costs.

SO ORDERED.42

Land Bank filed a Motion for Reconsideration.43 In an Order44 dated July 11, 2006, however, the RTC denied the same.

Both parties appealed to the CA.

Ruling of the Court of Appeals

In its December 18, 2009 Decision,45 the CA denied Land Bank’s appeal and granted that of Oñate. The CA affirmed the RTC’s ruling that Land Bank failed to establish the source of the funds it claimed to have been erroneously credited to Oñate’s account. With respect to Oñate’s appeal, the CA agreed that he is entitled to the unaccounted withdrawals which, as found by the Board, stood at P60,663,488.11 and $3,210,222.85.46 The CA’s ruling is anchored on the bank’s failure to observe Sections X401 and X425 of the Bangko Sentral ng Pilipinas Manual of Regulation for Banks (MORB) requiring it to give full disclosure of the services it offered and conduct its dealings with transparency, as well as to render reports that would sufficiently apprise its clients of the significant developments in the administration of their accounts. Aside from allowing undocumented withdrawals, the CA likewise noted that Land Bank failed to keep an accurate record and render an accounting of Oñate’s accounts. For the CA, the entries in the passbooks are not sufficient because they do not specify where the funds withdrawn from Oñate’s accounts were invested.

The dispositive portion of the CA’s Decision reads:

WHEREFORE, the appeal of plaintiff-appellant Land Bank is DENIED.

The appeal of defendant-appellant Emmanuel Oñate is hereby partially GRANTED. Accordingly, the May 31, 2006 Decision of the Regional Trial Court, Branch 141, Makati City is hereby MODIFIED in that, in addition to the previous grant of P1,471,416.52 representing the total amount of funds debited from defendant-appellant Oñate’s trust accounts, plaintiff-appellant Land Bank is hereby ordered to pay defendant-appellant Oñate the sum ofP60,663,488.11 and $3,210,222.85 representing the undocumented withdrawals it debited from the latter’s trust account with interest at the rate of 12% per annum, compounded yearly from June 21, 1991 until fully paid.

SO ORDERED.47

Land Bank filed a Motion for Reconsideration.48 In a Resolution49 dated May 27, 2010, however, the CA denied its motion. Hence, Land Bank filed the instant Petition for Review on

Certiorari based on the following issues:

Issues

1. WHETHER X X X THE ENTRIES IN THE PASSBOOK ISSUED BY LBP IN OÑATE’S TRUST ACCOUNT (EXPRESS TRUST) COVERED BY AN INVESTMENT MANAGEMENT AGREEMENT (IMA) WITH FULL DISCRETION ARE SUFFICIENT TO MEET THE "RULE ON PRESUMPTION OF REGULARITY OF ENTRIES IN THE COURSE OF BUSINESS" PROVIDED FOR UNDER SECTION 43, RULE 130 OF THE RULES OF COURT.

2. WHETHER X X X OÑATE IS ENTITLED TO CLAIM FOR P1,471,416.52 WHICH IS NOT PLEADED AS COUNTERCLAIM IN HIS ANSWER PURSUANT TO SECTION 2, RULE 9 OF THE RULES OF COURT.

3. WHETHER X X X OÑATE IS ENTITLED TO THE AWARD OF P60,663,488.11 AND $3,210,222.85 REPRESENTING THE ALLEGED UNDOCUMENTED WITHDRAWALS DEBITED FROM HIS TRUST ACCOUNTS ON THE GROUND OF LBP’S ALLEGED FAILURE TO MEET THE STANDARDS SET FORTH UNDER THE 2008 MANUAL ON REGULATIONS FOR BANKS (MORB) ISSUED BY BSP.

4. WHETHER X X X OÑATE MAY SUE [ON] TRUST ACCOUNT NOS. 01-014 AND 01-017 OPENED FOR AN UNDISCLOSED PRINCIPAL WITHOUT JOINING HIS UNDISCLOSED PRINCIPAL.

5. WHETHER X X X THE AWARD OF INTEREST TO OÑATE AT THE RATE OF TWELVE PERCENT (12%) PER ANNUM, COMPOUNDED YEARLY FROM JUNE 21, 1991 UNTIL FULLY PAID, IS VIOLATIVE OF ARTICLE 1959 OF THE CIVIL CODE.50

Land Bank’s Arguments

Land Bank disputes the ruling of both lower courts that it failed to prove the fact of "miscrediting" the amount ofP4,086,888.89 to Oñate’s Trust Account No. 01-125 as the deposit slips pertaining thereto were not presented. Land Bank maintains that in trust accounts the passbooks are always in the bank’s possession so that it can record the cash inflows and outflows even without the corresponding deposit or withdrawal slips. Citing Section 43, Rule 130 of the Rules

of Court, it asserts that the entries in the passbooks must be accepted as proof of the regularity of the transactions reflected in the trust accounts, including the "miscrediting" of P4,086,888.89, for they were made in the regular course of business. In addition, said entries are supported by demand letters dated October 8, 198151 and September 3, 1991,52 as well as a Statement of Account53 as of May 15, 1992. Land Bank avers that Oñate never questioned the statements of account and the reports it presented to him and, hence, he is deemed to have approved all of them.

Land Bank also imputes error on the lower courts in ordering the restoration of the amount of P1,471,416.52 it debited from Oñate’s five trust accounts because he never sought it in his Answer.

Petitioner bank vigorously argues that Oñate is not entitled to the undocumented withdrawals amounting toP60,663,488.11 and $3,210,222.85. According to Land Bank, in holding it liable for the said amounts, the CA erroneously relied on the 2008 MORB which was not yet in existence at the time the transactions subject of this case were made or even at the time when Land Bank filed its Complaint. In any case, Land Bank insists that it made proper accounting and apprised Oñate of the status of his investments in accordance with the terms of the IMAs. In its demand letter54 dated September 3, 1991 Land Bank made a full disclosure that the total outstanding balance of all the trust accounts amounted to P1,471,416.52, but that the same was setoff to recoup the "miscredited" funds. It faults Oñate for not interposing any objection as his silence constitutes as his approval after 30 days from receipt thereof. Land Bank asseverates that Oñate could have also inspected and audited the records of his accounts at any reasonable time. But he never did.

Land Bank likewise faults the CA in treating the undocumented withdrawals as unauthorized transactions as the Board’s reports do not state anything to that effect. It claims that the CA’s reliance on the consolidated report in awarding the extremely huge amounts of P60,663,488.11 and $3,210,222.85 is a grievous mistake because the Board itself already manifested that said report "may not be accurate." Consequently too, Land Bank asserts that the reports of the Board cannot prevail over the entries in the passbooks which were made in the regular course of business.

Land Bank further states that as computed by the Board, the amount of negative balances in Oñate’s accounts reached P131,747,487.02 and $818,674.71.55 It thus proposes that if the CA awarded to Oñate the undocumented withdrawals on the basis of the Board’s reports, then it should have also awarded to Land Bank said negative balances or over withdrawals as reflected in the same reports. After all, Oñate admitted in his Answer that all withdrawals from his trust accounts were done in the ordinary course of business.

Furthermore, Land Bank claims that it argued before the CA that Oñate cannot sue on Trust Account Nos. 01-014 and 01-017. While Oñate alleged that said accounts were opened for an undisclosed principal, he did not, however, join as an indispensable party said principal in violation of Section 3, Rule 3 of the Rules of Court.56Unfortunately, the CA sidestepped the issue and proceeded to grant Oñate the unaccounted withdrawals from said accounts in the aggregate amounts of P47,785,385.91 and $3,210,222.85. Following Quilatan v. Heirs of Lorenzo Quilatan,57 Land Bank insists that this case should be remanded to the trial court even if the issue of failure to implead an indispensable party was raised for the first time in a Motion for Reconsideration of the trial court’s Decision.

Finally, Land Bank questions the ruling of the CA imposing 12% per annum rate of interest. It contends that trust accounts are in the nature of "Express Trust" and not in the nature of a regular deposit account where a debtor-creditor relationship exists between the bank and its depositor. It was not indebted to Oñate but merely held and managed his funds. There being no loan or forbearance of money involved, in the absence of stipulation, the applicable rate of interest is only 6% per annum. Land Bank claims that the CA further erred when it compounded the 12% interest even in the absence of any such stipulation.

Oñate’s Arguments

In opposing the Petition, Oñate argues that the issues raised by Land Bank involve factual matters not proper in a petition for review on certiorari. He posits that the Petition does not fall under any of the exceptions where this Court could review factual issues.

As to Land Bank’s allegation that he cannot claim the funds without divulging and impleading as an indispensable party his undisclosed principal, Oñate points out that in his Answer (With Compulsory Counterclaim) he alleged that Trust Account Nos. 01-014 and 01-017 were opened for an "undisclosed principal." Yet Land Bank did not controvert his allegation. It is, therefore, too late in the day for Land Bank to invoke non-joinder of principal as an indispensable party. Besides, when he executed the IMAs, he was acting for himself and on behalf of an undisclosed principal. Hence, he could claim and recover the amounts owing not only to himself but also to his undisclosed principal.

Oñate likewise asserts that Land Bank, as uniformly found by both lower courts, failed to prove by preponderance of evidence the fact of "miscrediting." As to the demand letters adverted to by Land Bank, Oñate asserts that the lower courts did not consider the same because they were not formally offered. Land Bank also failed to present competent and sufficient evidence that he admitted his indebtedness on account of the "miscrediting" of funds. Since Land Bank failed to prove the fact of "miscrediting" it had no right to debit any amount from his accounts and must restore whatever funds it had debited therefrom. Oñate also denies having failed to seek the return of the funds debited from his account.

Oñate further claims that in 1982 his peso trust accounts had a total balance of P35,555,464.78 while the dollar trust accounts had a balance of US$1,690,943.78. Since then, however, he never received any report or update regarding his accounts until the bank sent him financial reports dated June 30, 1991 indicating that the balances of his trust accounts had been unilaterally setoff. According to Oñate, Land Bank’s failure to keep an accurate record of his accounts and to make proper accounting violate several circulars of the Central Bank.58 Hence, it is only proper to require the bank to return the undocumented withdrawals which, as found by the Board, amount toP60,663,488.11 and $3,210,222.82. In addition, Oñate points out Land Bank’s failure to keep an accurate record of his accounts as shown by the huge amounts of unsupported withdrawals and drawings which constitutes willful default if not gross misconduct in violation of the IMAs which, in turn, makes the bank liable for its actions.

Anent Land Bank’s invocation that the entries in the passbook made in the ordinary course of business are presumed correct and regular, Oñate argues that such presumption does not relieve the trustee, Land Bank in this case, from presenting evidence that the undocumented withdrawals and drawings were authorized. In any case, the presumption invoked by Land Bank does not lie as one of its elements – that the entrant must be deceased or unable to testify – is lacking. Land Bank cannot also excuse itself for failing to regularly submit to him accounting reports as, anyway, he was free to inspect the records at any reasonable day. Oñate emphasizes that it is the duty of the bank to keep him updated with significant developments in his accounts.

In refutation of Land Bank’s claim to negative balances and over withdrawals, Oñate posits that the bank cannot benefit from its own negligence in mismanaging the trust accounts.

Lastly, Oñate defends the CA’s grant of 12% per annum rate of interest as under BSP Circular No. 416, said rate shall be applied in cases where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. In any event, Land Bank is estopped from disputing said rate for Land Bank itself applied the same 12% per annum rate of interest when it sought to recover the amount allegedly "miscredited" to his account. As to the compounding of interest, Oñate claims that the parties intended that interest income shall be capitalized and shall form part of the principal.

Our Ruling

We deny the Petition.

The issues raised are factual and do not involve questions of law.

From the very start the issues involved in this case are factual – the very reason why the RTC created a Board of Commissioners to assist it in examining the records pertaining to Oñate’s accounts and determine the respective cash inflows and outflows in said accounts. Thereafter, the parties agreed to submit the case based on the Board’s reports. And when the controversy reached the CA, the appellate court basically conducted an "assiduous assessment of the evidentiary records."59 No question of law was ever raised for determination of the lower courts. Now, Land Bank practically beseeches us to assess the probative weight of the documentary evidence on record to resolve the same basic issues of (i) whether Land Bank "miscredited" P4,086,888.89 to Trust Account No. 01-125 and (ii) "whether x x x the undocumented withdrawals and drawings are considered valid and regular and, conversely, if in the negative, whether x x x such amounts shall be credited to the accounts."60

These issues could be resolved by consulting the evidence extant on records, such as the IMAs, the passbooks, the letters of instructions, withdrawal and deposit slips, statements of account, and the Board’s reports. Land Bank’s heavy reliance on Section 43, Rule 130 of the Rules of Court61 also attests to the factual nature of the issues involved in this case. "Well-settled is the rule that in petitions for review on certiorari under Rule 45, only questions of law can be raised."62 In Velayo-Fong v. Spouses Velayo,63 we defined a question of law as distinguished from a question of fact:

A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts.

For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of whether a question is one of law or of fact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question of law; otherwise, it is a question of fact. (Italics supplied)

While there are recognized exceptions64 to this rule, none exists in this case.

Anent Land Bank’s contention that the determination of whether the CA erred in retroactively applying the 2008 MORB poses a legal question, the same deserves scant consideration. True, the CA included in its ratio decidendi a discussion on the 2008 MORB to give emphasis to the duties of banks to keep an accurate record and regularly apprise their clients of the status of their accounts. But the issue of whether Land Bank failed to comply with those duties can be resolved even without the MORB as the same duties are also imposed on Land Bank by the IMAs, the contract that primarily governs the parties in this case. "As a general rule, a contract is the law between the parties. Thus, ‘from the moment the contract is perfected, the parties are bound not only to the fulfilment of what has been expressly stipulated but also to all consequences which, according to their nature, may be in keeping with good faith, usage and law.’ Also, ‘the stipulations of the contract being the law between the parties, courts have no alternative but to enforce them as they were agreed [upon] and written’ x x x."65

Based on the factual milieu of this case even without touching on the MORB, we found that Land Bank still failed to perform its bounden duties to keep accurate records and render regular accounting. We also found no cogent reason to disturb the other factual findings of the CA.

Land Bank failed to prove that the "miscredited" funds came from the proceeds of the pre-terminated loans of its corporate borrowers.

Land Bank argues that the entries in the passbooks were made in the regular course of business and should be accepted as prima facie evidence of the facts stated therein. But before entries made in the course of business may qualify under the exception to the hearsay rule and given weight, the party offering them must establish that: (1) the person who made those entries is dead, outside the country, or unable to testify; (2) the entries were made at, or near the time of the transaction to which they refer; (3) the entrant was in a position to know the facts stated therein; (4) the entries were made in the professional capacity or in the course of duty of the entrant; and, (5) the entries were made in the ordinary or regular course of business or duty.66

Here, Land Bank has neither identified the persons who made the entries in the passbooks nor established that they are already dead or unable to testify as required by Section 43,67 Rule 130 of the Rules of Court. Also, and as correctly opined by the CA, "[w]hile the deposit entries in the bank’s passbook enjoy a certain degree of presumption of regularity x x x," the same do "not indicate or explain the source of the funds being deposited or withdrawn from an individual account."68 They are mere prima facie proof of what are stated therein – the dates of the transactions, the amounts deposited or withdrawn, and the outstanding balances. They do not establish that the total amount of P4,086,888.89 deposited in Oñate’s Trust Account No. 01-125 in November 1980 came from the proceeds of the pre-terminated loans of Land Bank’s corporate borrowers. It would be too presumptuous to immediately conclude that said amount came from the checks paid to Land Bank by its corporate borrowers just because the maturity dates of the loans coincided with the dates said total amount was deposited. There must be proof showing an unbroken link between the proceeds of the pre-terminated loans and the amount allegedly "miscredited" to Oñate’s Trust Account No. 01-125. As a bank and custodian of records, Land Bank could have easily produced documents showing that its borrowers pre-terminated their loans, the checks they issued as payment for such loans, and the deposit slips used in depositing those checks. But it did not.

Land Bank did not also bother to explain how Oñate or his representative, Eduardo Polonio (Polonio), obtained possession of the checks when, according to it, the corporate borrowers issued the checks in its name as payment for their loans.69 Under paragraph 8 of its Complaint, Land Bank alleged that its corporate borrowers "paid their respective obligations in the form of checks payable to LANDBANK x x x".70 If it is true, then why were the checks credited to Oñate’s account? Unless subsequently endorsed to Oñate, said checks can only be deposited in the account of the payee appearing therein. We cannot thus lend credence to Land Bank’s excuse that the proximate cause of the alleged "miscrediting" was the fraudulent representation of Polonio, for assuming that the latter indeed employed fraudulent machinations, with the degree of prudence expected of banks, Land Bank and its tellers could have easily detected that Oñate was not the intended payee. In Traders Royal Bank v. Radio Philippines Network, Inc.,71 we held that petitioner bank was remiss in its duty and obligation for accepting and paying a check to a person other than the payee appearing

on the face of the check sans valid endorsement. Consequently, it was made liable for its own negligence and in disregarding established banking rules and procedures.

We are also groping in the dark as to the number of checks allegedly deposited by Polonio to Oñate’s Trust Account No. 01-125. According to Land Bank, the entire amount of P4,086,888.89 represents the proceeds of the pre-terminated loans of four of its clients, namely, RETELCO, PBM, CBY and PHILTOFIL. But it could only point to two entries made on two separate dates in the passbook as reproduced below:

Date WITHDRAWAL DEPOSIT BALANCE

x x x x x x P250,704.60

24NOV80 159,000.00 409,704.60

24NOV80 3,063,750.00CK 3,473,454.60

24NOV80 42,000.00 3,431,454.60

25NOV80 275,923.75 CK 3,707,378.35

25NOV 80 1,235,962.00 2,471,416.35

26NOV80 193,800.00 CK 2,665,216.35

26NOV80 250,000.00 CK 2,915,216.35

2,915,216.35

26NOV80 2,915,216.35

321,188.38 CK 3,236,404.73

26NOV80 1,373,167.00 1,863,237.73

27NOV80 1,021,250.00 CK 2,884,487.73

28NOV80 70,833.33 CK 2,955,321.06

27NOV80 919,300.00 2,036,021.06

28NOV80 1,023,138.89 CK 3,059,159.9572

Were there only two checks issued as payment for the separate loans of these four different entities? These hanging questions only confirm the correctness of the lower courts’ uniform conclusion that Land Bank failed to prove that the amount allegedly "miscredited" to Oñate’s account came from the proceeds of the pre-terminated loans of its clients. It is worth emphasizing that in civil cases, the party making the allegations has the burden of proving them by preponderance of evidence. Mere allegation is not sufficient.73

As a consequence of its failure to prove the source of the claimed "miscredited" funds, Land Bank had no right to debit the total amount of P1,471,416.52 and must, therefore, restore the same.

In view of the above, Land Bank’s argument that the lower courts erred in ordering the return of the amount ofP1,471,416.52 it debited from Oñate’s five trust accounts since he did not seek such relief in his Answer as a counterclaim, falls flat on its face. The order to restore the debited amount is consistent with the lower courts’ ruling that Land Bank failed to prove that the amount of P4,086,888.89 was "miscredited" to Oñate’s account and, hence, it had no right to seek reimbursement or debit any amount from his accounts in payment therefor.

Without such right, Land Bank should return the amount of P1,471,416.52 it debited from Oñate’s accounts in its attempt to recoup what it allegedly lost due to "miscrediting." Moreover, contrary to Land Bank’s assertion, Oñate contested the bank’s application of the balance of his trust accounts in payment for the allegedly "miscredited" amount in his Answer (With Compulsory Counterclaim) for being "without any factual and legal [bases]."74

Land Bank was remiss in performing its duties under the IMAs and as a banking institution.

The contractual relation between Land Bank and Oñate in this case is primarily governed by the IMAs. Paragraph 4 thereof expressly imposed on Land Bank the duty to maintain accurate records of all his investments, receipts, disbursements and other transactions relating to his accounts. It also obliged Land Bank to provide Oñate with quarterly balance sheets, statements of income and expenses, summary of investments, etc. Thus:

4. You shall maintain accurate records of all investments, receipts, disbursements and other transactions of the Account. Records relating thereto shall be open at all reasonable times to inspection and audit by me either personally or through duly authorized representatives.

Statements consisting of a balance sheet, portfolio analysis, statement of income and expenses, and summary of investment changes are to be sent to me/us quarterly.

I/We shall approve such accounting by delivering in writing to you a statement to that effect or by failure to express objections to such accounting in writing delivered to you within thirty (30) days from my receipt of the accounting.

Upon your receipt of a written approval of the accounting, or upon the passage of said period of time within which objections may be filed, without written objections having been delivered to you, such accounting shall be deemed to be approved, and you shall be released and discharged as to all items, matters and things set forth in such accounting as if such accounting had been settled and allowed by a decree of a court of competent jurisdiction, in an action or proceeding in which you and I were parties.75 (Emphasis supplied)

These are the obligations of Land Bank which it should have faithfully complied with in good faith.76 Unfortunately, Land Bank failed in its contractual duties to maintain accurate records of all investments and to regularly furnish Oñate with financial statements relating to his accounts. Had Land Bank kept an accurate record there would have been no need for the creation of a Board of Commissioners or at least the latter’s work would have been a lot easier and more accurate. But because of Land Bank’s inefficient record keeping, the Board performed the tedious task of trying to reconcile messy and incomplete records. The lackadaisical attitude of Land Bank in keeping an updated record of Oñate’s accounts is aggravated by its reluctance to accord the Board full and unrestricted access to the records when it was conducting a review of the accounts upon the orders of the trial court. Thus, in its Manifestation77 dated August 16, 2004, the Board informed the trial court that its report pertaining to outstanding balances may not be accurate because "the documents were then in the custody of Land Bank and the documents to be reviewed by the Board at a designated hearing depended on what was released by the then handling lawyer of Land Bank." They were "not given the opportunity to collate/sort-out the documents related to each trust account"78 and "the folders being reviewed contained documents related to different trust accounts."79 As a result, "[t]here may have been double take up of accounts since the documents previously reviewed may have been repeatedly considered in the reports."80

For its failure to faithfully comply with its obligations under the IMAs and for having agreed to submit the case on the basis of the reports of the Board of Commissioners, the latter’s findings are binding on Land Bank.

Because of Land Bank’s failure to keep an updated and accurate record of Oñate’s account, it would have been difficult, if not impossible, to determine with some degree of accuracy the outstanding balances in Oñate’s accounts. Indeed, the creation of a Board of Commissioners was a significant development in this case as it facilitated the examination of the records and helped in the determination of the balances in each of Oñate’s accounts. In a span of four years, the Board held 60 meetings and scoured the voluminous and scattered records of subject accounts. In the course thereof, it found several undocumented withdrawals and over withdrawals. Thereafter, the Board submitted its consolidated report, to which Land Bank did not file its comment despite having been given the opportunity to do so. It did not question the result of the examinations conducted by the Board, particularly the Board’s computation of the outstanding balance in each account, the existence of undocumented and over withdrawals, and how often the bank sent Oñate statements of account. In fact, during the pre-trial conference, Land Bank agreed to submit the case based on the reports of the Board.

Consequently, we found no cogent reason to deviate from the same course taken by the CA – give weight to the consolidated report of the Board and treat it as competent and sufficient evidence of what are stated therein. After all, the dearth of evidentiary documents that could have shed light on the alleged unintended crediting and unexplained withdrawals was brought about by Land Bank’s failure to maintain accurate records as required by the IMAs. In Simex International (Manila), Inc. v. Court of Appeals,81 we elucidated on the nature of banking business and the responsibility of banks:

The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them

with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life’s savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. x x x

The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligations to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. x x x (Emphasis supplied)

As to the conceded inaccuracies in the reports, we cannot allow Land Bank to benefit therefrom. Time and again, we have cautioned banks to spare no effort in ensuring the integrity of the records of its clients.82 And in Philippine National Bank v. Court of Appeals,83 we held that "as between parties where negligence is imputable to one and not to the other, the former must perforce bear the consequences of its neglect." In this case, the Board could have submitted a more accurate report had Land Bank faithfully complied with its duty of maintaining a complete and accurate record of Oñate’s accounts. But the Board could not find and present the corresponding slips for the withdrawals reflected in the passbooks. In addition, and as earlier mentioned, Land Bank was less than cooperative when the Board was examining the records of Oñate’s accounts. It did not give the Board enough leeway to go over the records systematically or in orderly fashion. Hence, we cannot allow Land Bank to benefit from possible inaccuracies in the reports.

Neither does Oñate’s failure to exercise his rights to inspect the records and audit his accounts excuse the bank from sending the required notices, for under the IMAs it behooved upon Land Bank to keep him fully informed of the status of his investments by sending him regular reports and statements. Oñate’s failure to inspect the record of his accounts should neither be construed as his waiver to be furnished with updates on his accounts nor authority for the bank to make undocumented withdrawals. As aptly opined by the CA:

x x x The least that Land Bank could have done was to keep a detailed quarterly report on [its] file. In this case, Land Bank did away with this procedure that made [its] records a complete mess of voluminous and meaningless records of numerous folders containing more than 7,600 leaves/pages and some 90 passbooks, with 1,355 leaves/pages of entries, corresponding to the seven (7) Trust Accounts.

The passbook entries alone are insufficient compliance with Land Bank’s duty to keep "accurate records of all investments, receipts, disbursements and other transactions of the Account." These passbooks do not inform what investments were made on the funds withdrawn. Moreover, these passbook entries do not show if the amounts purported to have been invested were indeed received by the concerned entity, facility, or borrower. From these entries alone, Oñate would have no way of knowing where his money went.84

But Land Bank next postulates that if Oñate is entitled to the undocumented withdrawals on the basis of the reports of the Board, then it should also be entitled to the negative balances or over withdrawals as reflected in the same reports.

We cannot agree for a number of reasons. First, as earlier discussed, Land Bank is guilty of negligence while Oñate (at least insofar as over withdrawals are concerned) is not. Had Land Bank maintained an accurate record, it would have readily detected and prevented over withdrawals. But without any qualms, Land Bank asks for the negative balances, unmindful that such claim is actually detrimental to its cause because it amounts to an admission that it allowed over withdrawals. As aptly observed by the CA:

Corollarily, the Court cannot allow Land Bank to recover the negative balances from Oñate’s trust accounts. Examining the Commissioners’ Report, the Court notes that the funds of Oñate’s trust accounts became seriously depleted due to the unaccounted withdrawals that Land Bank charged against his accounts. At any rate, those negative balances on Oñate’s accounts show Land Bank’s inefficient performance in managing his trust accounts. Reasonable bank practice and prudence [dictate] that Land Bank should not have authorized the withdrawal of various sums from Oñate’s accounts if it would result to overwithdrawals. x x x85

Second, Land Bank never prayed for the recovery of the negative balances in its Complaint.

It is settled that courts cannot grant a relief not prayed for in the pleadings or in excess of what is being sought by the party. x x x Due process considerations require that judgments must conform to and be supported by the pleadings and evidence presented in court. In Development Bank of the Philippines v. Teston,86 this Court expounded that:

Due process considerations justify this requirement. It is improper to enter an order which exceeds the scope of relief sought by the pleadings, absent notice which affords the opposing party an opportunity to be heard with respect to the proposed relief. The fundamental purpose of the requirement that allegations of a complaint must provide the measure of recovery is to prevent surprise to the defendant.87

Last, during the pre-trial conference, the issue of the validity of undocumented withdrawals was properly put into issue. The parties also agreed, as a collateral issue, that should it appear that the bank was not authorized to make the undocumented withdrawals, the next issue for consideration would be whether the amount subject thereof should be credited back to Oñate’s accounts.88 The case of negative balances as alluded to by Land Bank, however, is different. It was never put into issue during the pre-trial conference. In Caltex (Philippines), Inc. v. Court of Appeals,89 we held that "to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal." Land Bank interposed its claim to the negative balances for the first time only when it filed its Memorandum with the RTC.

Land Bank knew from the start and admitted during trial that Trust Account Nos. 01-014 and 01-017 do not belong to Oñate; hence, it should not have debited any amount therefrom to compensate for the alleged personal indebtedness of Oñate.

Land Bank claims that Oñate cannot sue on Trust Account Nos. 01-014 and 01-017 without joining as an indispensable party his undisclosed principal.

But if anyone in this case is guilty of failing to join an indispensable party, it is Land Bank that first committed a violation. The IMAs covering Trust Account Nos. 01-014 and 01-017 attached as Annexes "A"90 and "B,"91respectively, of Land Bank’s Complaint clearly state that Oñate signed the same "FOR: UNDISCLOSED PRINCIPAL." As party to the said IMAs, Land Bank knew and ought not to forget that Oñate is merely an agent and not the owner of the funds in said accounts. Yet Land Bank garnished the total amount of P792,595.25 from Trust Account Nos. 01-014 and 01-017 to answer for the alleged personal indebtedness of Oñate. Worse, when Land Bank filed its Complaint for Sum of Money, it did not implead said undisclosed principal or inform the trial court thereof. Now that Oñate is seeking the restoration of the amounts debited and withdrawn without withdrawal slips from said accounts, Land Bank is invoking the defense of failure to implead an indispensable party. We cannot allow Land Bank to do this. As aptly observed by the trial court:

Under the circumstances obtaining, it is highly unfair, unjust and iniquitous, to dismiss the suit with respect to the two Trust Accounts after [Land Bank] had garnished the balances of said accounts to pay the alleged indebtedness of [Oñate] allegedly incurred by the erroneous crediting of P4 million to x x x Trust Account No. 01-125 which does not appear to be owned by an undisclosed principal. Trust Account No. 01-125 is [Oñate’s] personal trust account with plaintiff. Stated differently, [Land Bank] having now recognized and admitted that Trust Account Nos. 01-014 and 01-017 were not owned by [Oñate], it has perforce no right, nay unlawful for it, to apply the funds in said accounts to pay the alleged indebtedness of [Oñate’s] personal account. Equity and justice so demand that the funds be restored to Trust Account Nos. 01-014 and 01-017.92

Oñate protested the contents of the statements of account at the earliest opportunity.

As to Land Bank’s insistence that Oñate is deemed to have accepted the contents of the statements of account for his failure to manifest his objection thereto within 30 days from receipt thereof, it should be recalled that from the time the alleged "miscrediting" occurred in November 1980, the first communication coming from Land Bank was its letter dated October 8, 1981.93 This, however, was the subject of a failed negotiation between the parties. Besides, said letter can hardly be considered as an statement that would apprise Oñate of the status of his investments. It is not "a balance sheet, portfolio analysis, statement of income and expenses or a summary of investment changes" as contemplated in paragraph 4 of the IMAs. It is a demand letter seeking the return of the alleged "miscredited" amount. The same goes true with Land Bank’s letter dated September 3, 1991. As can be readily seen from its opening paragraph, said letter is in response to Oñate’s "demand" for information regarding the offsetting,94 which Oñate protested and is now one of the issues involved in this case. In fine, it cannot be said that Oñate approved and adopted the outstanding balances in his accounts for his failure to object to the contents of those letters within the 30-day period allotted to him under the IMAs.

From what is available on the voluminous records of this case and as borne out by the Board’s consolidated report dated August 16, 2004, the statements which Land Bank sent to Oñate are only the following:

Based on the Annexes95 attached to Oñate’s Answer (With Compulsory Counterclaim)

ITF No. Balance Sheet As of

Total Liabilities and Trustor’s Equity

01-014 June 30, 1982 P1,909,349.80

01-017 June 30, 1982 6,003,616.35

01-089 June 30, 1982 551,267.24

01-082 June 30, 1982 1,915.28

01-075 June 30, 1982 12,113,262.95

01-125 June 30, 1982 13,595,271.16

01-024 June 30, 1982 1,131,854.20

Based on the Consolidated Report

ITF No. Report Details Last Date of Report

Balances

01-024 Schedule of Money Market Placement 03.31.82 P453,140.69

01-075 Statement of Income and Expenses Balance Sheet

03.31.90 03.31.90

0.00 1,207,501.69

01-014 Schedule of Money Market Placement Statement of Income and Expenses Balance Sheet

06.30.91 06.31.91 06.31.91

14,767.20 3,267.19

20,673.58

01-017 Schedule of Investment Statement of Income and Expenses Balance Sheet

06.30.91 06.30.91 06.30.91

38,502.06 10,437.22 39,659.56

01-082 Statement of Income and Expenses Balance Sheet

06.30.91 06.30.91

59.75 70.28

01-125 Schedule of Investment Statement of Income and Expenses Balance Sheet

06.30.91 06.30.91 06.30.91

44,055.72 10,079.16 60,920.42

The patent wide gap between the time Land Bank furnished Oñate with Balance Sheets as of June 30, 1982 and the date it sent him an Statement of Income and Expenses, as well as a Balance Sheet, on March 31, 1990 is a clear and gross violation of the IMAs requiring it to furnish him with balance sheet, portfolio analysis, statement of income and expenses and the like, quarterly. As to the reports dated June 30, 1991 and letters subsequent thereto, it should be noted that during those times Oñate had already interposed his objections to the outstanding balances of his accounts.96

The proper rate of legal interest.

Land Bank’s argument that the lower courts erred in imposing 12% per annum rate of interest is likewise devoid of merit. The unilateral offsetting of funds without legal justification and the undocumented withdrawals are tantamount to forbearance of money. In the analogous case of Estores v. Supangan,97 we held that "[the] unwarranted withholding of the money which rightfully pertains to [another] amounts to forbearance of money which can be considered as an involuntary loan." Following Eastern Shipping Lines, Inc. v. Court of Appeals,98therefore, the applicable rate of interest in this case is 12% per annum. Besides, Land Bank is estopped from assailing the award of 12% per annum rate of interest. In its Complaint, Land Bank arrived at P8,222,687.89 as the outstanding indebtedness of Oñate by using the same 12% per annum rate of interest. It was only after the lower courts rendered unfavorable decisions that Land Bank started to insist that the applicable rate of interest is 6% per annum.

Of equal importance is the determination of when the said 12% per annum rate of interest should commence.1âwphi1Recall that both the RTC and the CA reckoned the running of the 12% per annum rate of interest from June 21, 1991, or the day Land Bank unilaterally applied the outstanding balance in all of Oñate’s trust accounts, until fully paid. The compounding of interest, on the other hand, was based on the provision of the IMAs granting Land Bank "to hold, invest and reinvest the Fund and keep the same invested, in your sole discretion, without distinction between principal and income."

While we find sufficient basis for the compounding of interest, we find it necessary however to modify the commencement date. In Eastern Shipping,99 it was observed that the commencement of when the legal interest should start to run varies depending on the factual circumstances obtaining in each case.100 As a rule of thumb, it was suggested that "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 made101 (at which time the quantification of damages may be deemed to have been reasonably ascertained)."102

In the case at bench, while Oñate protested the setting off, no proof was presented that he formally demanded for the return of the amount so debited prior to the filing of the Complaint. Quite understandably so because at that time he could not determine with some degree of certainty the outstanding balances of his accounts as Land Bank neglected on its duty to keep him updated on the status of his accounts. Land Bank even undertook to furnish him with "the exact computation"103 of what remains in his accounts after the set off. But this never happened until Land Bank initiated the Complaint on September 7, 1992. Oñate, on the other hand, filed his Answer (With Compulsory Counterclaim) on May 26, 1993. In other words, we cannot reckon the running of the interest prior to the filing of the Complaint or Oñate’s Counterclaim as no demand prior thereto was made. Neither could the interest commence to run at the time of filing of any of aforesaid pleadings (as to constitute judicial demand) since the undocumented withdrawals in the sums of P60,663,488.11 and US$3,210,222.85, as well as the amount actually debited from all of Oñate’s accounts, were determined only after the Board submitted its consolidated report on August 16, 2004 or more than 10 years after Land Bank and Oñate filed their Complaint and Answer, respectively. Note too that while Oñate sought to recover the amount of undocumented withdrawals before the RTC,104 the same was denied in the latter’s May 31, 2006 Decision. The RTC granted Oñate only the total amount of funds debited from his trust accounts. It was only when the CA rendered its December 18, 2009 Decision that Oñate was awarded the undocumented withdrawals. Hence, we find it just and proper to reckon the running of the interest of 12% per annum, compounded yearly, for the debited amount and undocumented withdrawals on different dates. The debited amount of P1,471,416.52, shall earn interest beginning May 31, 2006 or the day the RTC rendered its Decision granting said amount to Oñate. As to the undocumented withdrawals ofP60,663,488.11 and US 3,210,222.85, the legal rate of interest should start to run the day the CA promulgated its Decision on December 18, 2009.

During the pendency of this case, however, the Monetary Board issued Resolution No. 796 dated May 16, 2013, stating that in the absence of express stipulation between the parties, the rate of interest in loan or forbearance of any money, goods or credits and the rate allowed in judgments shall be 6% per annum. Said Resolution is embodied in Bangko Sentral ng Pilipinas Circular No. 799, Series of2013, which took effect on July 1, 2013. Hence, the 12% annual interest mentioned above shall apply only up to June 30, 2013. Thereafter, or starting July 1, 2013, the applicable rate of interest for both the debited amount and undocumented withdrawals shall be 6% per annum compounded annually, until fully paid.

WHEREFORE, the Petition is hereby DENIED and the December 18, 2009 Decision of the Court of Appeals in CA-G.R. CV No. 89346 is AFFIRMED with modification in that the interest of 12% per annum compounded annually, for the debited amount of P1,471,416.52 shall commence to run on May 31, 2006, while the same rate of interest shall apply to the undocumented withdrawals in the amounts of P60,663,488.11 and US 3,210,222.85 starting December 18 2009. Beginning July 1, 2013, however, the applicable rate of interest on all amounts awarded shall earn interest at the rate of 6% per annum compounded yearly, until fully paid.

SO ORDERED.

*Footnotes:

7 AN ACT TO ORDAIN THE AGRICULTURAL LAND REFORM CODE AND TO INSTITUTE LAND REFORMS IN THE PHILIPPINES, INCLUDING THE ABOLITION OF TENANCY AND THE CHANNELING OF CAPITAL INTO INDUSTRY, PROVIDE FOR THE NECESSARY IMPLEMENTING AGENCIES, APPROPRIATE FUNDS THEREFOR AND FOR OTHER PURPOSES. Approved August 8, 1963.

20 Under paragraph 15 of the Complaint, Land Bank explained how it arrived at the amount ofP8,222,687.89, viz: 15. [Oñate’s] outstanding indebtedness to LANDBANK stands at P8,222,687.89 as of May 15, 1992, which was computed on the basis of the more than P4 Million erroneously credited to [Oñate] multiplied by 12% interest per annum from the date of the erroneous crediting up to February 4, 1992, minus P1,528,583.48 representing the balance standing in [Oñate’s] personal trust accounts which was applied as payment by way of set-off. x x x (Id. at 6.)

33 Per commissioners’ consolidated report dated August 16, 2004, id., "withdrawals" is defined as cash outflow reflected on the passbooks of Oñate, while "drawings" is cash outflow from the capital contribution of Oñate per his Letter of Instructions.

41 Broken down as follows: Trust Account No. 01-014, P170,172.91; Trust Account No. 01-017,P622,422.34; Trust Account No. 01-082, P4,175.88; Trust Account No. 01-089, P148,298.79; and, Trust Account No. 01-125, P526,346.61, for a total amount of P1,471,416.52.

46 Broken down as follows:

PESO ACCOUNTS

Trust Account No. Undocumented Withdrawals

01-014 P45,103,297.33

01-017 2,682,088.58

01-024 900,000.00

01-075 500,000.00

01-082 1,782,741.86

01-089 5,054,089.00

01-125 4,640,551.34

TOTAL P60,663,488.11

DOLLAR ACCOUNT

Trust Account No. Undocumented Withdrawals

01-014 $3,210,222.85

56 SEC. 3. Representatives as parties. – Where the action is allowed to be prosecuted or defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the title of the case and shall be deemed to be the real party in interest. A representative may be a trustee of an express trust, a guardian, an executor or administrator, or a party authorized by law or these Rules. An agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without joining the principal except when the contract involves things belonging to the principal.57 G.R. No. 183059, August 28, 2009, 597 SCRA 519.

64 Section 4, Rule 3, The Internal Rules of the Supreme Court enumerates the following exceptions: (a) the conclusion is a finding grounded entirely on speculation, surmise and conjecture; (b) the inference made is manifestly mistaken; (c) there is grave abuse of discretion; (d) the judgment is based on a misapprehension of facts; (e) the findings of fact are conflicting; (f) the collegial appellate courts went beyond the issues of the case, and their findings are contrary to the admissions of both appellant and appellee; (g) the findings of fact of the collegial appellate courts are contrary to those of the trial court; (h) said findings of fact are conclusions without citation of specific evidence on which they are based; (i) the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not disputed by the respondents; (j) the findings of fact of the collegial appellate courts are premised on the supposed evidence, but are contradicted by the evidence on record; and, (k) all other similar and exceptional cases warranting a review of the lower courts’ findings of fact.

67 SEC. 43. Entries in the course of business. – Entries made at, or near the time of the transactions to which they refer, by a person deceased, or unable to testify, who was in a position to know the facts therein stated, may be received as

prima facie evidence, if such person made the entries in his professional capacity or in the performance of duty and in the ordinary or regular course of business or duty.

76 Article 1159 of the CIVIL CODE OF THE PHILIPPINES provides:

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.